EXHIBIT 13

<PAGE>


                              FSF FINANCIAL CORP.
                               1996 ANNUAL REPORT


TABLE OF CONTENTS
-----------------

CORPORATE PROFILE AND STOCK MARKET INFORMATION..............................  1

SELECTED FINANCIAL AND OTHER DATA...........................................  3

LETTER TO STOCKHOLDERS......................................................  4

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................  5

INDEPENDENT AUDITOR'S REPORT................................................ 16

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION.............................. 17

CONSOLIDATED STATEMENTS OF INCOME........................................... 18

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY.................. 19

CONSOLIDATED STATEMENTS OF CASH FLOWS....................................... 20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................. 22

SELECTED QUARTERLY FINANCIAL DATA........................................... 39

OFFICE LOCATIONS............................................................ 40

CORPORATE INFORMATION....................................................... 41 




<PAGE>

                               FSF FINANCIAL CORP.

Corporate Profile and Related Information

FSF Financial Corp. (the "Corporation") is a Minnesota  corporation organized in
1994 at the  direction  of First  Federal fsb (the "Bank") to acquire all of the
capital stock of the Bank upon its  conversion  from the mutual to stock form of
ownership.  The Bank resulted from the merger of First Federal  Savings and Loan
Association of Hastings, Hastings,  Minnesota, with and into First State Federal
Savings and Loan Association,  Hutchinson,  Minnesota, on September 30, 1994. On
October  6,   1994,   the  Bank   completed   its   mutual-to-stock   conversion
("Conversion")  and is currently  chartered by the Office of Thrift  Supervision
("OTS") as a  federally-chartered  stock  savings  bank.  The  Corporation  is a
unitary savings and loan holding company which,  under existing laws,  generally
is not  restricted  in the types of business  activities  in which it may engage
provided   that  the  Bank   retains  a  specified   amount  of  its  assets  in
housing-related investments.

The Corporation  purchased all of the capital stock of the Bank with one-half of
the net proceeds from the Conversion.  The  Corporation  also provided a loan to
the Bank's Employee Stock Ownership Plan ("ESOP") to enable the ESOP to purchase
shares of the  Corporation's  common stock in the initial public  offering.  The
note bears an interest rate and has terms and conditions  which prevailed in the
marketplace at the time it was  originated.  The  Corporation has not engaged in
any business activities to date other than the loan to the ESOP.

The Bank  conducts its business from its main office in  Hutchinson,  Minnesota,
and ten additional  full service  offices  located in the Minnesota  counties of
McLeod,  Dakota,  Meeker,  Sibley,  Carver,  Stearns and  Wright.  The Bank also
operates ten automated teller machines  ("ATMs").  The Bank's deposits have been
federally  insured  since  1934  and are  currently  insured  up to the  maximum
allowable by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
a  community  oriented  savings  institution  offering  a variety  of  financial
services to meet the needs of the communities it serves.

The Bank  attracts  deposits  from the  general  public and uses such  deposits,
together with  borrowings  and other funds,  primarily to originate and purchase
loans  secured  by  first  mortgages  on   owner-occupied,   one-to-four  family
residences  located  in its  market  area and to invest in  mortgage-backed  and
investment  securities.  The Bank also  originates  commercial  real  estate and
multi-family loans, construction loans and consumer loans.

Stock Market Information

Since its  issuance in October  1994,  the  Corporation's  common stock has been
traded  on the  NASDAQ  National  Market.  The  daily  stock  quotation  for FSF
Financial Corp. is listed in the NASDAQ  National  Market  published in The Wall
Street  Journal,  the St Paul  Pioneer  Press and  Dispatch,  and other  leading
newspapers  under the trading  symbol "FFHH".  The following  table reflects the
stock price as published by the NASDAQ statistical report.


                                              High               Low
                                          --------------     -------------
First Quarter - December 31, 1994            $10.50             $ 7.50
Second Quarter - March 31, 1995              $10.75             $ 9.00
Third Quarter - June 30, 1995                $12.00             $10.00
Fourth Quarter - September 30, 1995          $13.13             $11.13
First Quarter - December 31, 1995            $13.50             $12.38
Second Quarter - March 31, 1996              $13.50             $12.38
Third Quarter - June 30, 1996                $13.00             $11.50
Fourth Quarter - September 30, 1996          $13.25             $11.38

                                       1
<PAGE>

The number of  stockholders  of record of common  stock as of the record date of
December 11, 1996,  was  approximately  650. This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage  firms.  At  December  11,  1996,  there  were  3,304,310  issued  and
outstanding.

The following  table sets forth the  Corporation's  net income and the dividends
declared on the common stock:


                                               Net            Dividends
                                             Income            Declared
                                          --------------     -------------
                                               (Dollars in thousand,
                                             except per share amounts)

Quarter ended December 31, 1994
     Total                                       $1,069
     Per common share outstanding                     0             N/A
Quarter ended March 31, 1995
     Total                                          565
     Per common share outstanding                  0.14            $0.125
Quarter ended June 30, 1995
     Total                                          531
     Per common share outstanding                  0.14             0.125
Quarter ended September 30, 1995
     Total                                          460
     Per common share outstanding                  0.12             0.125
Quarter ended December 31, 1995
     Total                                          421
     Per common share outstanding                  0.11             0.125
Quarter ended March 31, 1996
     Total                                          460
     Per common share outstanding                  0.13             0.125
Quarter ended June 30, 1996
     Total                                          684
     Per common share outstanding                  0.11             0.125
Quarter ended September 30, 1996
     Total                                          103
     Per common share outstanding                  0.03             0.125


The Corporation's ability to pay dividends to stockholders is dependent upon the
dividends  it  receives  from the Bank.  The Bank may not  declare or pay a cash
dividend  on any of its stock if the  effect  thereof  would  cause  the  Bank's
regulatory  capital  to be  reduced  below  (1)  the  amount  required  for  the
liquidation  account  established in connection with the Bank's  conversion from
mutual to stock form, or (2) the regulatory capital  requirements imposed by the
OTS.

                                       2
<PAGE>


FSF FINANCIAL CORP.

-------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA  (1)
Financial Condition (Dollars in Thousands)
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
September 30,                                                1996          1995           1994          1993          1992
----------------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>           <C>            <C>           <C>           <C>       
Total assets                                            $  354,636    $  304,605     $  281,467    $  217,672    $  190,146
Loans held for sale                                            443           230            729        21,576        17,572    
Loans receivable, net                                      216,727       170,921        116,591        99,370       105,355
Mortgage-backed securities                                  38,557        37,110         33,267        30,702        25,785
Mortgage-backed securities available for sale               16,336        16,141         16,338        16,979             -
Debt securities                                             44,349        41,914         22,897        28,175        22,868
Equity securities available for sale                        18,231        16,165         14,172             -             -
Investment securities held for trading                           -             -              -             -         2,950
Cash and cash equivalents (2)                               11,756        14,855         69,991        14,666        12,189
Savings deposits                                           189,074       171,516        156,479       164,827       163,664
Other borrowings                                           114,693        73,807         37,688        30,472         6,100
Stockholders' equity                                        47,649        57,351         20,508        19,873        17,447

Summary of Operations (Dollars in Thousands)  (3)
----------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                     1996          1995           1994          1993          1992
----------------------------------------------------------------------------------------------------------------------------

Interest income                                        $    23,244   $    19,079    $    15,320   $    14,728   $    15,050
Interest expense                                            13,609         9,472          7,544         7,282         8,479
Net interest income                                          9,635         9,607          7,776         7,446         6,571
Provision for loan losses                                       42            24             33            47           412
Non-interest income                                          1,354         1,127            184         1,684         2,507
Non-interest expense (4)                                     8,178         6,966          5,964         5,339         5,165
Income before cummulative effect
     of change in accounting principle                       1,668         2,243          1,135         2,464         2,375
Net income                                                   1,668         2,625          1,135         2,464         2,241

Other Selected Data
----------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                     1996          1995           1994          1993          1992
----------------------------------------------------------------------------------------------------------------------------

Return on average assets before cum. eff.                     0.69%         0.82%          0.50%         1.27%         0.62%
Return on average assets after cum. eff.                      0.69%         0.95%          0.50%         1.27%         0.59%
Return on average equity before cum. eff.                     4.25%         3.83%          5.58%         7.56%         1.66%
Return on average equity after cum. eff.                      4.25%         4.48%          5.58%        14.78%         7.13%
Average equity to average assets                             15.93%        21.31%          8.96%         8.57%         8.17%
Net interest rate spread (5)                                  2.36%         2.78%          3.41%         3.73%         3.07%
Non-performing assets to total assets                         0.06%         0.12%          0.20%         0.38%         0.51%
Allowance for loan losses to total loans                      0.36%         0.41%          0.61%         0.57%         0.58%
Earnings per share before cum. eff.                    $      0.48   $      0.57            N/A           N/A           N/A
Earnings per share after cum. eff.                            0.48   $      0.67            N/A           N/A           N/A
Cash dividends declared per share                      $      0.50   $      0.375           N/A           N/A           N/A
</TABLE>

----------------------------------------------------
(1)  The financial  statements and other selected data as of and for the periods
     ended  September  30, 1993,  and 1992 have been  restated to reflect  First
     State Federal's merger with First Federal of Hastings,  which was accounted
     for as a pooling-of-interests.
(2)  Consists  of cash due from  banks,  interest-bearing  deposits,  and  other
     investments with original maturities of less than three months.
(3)  The cumulative  effect of the change in accounting for debt securities as a
     pro-forma  adjustment to prior years operations would result in an increase
     in  non-interest  income  for  fiscal  1994 by $681  and net  income  would
     increase by $382.
(4)  Includes a one-time  special  assessment of $1,030,000 to recapitalize  the
     SAIF for the year ended September 30, 1996.
(5)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities

                                       3
<PAGE>



To Our Stockholders:

The year ended September 30, 1996, provided many challenges, which were met, and
many opportunities, which were capitalized on. The Savings Association Insurance
Fund special assessment cost the Corporation more than $1 million,  but the move
toward deposit  insurance  parity and the reduction in ongoing  premiums  should
enhance future earnings. The relatively low interest rate environment during the
first half of the year gave way to slightly  higher interest rates and a steeper
yield curve, which helped to increase net interest margin.  Lending continues to
be diversified,  with a greater emphasis on  adjustable-rate  and  "prime-based"
products, while not compromising our credit risk standards.

Earnings  per share were $0.48 for the fiscal year  compared  with $0.57 for the
1995  fiscal  year,  before  the  cumulative  effect  of  change  in  accounting
principle,  and $.67  after the  cumulative  effect.  Without  the SAIF  special
assessment, earnings per share would have been $0.66. Stockholders' equity, as a
percentage of total assets, decreased to 13.4% at September 30, 1996, from 18.8%
at September 30, 1995.  This was  accomplished  by stock  repurchases  completed
during the year that totaled 802,485 shares. Another 5% repurchase was completed
during  October,  1996, and we have received  approval from the Office of Thrift
Supervision to repurchase  another 10% of the outstanding  stock over a 12 month
period.  These  repurchases have the effect of decreasing  stockholders'  equity
while increasing earnings per share for you, our stockholders.

Fiscal year 1996 saw mortgage  originations  and  purchases  exceed $87 million,
land and commercial  real estate  originations  were $3.5 million,  and consumer
originations totaled more than $27 million.  This activity led to an increase in
our loan portfolio of more than $44.6 million and an increase in total assets of
more than 20%.  Mortgage  lending will  continue to be an important  part of our
asset generation and will be supplemented with a continued  increase in consumer
and other prime-based lending.

Our  emphasis   continues  to  be  customer   service  and  increased   customer
relationships.  The  introduction  of our "Master Money" check card has provided
customers with increased  access to funds. We recently  provided  customers with
telephonic access to all of their account information, while still continuing to
provide excellent face-to-face customer service at no charge.

FSF  Financial   Corp.  is  positioned  to  meet   tomorrow's   challenges   and
opportunities.  Quality  financial  services and products,  along with dedicated
staff,  management,  and directors who recognize the  importance of customer and
stockholder  satisfaction,  will  be  the  key  ingredients  to our  growth  and
profitability.

Thank you for your confidence and support in our future success.

Sincerely,


/s/ Donald A. Glas                              /s/ George B. Loban
Donald A. Glas                                  George B. Loban
Co-Chair/Chief Executive Officer                Co-Chair/President








                                       4
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

General

The Corporation does not engage in any active  business.  In connection with the
Conversion from the mutual to stock form of ownership,  the  Corporation  made a
loan to the  Bank's  employee  stock  ownership  plan,  from  which it  receives
interest  income.   The  Corporation  also  receives   interest  income  on  its
investments.

The  earnings of the  Corporation  depend  primarily  on the Bank's net interest
income.  Net  interest  income is affected by the  interest  rates that the Bank
receives from its loans and  investments and by the interest rates that the Bank
must pay for its  sources of funds.  The  difference  between  average  rates of
interest earned on earning assets and the average rates paid on interest bearing
liabilities is the "interest rate spread". When interest earning assets equal or
exceed  interest  bearing  liabilities,  any positive  interest rate spread will
produce net interest income.

In addition,  the Bank receives  income from service  charges and other fees and
occasionally from sales of loans and real estate owned. The Bank incurs expenses
in addition to interest  expense in the form of salaries and  benefits,  deposit
insurance,  property  operations and maintenance,  advertising and other related
business expenses.

Earnings of the Bank are  significantly  affected by  economic  and  competitive
conditions,  particularly  changes in interest  rates,  government  policies and
regulations of various regulatory authorities.

Interest Rate Sensitivity Analysis

The Bank,  like  other  financial  institutions,  is  vulnerable  to  changes in
interest  rates  to  the  extent  that   interest-bearing   liabilities   mature
differently than  interest-earning  assets.  The lending  activities of the Bank
have   emphasized  the  origination  of  long-term  loans  secured  by  one-  to
four-family  residences,  the  majority of which have a repricing  term which is
substantially  shorter than their amortization term, and the source of funds has
been deposits and borrowings.  Having  interest-earning assets that reprice more
frequently  than  interest-bearing  liabilities  is generally  beneficial to net
interest  income  during  periods  of  increasing   interest   rates,   such  an
asset/liability  mismatch is generally  detrimental  during periods of declining
interest rates.

In an attempt to manage its  exposure to changes in interest  rates,  management
closely  monitors  interest rate risk.  Management  meets at least  quarterly to
review the interest rate risk position and projected  profitability of the Bank.
In addition,  management  reviews the Bank's  portfolio,  formulates  investment
strategies and oversees the timing and  implementation of transactions to assure
attainment of the Bank's objectives in the most effective  manner.  The Board of
Directors  reviews on a  quarterly  basis the Bank's  asset/liability  position,
including  simulations of the effect on the Bank's  capital of various  interest
rate scenarios.

Depending on the relationship  between long-term and short-term  interest rates,
market conditions and consumer  preferences,  the Bank, at times, may place more
emphasis on managing  net interest  margin than on better  matching the interest
rate  sensitivity  of its assets  and  liabilities  in an effort to enhance  net
interest  income.  Management  believes that the  increased net interest  income
resulting from a mismatch in the maturity of its assets and liability portfolios
can provide high enough returns to justify the increased  exposure to sudden and
unexpected changes in interest rates.

Management  attempts  to reduce  the Bank's  interest  rate risk and has taken a
number of steps to restructure  its assets and  liabilities.  The Bank sells all
fixed rate  mortgages  with  contractual  terms of greater than 20 years and has
primarily  focused  its  residential  lending  programs  on  loans  with  either
adjustable  interest rates or balloon  provisions.  These loans provide the Bank
with a repricing time frame which is substantially  shorter than the contractual
term.  During the 1996 fiscal year, the Bank originated  $21.2 million of single
family  mortgage  loans which have  initial  fixed rates for terms of one to ten
years and then adjust  annually off a treasury index  thereafter.  The Bank also
originated  $6.7  million of single  family  mortgage  loans that have a balloon
payment  due in three to seven  years.  Originations  of  construction  and land
development loans,  which generally have a contractual  maturity of two years or
less,  totaled  $27.9  million.  At September 30, 1996,  $126.0  million of real
estate  mortgages  were  adjustable  rate  mortgages,   balloon  mortgages,   or
construction and land development loans, representing 71% of total mortgages and
35.5% of total assets.

Interest  rate  sensitivity  is the result of  differences  in the  amounts  and
repricing dates of rate-sensitive assets and rate-sensitive  liabilities.  These
differences,  or interest  rate  repricing  "GAP,"  provide an indication of the
extent to which the 

                                       5
<PAGE>

Bank's net interest  income is affected by future  changes in interest  rates. A
GAP is considered  positive when the amount of interest  rate  sensitive  assets
exceeds the amount of interest rate sensitive  liabilities.  A GAP is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive GAP
would tend to affect net interest income adversely.  Conversely, during a period
of rising  interest  rates, a negative GAP would tend to result in a decrease in
net interest income, while a positive GAP would tend to result in an increase in
net interest income.

The table that  follows  sets forth the amounts of  interest-earning  assets and
interest-bearing  liabilities  at  September  30,  1996,  which are  expected to
reprice or mature in each of the future time periods shown.

                        Analysis of Repricing Mechanisms
<TABLE>
<CAPTION>
                                                          Over One         Over Five
                                        Within            to Five            to Ten           Over Ten
                                       One Year            Years             Years             Years             Total
                                     --------------     -------------    ---------------    -------------    --------------
Interest-earning assets:                                            (Dollars in Thousands)
<S>                                   <C>                <C>                <C>                <C>            <C>       
   Mortgage loans                     $ 86,502           $  55,817          $  25,599          $  9,937       $  177,855
   Other loans                          28,752               9,015              2,324              -              40,091
   Investment securities                67,237              12,166               -               47,462          126,865
                                     --------------     -------------    ---------------    -------------    --------------
Total interest-earning assets          182,491              76,998             27,923            57,399          344,811
                                     --------------     -------------    ---------------    -------------    --------------

Interest-bearing liabilities:
   Noninterest bearing deposits                                                                    -                -
   NOW and Super now accounts            6,530               1,760              3,168            12,674           24,132
   Savings accounts                     12,955               3,538              6,367            25,474           48,334
   Money market deposit accounts           940                 253                455             1,821            3,469
   Certificates                         84,776              26,972              1,391              -             113,139
   Other borrowed money                 32,100              82,593                  -              -             114,693
                                     --------------     -------------    ---------------    -------------    --------------
Total interest-bearing liabilities     137,301             115,116             11,381            39,969          303,767
                                     --------------     -------------    ---------------    -------------    --------------

Interest sensitivity gap              $ 45,190           $ (38,118)         $  16,542          $ 17,430       $   41,044
                                     ==============     =============    ===============    =============    ==============

Cumulative interest sensitivity 
   gap                                $ 45,190           $   7,072          $  23,614          $ 41,044
                                     ==============     =============    ===============    =============
Cumulative ratio of interest-
   earning-assets to interest-
   bearing liabilities                    1.33%               1.03%              1.09%             1.14%
                                    ==============     =============    ===============    =============
Cumulative ratio of cumulative 
   interest sensitivity gap to 
   total assets.                         12.74%               2.00%              6.67%            11.57%
                                    ==============     =============    ===============    =============
</TABLE>


         The table above  indicates  the time periods in which  interest-earning
         assets  and  interest-bearing  liabilities  will  mature or  reprice in
         accordance with their contractual terms. The following assumptions have
         been used in calculating the values in the table:  Adjustable-rate  and
         balloon loans have a constant prepayment rate of 6%; mortgages held for
         sale are all set to reprice in three years or less; remaining mortgages
         have  prepayment  rates ranging from 4% to 10%;  consumer  loans have a
         prepayment  rate that is constant over time at 19%; NOW checking,  core
         savings  deposits,  and money market deposits have an increasing  decay
         ranging from 6.0% to 30.0%.  Management  utilizes its own  assumptions,
         and feels that  these  assumptions  provide a  reasonable  estimate  of
         actual experience.

         Certain  shortcomings are inherent in the method of analysis  presented
         in the  previous  table.  For  example,  although  certain  assets  and
         liabilities may have similar  maturities or periods of repricing,  they
         may react in  different  degrees to changes in market  interest  rates.
         Also, the interest rates on certain types of assets and liabilities may
         fluctuate  in  advance  of  changes  in market  interest  rates,  while
         interest  rates on other types may lag behind  changes in market rates.
         Additionally,  certain assets, such as adjustable-rate  mortgage loans,
         have features which restrict  changes in interest rates on a short-term
         basis over the life of the assets. Further, in the event of a 

                                       6
<PAGE>

         change  in  interest  rate,  prepayment  levels and decay rates on core
         deposits  may deviate  significantly  from those assumed in calculating
         the table.

Net Portfolio Analysis

Due to the  shortcomings  of the GAP  analysis  presented  above,  the Bank also
utilizes a Net Portfolio Value ("NPV") analysis to assist  management in dealing
with the potential  impact of changes in interest  rates.  NPV is the difference
between  incoming and outgoing  discounted cash flows from assets,  liabilities,
and off-balance  sheet contracts.  In applying this  methodology,  instantaneous
changes  in  interest  rates  are  applied  to  all  assets,  liabilities,   and
off-balance  sheet  contracts  in 100 basis point (one basis point  equals .01%)
increments.

The OTS adopted a final rule in August,  1993,  incorporating  an interest  rate
risk  ("IRR")  component  into  the  risk-based  capital  rules.   Although  the
implementation of the new rule has been delayed,  the Bank and the OTS have used
a NPV  approach to interest  rate risk.  When the IRR  component  is applied,  a
dollar amount will be deducted from total capital for the purpose of calculating
an  institution's  risk-based  capital  requirement  based on changes in NPV. An
institution's  IRR  is  measured  as the  change  to its  NPV as a  result  of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated  market value of its assets will require
the  institution to deduct from its capital 50% of that excess change.  When the
rule is implemented, the OTS will calculate the IRR component quarterly for each
institution.  The  following  table  presents the Bank's NPV as of September 30,
1996,  based  on  information   Management   believes  is  consistent  with  OTS
methodology.

<TABLE>
<CAPTION>
  Changes in Interest
     Rates in Basis                          Net Portfolio Change                                 NPV as % of Assets
                            --------------------------------------------------------   -----------------------------------------
  Points (Rate Shock)           $ Amount           $ Change            Change %           NPV Ratio               Change
                            -----------------   ---------------    -----------------   ----------------    ---------------------
                                                 (Dollars in thousands)

<S>                            <C>                  <C>                   <C>                <C>                 <C>    
        +400 bp                $     125,882         6,227                 5.20 %            31.64                266  bp
        +300 bp                      124,441         4,786                 4.00              31.01                203  bp
        +200 bp                      122,925         3,270                 2.73              30.36                137  bp
        +100 bp                      121,331         1,676                 1.40              29.68                 70  bp
          0 bp                       119,655             -                    -              28.99                  - 
        -100 bp                      117,898        (1,757)               (1.47)             28.27                (72) bp
        -200 bp                      116,057        (3,598)               (3.01)             27.52               (146) bp
        -300 bp                      114,133        (5,522)               (4.61)             26.76               (222) bp
        -400 bp                      112,128        (7,527)               (6.29)             25.98               (301) bp

</TABLE>


As the table shows, increases in interest rates would result in net increases in
the Bank's NPV,  while  decreases in interest rates will result in net decreases
in the Bank's NPV. Based upon the above  calculations  as of September 30, 1996,
the Bank  would not be  required  to deduct any amount  from total  capital  for
purposes of calculating the Bank's risk-based capital requirement.  (Bank's NPV,
as a percent of assets,  decreases  by 1.46% if interest  rates  decrease by 200
basis points.) Certain  shortcomings are inherent in the methodology used in the
above table.  Modeling changes in NPV requires the making of certain assumptions
that may tend to  oversimplify  the  manner  in which  actual  yields  and costs
respond to changes in market interest rates.  First,  the models assume that the
composition of the Bank's interest sensitive assets and liabilities  existing at
the  beginning of a period  remains  constant  over the period  being  measured.
Second,  the  models  assume  that a  particular  change  in  interest  rates is
reflected  uniformly  across  the yield  curve  regardless  of the  duration  to
maturity or repricing of specific assets and liabilities.  Accordingly, although
the NPV  measurements  do provide an indication of the Bank's interest rate risk
exposure at a particular  point in time, such  measurements  are not intended to
provide a precise  forecast of the effect of changes in market interest rates on
the Bank's net interest income.

                                       7
<PAGE>


Average Balances

The following table sets forth information relating to the Corporation's average
balance  sheet and  reflects  the average  yield on assets and  average  cost of
liabilities  for the  periods  indicated.  The yields and costs are  computed by
dividing income or expense by the average balance of interest-earning  assets or
interest-bearing liabilities,  respectively,  for the periods indicated. Average
balances are derived from month-end  balances.  Management does not believe that
the  use of  month-end  balances  has  caused  any  material  difference  in the
information presented.

<TABLE>                                 
<CAPTION>
                                                                        Years Ended September 30,
                                             ------------------------------------------------------------------------
                                                             1996                                  1995              
                                            -------------------------------------------------------------------------
                                                                        Average                               Average
                                               Average      Income/      Yield/      Average     Income/      Yield/ 
                                               Balance      Expense       Cost       Balance     Expense       Cost  
                                            -------------------------------------------------------------------------
Interest-Earning Assets                          (in thousands)                         (in thousands)               
<S>                                           <C>        <C>              <C>     <C>            <C>           <C>   
   Loans receivable (1)                       $193,202   $  16,077        8.32%   $ 142,711      $11,221       7.86% 
   Mortgage-backed securities                   54,208       3,270        6.03%      51,984        3,504        6.74%
   Investment securities (2)                    69,676       3,897        5.59%      70,762        4,354        6.15%
                                            -----------------------             -------------------------            
      Total interest-earning assets           $317,086      23,244        7.33%   $ 265,457       19,079        7.19%
                                            -----------------------             -------------------------            

Interest-Bearing Liabilities
   NOW and money market accounts               $25,697         443         2.41%     27,923          673        2.41%            
   Passbook savings                             49,120       1,576         3.52%     47,519        1,669        3.52%
   Certificates of deposit                     108,665       6,243         5.75%     86,518        4,411        5.10%
                                            -----------------------             -------------------------            
      Total deposits                           183,482       8,262         4.50%    161,960        6,753        4.17%
   FHLB advances                                90,408       5,347         5.91%     52,688        2,719        5.16%
                                            -----------------------             -------------------------            
      Total interest-bearing liabilities       273,890      13,609         4.97%    214,648        9,472        4.41%
                                            -----------------------            -------------------------             
Net Interest Income                                      $   9,635                               $ 9,607             
                                                       ============                         =============            
Net Interest Rate Spread  (3)                                             2.36%                                2.78% 
Net Interest Rate Margin  (4)                                             3.04%                                3.62% 
Ratio of average interest-earning assets
  to average interest-bearing liabilities        1.16x                                1.24x                          
                                            ===========                         ============                         
</TABLE>
<TABLE>
<CAPTION>

                                                       Years Ended September 30,
                                            ------------------------------------
                                                              1994
                                            ------------------------------------
                                                                         Average
                                                Average      Income/      Yield/
                                                Balance      Expense       Cost
                                            ------------------------------------
Interest-Earning Assets                            (In thousands)
<S>                                           <C>         <C>              <C>  
   Loans receivable (1)                       $ 119,133   $   9,996        8.39%
   Mortgage-backed securities                    49,623       2,696        5.43%
   Investment securities (2)                     40,429       2,628        6.50%
                                            ------------------------
      Total interest-earning assets           $ 209,185      15,320        7.32%
                                            ------------------------

Interest-Bearing Liabilities
   NOW and money market accounts              $  33,192         796        2.40%                  
   Passbook savings                              48,899       1,496        3.06%
   Certificates of deposit                       76,563       3,810        4.98%
                                            ------------------------
      Total deposits                            158,654       6,102        3.85%
   FHLB advances                                            
                                                 34,080       1,442        4.23%
                                            ------------------------
      Total interest-bearing liabilities        192,734       7,544        3.91%
                                            ------------------------
Net Interest Income                                       $   7,776
                                                        ============
Net Interest Rate Spread  (3)                                              3.41%
Net Interest Rate Margin  (4)                                              3.72%
Ratio of average interest-earning assets
  to average interest-bearing liabilities         1.07X
                                            ============
</TABLE>



------------------------------
(1)  Average balances include non-accrual loans and loans held for sale.
(2)  Includes interest-bearing deposits in other financial institutions.
(3)  Net interest  rate spread  represents  the  difference  between the average
     yield on  interest-earning  assets and the average cost of interest-bearing
     liabilities.
(4)  Net  interest rate margin represents net interest income as a percentage of
     average interest-earning assets

                                       8
<PAGE>


Rate/Volume Analysis

The table below sets forth  certain  information  regarding  changes in interest
income and  interest  expense of the Bank for the  periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information  is  provided  on  changes  attributable  to (1)  changes  in volume
(changes  in  average  volume  multiplied  by old  rate);  (2)  changes in rates
(changes  in rate  multiplied  by old  average  volume);  (3) total  changes  in
rate-volume.  The  combined  effects of  changes  in both  volume and rate which
cannot be separately  identified,  have been  allocated  proportionately  to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>

                                                                            Increase (Decrease) Due To
                                                       ---------------------------------------------------------------
                                                           Rate           Volume         Rate/Volume        Total
                                                       --------------  -------------    ---------------  -------------
Year Ended September 30, 1996 vs 1995:                                           (In Thousands)
Interest income:
<S>                                                      <C>              <C>                <C>            <C>      
   Loans Receivable                                      $   656          $ 3,968            $ 232          $4,856
   Mortgage-backed securities                               (369)             150              (15)           (234)
   Investment securities                                    (396)             (67)               5            (458)
                                                          ------           ------           ------           -----
      Total change in interest income                       (109)           4,051              222           4,164
                                                                                                           
Interest expense:                                                                                          
   Savings accounts                                          534              897               78           1,509
   Other liabilities                                         395            1,947              286           2,628
                                                          ------           ------           ------           -----
      Total change in interest expense                       929            2,844              364           4,137
                                                          ------           ------           ------           -----
Net change in net interest income                        $(1,038)         $ 1,207            $(142)         $   27
                                                          ======           ======           ======           =====
                                                                                                           
Year Ended September 30, 1995 vs 1994: 
Interest income:                                                    
                                                                                                           
   Loans Receivable                                      $  (631)         $ 1,978            $(122)         $1,225
   Mortgage-backed securities                                650              128               30             808
   Investment securities                                    (142)           1,972             (104)          1,726
                                                          ------           ------           ------           -----
   Other interest-earning assets                            (123)           4,078             (196)          3,759
      Total change in interest income                                                                      
                                                                                                           
Interest expense:                                                                                          
   Savings accounts                                          349              131              171             651
   Other liabilities                                         375              755              147           1,277
                                                          ------           ------           ------           -----
      Total change in interest expense                       724              886              318           1,928
                                                          ------           ------           ------           -----
Net change in net interest income                        $  (847)         $ 3,192            $(514)         $1,831
                                                          ======           ======           ======           =====
</TABLE>
                                                                         
                                                                             
                                       9                                   







<PAGE>


Changes in Financial Condition

             General.  Total assets  increased  from $304.6 million at September
30, 1995, to $354.6 million at September 30, 1996, an increase of $50 million or
16.4%.  The Bank continues to experience good demand for loans and  supplemented
the internal loan  originations  ($97.6  million) with  purchases of other loans
($17.4  million)  that meet the  interest  rate risk and  credit  risk  criteria
established by management.

             Securities Available for Sale. Equity securities available for sale
increased  by $2.0  million  during  the 1996  fiscal  year as a  result  of the
purchase of additional stock in the Federal Home Loan Bank of Des Moines (FHLB).
The additional stock purchase was required as FHLB borrowings increased.

             Securities  Held to  Maturity.  Debt  securities  held to  maturity
increased  from $41.9  million to $44.3 million and  mortgage-backed  securities
held to maturity  increased  from $37.1 million to $38.6  million  during fiscal
1996 as a result of purchases of securities that management made in an effort to
enhance net interest income.

             Loans Held for Sale.  Loans held for sale  increased  from $230,000
at September 30, 1995, to  $443,000  at  September  30, 1996.  The Bank has firm
commitments  to  sell  $316,000  of  the  loans  held for  sale that were closed
in September, 1996.

             Loans Receivable. Loans receivable increased from $170.9 million at
September  30, 1995,  to $216.7  million at September  30, 1996,  an increase of
$45.8  million or 26.8%.  The increase was  primarily  comprised of increases in
adjustable  rate  mortgages  (ARMs),   balloon   mortgages,   loans  with  short
contractual  maturities  and/or interest rates that adjusts to the prime rate as
published in the Wall Street  Journal,  i.e.  consumer loans,  land  development
loans, and Home Equity Lines of Credit (HELOCs).

             Deposits.  Total  deposits  increased  by $17.6  million,  or 10.3%
during the 1996 fiscal  year.  The  increase in  deposits  can be almost  solely
attributable to an increase in  certificates  of deposit.  The increase in total
deposits was  accompanied  by an increase in the weighted  average cost of funds
from  4.17%  to  4.50%  for  the  years  ended  September  30,  1995  and  1996,
respectively.  The increase in cost is primarily attributable to the increase in
short-term interest rates during the periods compared.

             Borrowings.   With  an  increase  of  $17.6  million  in  deposits,
additional  borrowings  of $40.9 million were needed in order to fund the growth
in assets.  Management  utilizes a least cost,  at the margin,  approach to fund
assets.  As a result,  borrowings  will be utilized as a funding  source when it
provides the least cost,  at the margin.  FHLB advances are used to fund lending
and investment  activities,  withdrawls from deposit accounts and other ordinary
business activity.

             Stockholders'  Equity.  Stockholders'  equity  decreased from $57.4
million at  September  30,  1995,  to $47.6  million at  September  30,  1996, a
decrease of $9.8 million.  The  Corporation  repurchased  802,485  shares of its
common stock  during the year at an average  price of $13.16,  thereby  reducing
stockholders'  equity. The repurchase of shares also reduced the total number of
shareholders  and even though total  stockholders'  equity  decreased during the
1996 fiscal year,  book value per share  increased  from $15.07 at September 30,
1995, to $15.50 at September 30, 1996.

Comparison of Years Ended September 30, 1996 and 1995

             Net Income.  Net income  decreased  by $957,000 to $1.7 million for
the year  ended  September  30,  1996,  from  $2.6  million  for the year  ended
September 30, 1995.  The decrease was  primarily due to the Savings  Association
Insurance Fund (SAIF) special  assessment of $1,030,000 which was accrued for as
of September 30, 1996. Without the special  assessment,  net income for the year
ended September 30, 1996,  would have been $2.3 million,  a decrease of $344,000
compared to the year ended September 30, 1995.

             Interest  Income.  Total interest income  increased $4.1 million to
$23.2 million for the year ended  September 30, 1996, from $19.1 million for the
year ended  September  30,  1995.  Interest  income on loans  increased  by $4.9
million  from $11.2  million for the year ended  September  30,  1995,  to $16.1
million for the year ended  September  30, 1996,  as a result of a $50.5 million
increase  in the average  balance of loans  receivable  from  $142.7  million at
September 30, 1995, to $193.2  million at September 30, 1996.  Furthermore,  the
average yield  increased from 7.86% at September 30, 1995, to 8.32% at September
30, 1996.  Interest  income on  mortgage-backed  securities  decreased from $3.5
million for the year ended  September  30,  1995,  to $3.3  million for the year
ended  September 30, 1996.  The income  decrease was the result of a decrease in
average  rate from 6.74% for the 1995  fiscal  year to 6.03% for the 1996 fiscal
year.  The average  balance 

                                       10
<PAGE>

of investment  securities  decreased by $1.1 million  during the fiscal year and
the yield decreased from 6.15% to 5.59%. The decline in yields for both mortgage
backed  securities  and  investment  securities  was  primarily  impacted by the
relatively low interest rate  environment  and the flat yield curve that existed
during the first six months of the fiscal  year.  The yield on  interest-earning
assets  increased from 7.19% for the year ended September 30, 1995, to 7.33% for
the year ended September 30, 1996.  Interest income increased by $4.1 million as
a result of increased  volume  during the year while the changes in rates caused
interest  income to decrease by $109,000 and the  rate/volume  change  increased
interest income by $222,000.

             Interest Expense. Total interest expense increased to $13.6 million
for  1996  from  $9.5  million  for 1995 as both the  average  balance  of total
interest  bearing  liabilities  and the  average  cost of funds  increased.  The
increased cost of deposits attendant to the growth of balances was approximately
$897,000  while the  increase  associated  with a change in  interest  rates was
approximately  $534,000.  The cost  associated  with interest  bearing  deposits
increased  from 4.17% for the year ended  September  30, 1995,  to 4.50% for the
same period ended  September 30, 1996. The cost  associated  with borrowed funds
increased to 5.91% for fiscal 1996  compared to 5.16% for fiscal 1995.  $395,000
of the  increase  in the cost of  borrowed  funds was a result of  increases  in
rates,  $1.9 million of the increase was  attributable to the increased  volumes
and $286,000 was rate/volume related.

             Net Interest Income. Net interest income remained unchanged at $9.6
million.  Changes in interest rates caused a decrease in net interest  income of
$1.0 million,  volumes  accounted for an increase in net interest income of $1.2
million and rate/volume differences were slightly less than $200,000.

             Provision  For Loan Losses.  The  allowance  for losses on loans is
maintained at a level which is considered by management to be adequate to absorb
probable  losses on  existing  loans that may become  uncollectible  based on an
evaluation of the  collectibility,  prior loss experience and market conditions.
The evaluation  takes into  consideration  such factors as changes in the nature
and volume of the loan portfolio,  overall portfolio quality, review of specific
problem loans,  and current  economic  conditions that may affect the borrower's
ability to pay. The allowance for loan losses is established through a provision
for loan losses charged to expense.

 The  Bank's  loan loss  provision  increased  from  $24,000  for the year ended
September 30, 1995, to $42,000 for the year ended September 30, 1996. The Bank's
allowance for loan losses was $776,000 at September 30, 1996.  The allowance for
loan  losses  represents  .36% of total  loans  outstanding  and 354.3% of total
non-performing assets. While the Bank maintains its allowance for loan losses at
a level  which it  considers  to be  adequate,  there can be no  assurance  that
further  additions  will not be made to the loss  allowances or that such losses
will not exceed the estimated amounts.

             Non-interest   Income.   Total  non-interest  income  increased  by
$227,000  to $1.4  million  for the year ended  September  30,  1996,  from $1.1
million for the year ended  September  30, 1995.  Gains on loans sold  increased
from  $6,000 in the 1995 fiscal  year to $38,000 in the 1996  fiscal  year.  The
gains are a result of long-term  fixed-rate  mortgages  (with an amortization of
greater than 20 years) that are sold in the secondary market because they do not
fit the interest rate risk profile of the Bank.  Other service  charges and fees
increased  from  $117,000 for the year ended  September 30, 1995 to $226,000 for
the year ended September 30, 1996. Service charges on deposit accounts increased
$87,000 during the periods  compared as a result of an increase in the number of
accounts  affected and to a lesser degree by an increase in the fees  associated
with deposit accounts.

             Non-interest Expense.  Total non-interest expense increased to $8.2
million for the year ended  September  30, 1996,  from $7.0 million for the year
ended  September  30,  1995,  or 17.4%.  Without the impact of the SAIF  special
assessment,  non-interest  expense  increased  by  $181,000  or 2.6%  during the
period. Compensation and benefits increased from $4.2 million to $4.4 million or
4.8%,  primarily  due  to  merit  increases.  Occupancy  and  equipment  expense
increased  11.3% between  September 30, 1995,  and September 30, 1996,  with the
majority of the increase due to the opening of the Bank's  eleventh  location in
Waite Park,  Minnesota.  Data  processing  decreased  from $567,000 for the year
ended  September 30, 1995, to $379,000 for the year ended September 30, 1996, as
a result of cost savings realized through the integration of processing  systems
subsequent to the merger.

Recent  legislation  required all qualifying  members of the SAIF (including the
Bank) to recapitalize the SAIF by paying a one-time special  assessment equal to
 .65% of the Bank's  deposits as of March 31,  1995.  This  assessment,  expensed
during the fourth quarter of fiscal 1996, cost the Bank approximately $1,030,000
prior to any tax benefit. Due to the special assessment,  it is anticipated that
future SAIF premiums will be lowered from levels paid during fiscal 1996.

                                       11
<PAGE>

             Income  Tax Expense.  Income tax expense  decreased to $1.1 million
for  the  year  ended  September 30, 1996, from $1.5 million for  the year ended
September 30, 1995, or 26.6%.  The  decrease  was primarily due to a decrease in
pre-tax income of slightly less than $1 million.

Comparison of Years Ended September 30, 1995 and 1994

             Net Income.  Net income  increased  by $1.5 million to $2.6 million
for the year ended  September  30,  1995,  from $1.1  million for the year ended
September  30,  1994.  The  increase  was  primarily  due to an  increase in net
interest  income from  increased  interest-earning  assets,  net proceeds of the
Conversion and the Bank's continued growth. An increase in non-interest  expense
was  almost  offset by an  increase  in  non-interest  income.  The  results  of
operations for 1995 included $382,000 as a result of the  implementation of SFAS
No.  115  as  described  in  Note  1 to  the  Notes  to  Consolidated  Financial
Statements.

             Interest  Income.  Total interest income  increased $3.8 million to
$19.1 million for the year ended September  30,1995,  from $15.3 million for the
year ended  September  30,  1994.  Interest  income on loans  increased  by $1.2
million  from $10.0  million for the year ended  September  30,  1994,  to $11.2
million for the year ended  September  30, 1995,  as a result of a $23.6 million
increase  in the average  balance of loans  receivable  from  $119.1  million at
September  30,  1994,  to $142.7  million at September  30,  1995.  Although the
average  balance on loans  increased,  the average yield  declined from 8.39% at
September  30,  1994,  to  7.86% at  September  30,  1995.  Interest  income  on
mortgage-backed  securities  increased  from  $2.7  million  for the year  ended
September 30, 1994, to $3.5 million for the year ended  September 30, 1995.  The
income growth was a combined result of an increase in average balance from $49.6
million to $52.0 million and an increase in yield from 5.43% to 6.74% during the
1995 fiscal year.  Investment  securities  increased  by $30.3  million or 75.0%
during the fiscal year. While the average balance increased, the yield decreased
from 6.50% to 6.15%. Interest on investment securities increased by $1.7 million
as a  result  of the  changes  in  average  balance  and  yield.  The  yield  on
interest-earning  assets  declined  from 7.32% for the year ended  September 30,
1994,  to 7.19% for the year ended  September  30,  1995.  The decrease in yield
reduced  interest  income by $123,000 for the year while the increase in average
balance provided $4.1 million in additional  interest income and the rate/volume
change reduced interest income by $196,000.

             Interest Expense.  Total interest expense increased to $9.5 million
for  1995  from  $7.5  million  for 1994 as both the  average  balance  of total
interest  bearing  liabilities  and the  average  cost of funds  increased.  The
increased cost of deposits attendant to the growth of balances was approximately
$886,000  while the  increase  associated  with a change in  interest  rates was
approximately  $724,000.  The cost  associated  with interest  bearing  deposits
increased  from 3.85% for the year ended  September  30, 1994,  to 4.17% for the
same period ended  September 30, 1995. The cost  associated  with borrowed funds
increased  to 5.16% for  fiscal  1995  compared  to 4.23% for fiscal  1994.  The
increase is consistent  with the increase in short-term  interest  rates and the
overall flattening of the treasury yield curve.

             Net Interest Income.  Net interest income increased $1.8 million or
23.5% for the year ended September 30,1995, from $7.8 million for the year ended
September  30,  1994.  This  increase  is  primarily  attributed  to the average
balances of interest earning assets  increasing  faster than the average balance
of  interest  bearing  liabilities.  The net  changes in the amount of  interest
earning  assets and interest  bearing  liabilities  accounted for a $3.2 million
increase  in net  interest  income,  while the  change in  interest  rates had a
negative  impact on net interest  income of  $847,000,  and the  combination  of
rate/volume changes reduced net interest income by $514,000.

             Provision For Loan Losses. The Bank's loan loss provision decreased
from  $33,000 for the year ended  September  30,  1994,  to $24,000 for the year
ended  September 30, 1995. The Bank's  allowance for loan losses was $764,000 at
September 30, 1995. The allowance for loan losses represents .45% of total loans
outstanding and 201.1% of total non-performing  assets. While the Bank maintains
its  allowance  for loan losses at a level which it  considers  to be  adequate,
there can be no assurance  that further  additions  will not be made to the loss
allowances or that such losses will not exceed the estimated  amounts.  See also
"Comparison  of Years Ended  September  30, 1996,  and 1995 - Provision for Loan
Losses."

                                       12
<PAGE>

             Non-interest   Income.   Total  non-interest  income  increased  by
$943,000 to $1.1 million for the year ended  September  30, 1995,  from $184,000
for the year ended  September  30, 1994,  due primarily to the absence of losses
associated  with the sale of loans and market  value losses in  securities  that
were  held for  sale.  Prior to the  adoption  of SFAS No.  115,  the Bank  held
mortgage-backed  securities  that  were  classified  as  held  for  sale.  These
securities  were  reported in the balance  sheet at the lower of cost or market,
with the changes  reported in the income  statement.  Following  the adoption of
SFAS No. 115, the same  securities  were  designated  available for sale and are
reported  in the  balance  sheet at fair value with the  changes  reported  as a
separate  component of equity.  The cumulative  effect of the adjustments due to
the  adoption of SFAS No. 115 are  non-recurring  and will not have an effect on
non-interest income in future periods.

             Non-interest Expense.  Total non-interest expense increased to $7.0
million for the year ended  September  30, 1995,  from $6.0 million for the year
ended  September 30, 1994, or 16.8%.  Compensation  and benefits  increased from
$3.2  million to $4.2  million or 31.0%,  due to the  implementation  of benefit
programs  instituted  subsequent to the Conversion and approved by stockholders,
and to a lesser extent merit increases.  Data processing decreased from $762,000
for the year ended  September 30, 1994, to $567,000 for the year ended September
30,  1995,  as a  result  of cost  savings  realized  from  the  integration  of
processing  systems in February,  1995.  Professional  expense increased $82,000
during the 1995 fiscal year and was a direct result of the cost  associated with
being a public company.

             Income Tax  Expense.  Income tax expense  increased to $1.5 million
for  the  year  ended  September 30,  1995,  from  $828,000  for  the year ended
September 30, 1994, or 81.3%.  The  increase was primarily due to an increase in
pre-tax income of $1.8 million.


Liquidity and Capital Resources

The liquidity of a banking institution  reflects its ability to provide funds to
meet  loan  requests,  accommodate  possible  outflows  in  deposits,  and  take
advantage  of interest  rate  market  opportunities.  Funding of loan  requests,
providing for liability  outflows,  and management of interest rate fluctuations
require a  continuous  analysis  in order to match the  maturities  of  specific
categories of short-term  loans and investments  with specific types of deposits
and borrowings. The Bank's liquidity,  represented by cash and cash equivalents,
is a product of its operating,  investing and financing activities.  The primary
sources of cash were net income and cash derived from investing activities.

Operating  activities  provided  cash of $3.0  million,  $3.6  million  and $3.6
million during the years ended September 30, 1996, 1995, and 1994, respectively.
In fiscal 1996, the cash flow in operating  activities was primarily  influenced
by the increase in accrued  liabilities  associated with the accrual of the SAIF
special  assessment.  Flows for fiscal 1995 and 1994 have been primarily related
to increases or decreases in loans and investments held for sale.

Investing activities used $52.2 million, $79.5 million, and $11.5 million during
the years ended September 30, 1996, 1995, and 1994, respectively.  During fiscal
1996 and fiscal 1995, the cash used in investing activities was primarily due to
the origination and purchase of loans and to a less extent was the result of the
purchase of securities held to maturity and  mortgage-backed  securities held to
maturity.  During  fiscal 1994,  the cash used in investing  activities  was the
result of the  purchase  of  securities  held to  maturity  and  mortgage-backed
securities  held to maturity.  The use of cash in all periods was offset in part
by maturities of investments.

The primary  activity  of the Bank is  originating  and  purchasing  loans,  and
purchasing  investment and  mortgage-backed  securities.  During the years ended
September 30, 1996,  1995, and 1994, the Bank originated loans in the amounts of
$97.6  million,  $94.7 million and $62.8  million,  respectively.  The Bank also
purchases loans,  investment and mortgage-backed  securities to manage liquidity
and interest  rate risk,  to  supplement  local loan demand and to diversify its
loan portfolio.  Purchases of loans were $17.4 million and $21.0 million for the
1996  and  1995  fiscal  years,   respectively.   Purchases  of  investment  and
mortgage-backed  securities  held  to  maturity  totaled  $21.0  million,  $26.0
million,  and $27.5  million,  and  securities  available  for sale totaled $2.0
million,  $1.9 million and $0.0  million  during the years ended  September  30,
1996,  1995,  and  1994,  respectively.  Other  investment  activities  included
investments in U. S. Government and federal agency obligations,  and FHLB of Des
Moines stock.

Changes in cash  flows from  financing  activities  covered by the  Consolidated
Statements  of  Cash  Flows  in  fiscal  1994  were   primarily  the  result  of
subscriptions  to  purchase  Common  Stock  of the  Corporation  as  part of the
Conversion.  In  addition,  short-term  borrowings  provided  $7.2  million  and
decreases in deposits used $4.3 million in cash during fiscal 1994. For the year
ended  September 30, 1995,  $15.0 million in cash was provided as a result of an
increase in deposits  and $36.1  million in cash was  provided as a result of an
increase in borrowings. Expenses related to the Conversion, purchase of 

                                       13
<PAGE>

treasury stock, refunds of oversubscriptions  and dividends on common stock used
$1.5 million, $2.6 million, $23.0 million and $1.5 million, respectively. During
the fiscal year ended September 30, 1996,  $17.6 million in cash was provided as
a result of an increase in deposits  and $40.9  million was provided as a result
of an increase in borrowings.  The purchase of treasury stock used $10.6 million
and  dividends on Common  Stock used $1.8  million  during the 1996 fiscal year.
Earnings per share for the year ended  September 30, 1996, were $0.48. A portion
of the earnings per share was a result of the purchase of treasury  stock during
the fiscal  year.  Earnings per share for the fiscal year would have been $0.42,
if the same weighted  average shares would have been  outstanding  during fiscal
1996 as were  outstanding in fiscal 1995.  Financing  activities  provided $46.2
million,  $20.7  million,  and $63.2  million  in cash  during  the years  ended
September 30, 1996,  1995 and 1994,  respectively.  Financing  activities in the
foreseeable  future are  expected to primarily  include  changes in deposits and
advances from FHLB of Des Moines.  See Consolidated  Statements of Cash Flow for
FSF Financial Corp. and Subsidiary.

The Bank's  liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits, and other cash outflows in an efficient, cost effective manner. The
Bank's  primary  source of funds are deposits  and  scheduled  amortization  and
prepayments  of loan and  mortgage-backed  security  principal.  During the past
several  years,  the Bank has used such funds  primarily to fund  maturing  time
deposits,  pay savings  withdrawals,  fund  lending  commitments,  purchase  new
investments,  and increase liquidity.  The Bank funds its operations  internally
and as needed with borrowed funds from the FHLB. As of September 30, 1996,  such
borrowed  funds  totaled  $114.7  million.  While loan  repayments  and maturing
investments and mortgage-backed securities are relatively predictable sources of
funds,  deposit  flows and loan and  mortgage-backed  security  prepayments  are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.

The Bank is required  under federal  regulations to maintain  certain  specified
levels of "liquid  investments,"  which include certain United States government
obligations and other approved investments. Current regulations require the Bank
to maintain liquid assets of not less than 5% of its net  withdrawable  accounts
plus short term  borrowings.  Short term liquid  assets must consist of not less
than 1% of such accounts and  borrowings,  which amount is also included  within
the 5% requirement.  These levels may change from time to time by the regulators
to reflect the current economic  conditions.  The Bank has generally  maintained
liquidity  far in excess  of  regulatory  requirements.  The  Bank's  regulatory
liquidity was 6.08%,  11.05% and 19.04% at September 30, 1996,  1995,  and 1993,
respectively,  and its short-term  liquidity was 6.08%,  11.05%,  and 19.03%, at
such dates, respectively.

The amount of  certificate  accounts  which are  scheduled to mature  during the
twelve months ending September 30, 1997, is approximately  $80.7 million. To the
extent  that these  deposits do not remain at the Bank upon  maturity,  the Bank
believes  that  it  can  replace  these  funds  with  deposits,  current  excess
liquidity,  FHLB  advances  or  outside  borrowings.  It  has  been  the  Bank's
experience  that a substantial  portion of such maturing  deposits remain at the
Bank.

At  September  30,  1996,  the Bank had  commitments  to extend  credit of $17.9
million and forward  commitments  to purchase  mortgages of $1.5 million.  Funds
required to fill these  commitments are derived  primarily from FHLB borrowings,
current excess liquidity, deposit inflows, or loan and security repayments.

OTS  regulations  require the Bank to maintain core capital of 3% of assets,  of
which  1.5%  must be  tangible  capital,  excluding  goodwill.  The Bank is also
required to maintain  risk-based capital equal to 8% of total risk-based assets.
The OTS has proposed  amending its  regulations  in a manner that would increase
the core capital  requirements  for most thrifts from 3% to 4% or 5%,  depending
upon the institution's financial condition and other factors. Although the final
form of the  regulation  cannot be foreseen,  if adopted as  proposed,  the Bank
would expect its core capital requirement to remain at 3%.

The Bank's compliance with regulatory capital requirements are presented in Note
12 to the Notes to Consolidated Financial Statements.

Management  believes that under current  regulations,  the Bank will continue to
meet its minimum capital  requirements in the foreseeable future.  Events beyond
the control of the Bank,  such as increased  interest rates or a downturn in the
economy  in areas in which the Bank  operates,  could  adversely  affect  future
earnings  and as a result,  the  ability of the Bank to meet its future  minimum
capital requirements.

                                       14
<PAGE>


Impact of Inflation and Changing Prices

The financial  statements and related data have been prepared in accordance with
Generally Accepted Accounting Principles (GAAP) which require the measurement of
financial position and operating results in terms of historical dollars, without
consideration  for changes in the relative  purchasing  power of money over time
caused by inflation.

Unlike  industrial  companies,  nearly all of the assets  and  liabilities  of a
financial institution are monetary in nature. As a result, interest rates have a
more significant  impact of a financial  institution's  performance than general
levels  of  inflation.  Interest  rates  do not  necessarily  move  in the  same
direction  or in the same  magnitude as the price of goods and  services,  since
goods and services  are  affected by  inflation.  In the current  interest  rate
environment,  liquidity  and the  maturity  structure  of the Bank's  assets and
liabilities are critical to the maintenance of acceptable performance levels.

                                       15
<PAGE>




                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders
FSF Financial Corp. and Subsidiary
Hutchinson, MN  55350

We have audited the accompanying  consolidated statements of financial condition
of FSF Financial  Corp. and  Subsidiary  (the  Corporation)  as of September 30,
1996, and 1995, and the related  consolidated  statements of income,  changes in
stockholders'  equity,  and cash flows for each of the three fiscal years in the
period  ended   September  30,  1996.   These   financial   statements  are  the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

 In our opinion the financial  statements  referred to above present fairly,  in
all material  respects,  the  consolidated  financial  position of FSF Financial
Corp. and  Subsidiary as of September 30, 1996,  and 1995, and the  consolidated
results of their  operations  and their cash flows for each of the three  fiscal
years in the period ended  September  30, 1996,  in  conformity  with  generally
accepted accounting principles.

As discussed in Note 1 to the financial statements,  the Corporation changed its
method of accounting for certain investments in debt and equity securities as of
October 1, 1994.




Bertram Cooper & Co., LLP
Waseca, Minnesota
October 25, 1996


                                       16


<PAGE>
                 FSF FINANCIAL CORP. AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                    September 30,
                                                ----------------------
                                                   1996       1995
                                                ----------------------
                                                    (In thousands)

                    ASSETS 
Cash and cash equivalents:
   Interest bearing                              $   9,392  $  12,448
   Non-interest bearing                              2,364      2,407
Securities available for sale, at fair value:
   Equity securities                                18,231     16,165
   Mortgage-backed and related securities           16,336     16,141
Securities held to maturity, at amortized cost:
   Debt securities                                  44,349     41,914
   Mortgage-backed and related securities           38,557     37,110
Loans held for sale                                    443        230
Loan receivable, net                               216,727    170,921
Accrued interest receivable                          2,325      2,097
Premises and equipment                               3,728      3,758
Other assets                                         2,184      1,414
                                                ----------------------

          Total Assets                           $ 354,636   $304,605
                                                ======================

     LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Demand deposits                             $  27,601   $ 27,338
     Savings accounts                               48,334     48,027
     Certificates of deposit                       113,139     96,151
                                                ----------------------
          Total deposits                           189,074    171,516
     Federal Home Loan Bank borrowings             114,693     73,807
     Other liabilities                               3,220      1,931
                                                ----------------------
          Total liabilities                        306,987    247,254
                                                ----------------------

Stockholders' equity:
     Serial preferred stock, no par value
          5,000,000 shares authorized,
          no shares issued                               -          -
     Common stock, $.10 par value 10,000,000
          shares authorized, 4,501,277
          and 4,499,905 shares issued                  450        450
     Additional paid in capital                     43,150     43,069
     Retained earnings, substantially               22,068     22,158
          restricted
     Treasury stock at cost (1,023,083 and         (13,095)    (2,589)
          224,825 shares)
     Unearned ESOP shares at cost (271,850 and
          310,259 shares)                           (2,719)    (3,103)
     Unearned MSP stock grants at cost
          (131,946 and 159,322 shares)              (1,398)    (1,688)
     Unrealized (loss) on securities available
          for sale                                    (807)      (946)
                                                ----------------------
          Total stockholders' equity                47,649     57,351
                                                ----------------------

          Total Liabilities and Stockholders'
               Equity                           $  354,636   $304,605
                                                ======================

                                       17

   The accompanying notes are an integral part of these statements


<PAGE>



                    FSF FINANCIAL CORP. AND SUBSIDIARY
                    CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                              Years Ended
                                                              September 30,
                                                     ------------------------------
                                                        1996      1995      1994 
                                                     ------------------------------
                                                        (In thousands)
Interest income:
<S>                                                  <C>        <C>        <C>     
     Loans receivable                                $ 16,077   $ 11,221   $  9,996
     Mortgage-backed and related securities             3,270      3,504      2,696
      Investment securities                             3,897      4,354      2,628
                                                       ----------------------------
          Total interest income                        23,244     19,079     15,320
                                                       ----------------------------
Interest expense:
     Deposits                                           8,262      6,753      6,102
      Borrowed funds                                    5,347      2,719      1,442
                                                       ----------------------------
          Total interest expense                       13,609      9,472      7,544
                                                       ----------------------------
          Net interest income                           9,635      9,607      7,776
     Provision for loan losses                             42         24         33
                                                       ----------------------------
          Net interest income after provision for
              loan losses                               9,593      9,583      7,743
                                                       ----------------------------
Non-interest income:
     Gain (loss) on loans - net                            38          6       (842)
     Other service charges and fees                       226        117         90
     Service charges on deposit accounts                  744        657        562
     Commission income                                    231        161        166
     Other                                                115        186        208
                                                       ----------------------------
          Total non-interest income                     1,354      1,127        184
                                                       ----------------------------
Non-interest expense:
     Compensation and benefits                          4,404      4,212      3,214
     Occupancy and equipment                              797        716        748
     Deposit insurance premiums                           406        357        381
     SAIF special assessment                            1,030       --         --
     Data processing                                      379        567        762
     Professional fees                                    249        242        160
     Other                                                913        872        699
                                                       ----------------------------
          Total non-interest expense                    8,178      6,966      5,964
                                                       ----------------------------
          Income before provision for income taxes
              and  cumulative effect of change in
              accounting principle                      2,769      3,744      1,963
Income tax expense                                      1,101      1,501        828
                                                       ----------------------------
Income before cumulative effect of change
     in accounting principle                            1,668      2,243      1,135
Cumulative effect of change in accounting for
     securities available for sale                       --          382       --
                                                       ----------------------------
Net income                                             $ 1,668  $  2,625  $   1,135
                                                       ============================

Earnings per common and common equivalent shares:
     Income before cumulative effect of change
         in accounting principle                     $   0.48   $   0.57        N/A
     Cumulative effect of change in accounting
         principle                                       --         0.10        N/A
         Net income                                  $   0.48   $   0.67        N/A
</TABLE>

                                       18

          The accompany notes are an integral part of these statements
<PAGE>

                       FSF FINANCIAL CORP. AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                Retained Unallocated                      Unrealized
                                                Earnings   Common    Unearned             (Loss) on
                                     Additional Substan-   Stock       Stock              Securities
                              Common   Paid-in   tially   Held by  Acquired by Treasury   Available
                               Stock   Capital  Restricted  ESOP      MSP        Stock     For Sale   Total
                              ------------------------------------------------------------------------------

<S>                            <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>     
Balance, September 30, 1993    $     -  $     -   $ 19,911  $     -   $     -   $      -  $   (38)  $ 19,873
  Net earnings for
  the year ended
  September 30, 1994                 -        -      1,135        -         -          -         -     1,135

  Change in
  unrealized
  loss on equity
  securities                         -        -          -        -         -          -      (500)     (500)
                               -----------------------------------------------------------------------------


Balance, September 30, 1994          -        -     21,046        -         -          -      (538)    20,508

  Net earnings for
  the year ended
  September 30, 1995                 -        -      2,625        -         -          -         -      2,625

  Issuance of common stock
  net of stock acquired 
  by the ESOP and MSP              450   43,020          -   (3,597)   (1,905)         -         -     37,968

  Cost of shares
  reacquired for
  treasury                           -        -          -        -         -     (2,589)        -     (2,589)

  Cash dividends
  declared on
  common stock at
  $0.375 per share                   -        -     (1,513)        -        -          -         -     (1,513)

  Allocated/earned
  ESOP & MSP shares                  -       17          -       494      217          -         -        728

  Stock issued for
  options
  exercised                          -       32          -         -        -           -        -         32

  Cumulative effect
  of change in
  accounting for
  securities                         -        -          -         -        -           -     (382)      (382)

  Net changes in
  unrealized loss on
  securities
  available for
  sale, net of tax                   -         -         -         -        -           -      (26)       (26)
                               --------------------------------------------------------------------

Balance September 30, 1995         450    43,069    22,158    (3,103)  (1,688)     (2,589)    (946)    57,351

  Net earnings for
  the year ended 
  September 30, 1996                 -         -     1,668         -        -           -        -      1,668

  Cost of shares
  reacquired for
  treasury                           -         -         -         -        -     (10,560)       -    (10,560)

  Treasury stock
  issued for
  stock options                      -        (7)        -         -        -          54        -         47

  Cash dividends
  declared on
  common stock at
  $0.50 per share                    -         -    (1,758)        -        -           -        -     (1,758)

  Allocated/earned
  ESOP & MSP shares                  -        75         -       384       290          -        -        749

  Stock issued for
  options exercised                  -        13         -         -         -          -        -         13

  Net changes in
  unrealized loss on
  securities
  available for
  sale, net of tax                   -         -         -         -         -          -      139        139
                               ------------------------------------------------------------------------------

Balance September 30, 1996     $   450  $ 43,150  $ 22,068  $ (2,719)  $(1,398)  $(13,095) $  (807)  $ 47,649
                               ==============================================================================
</TABLE>

          The accompany notes are an integral part of these statements

                                       19

<PAGE>
                   FSF FINANCIAL CORP. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                               Years Ended September 30,
                                              ----------------------------
                                                1996      1995     1994
                                              ----------------------------
Cash flows from operating activities:               (In thousands)
<S>                                            <C>          <C>        <C>       
     Net income                                $  1,668     $ 2,625    $   1,135  
     Adjustments to reconcile net income to                             
       net cash provided by operating activities:                       
     Depreciation                                   340         330          297
     Net amortization of discounts and                                  
       premiums on securities held to maturity      (36)        (55)         (6)
     Provision for loan losses                       42          24          33
     Net market value adjustment on ESOP shares      89          18           -
     Amortization of ESOP and MRP                                       
       stock compensation                           674         712           -
     Net gain on sale of fixed assets                (2)        (12)          -
     Net gain on real estate sold                    (3)        (44)        (13)
     Federal Home Loan Bank stock dividends         (81)          -           -
     Change in accounting for securities                                
       available for sale                             -        (382)          -
     Net decrease in market value of                                    
       securities available for sale                  -           -         641
     Net loan fees deferred and amortized           283         225         234
     (Increase) decrease in:                                            
        Loans held for sale                        (213)        499       2,367
        Accrued interest receivable                (228)       (741)       (136)
        Income taxes receivable                       -           -        (309)
        Other assets                                (72)        547        (575)
     Increase (decrease) in:                                            
        Net deferred tax liability                 (676)       (237)         58
        Accrued interest payable                    (16)        (87)         62
        Accrued income tax                          (26)        411        (149)
        Accrued liabilities                       1,111        (416)       (101)
        Deferred compensation payable               106         203          71
                                              ----------   ----------   --------
Net cash provided by operating activities         2,960       3,620       3,609
                                              ----------   ----------   --------
                                                                        
Cash flows from investing activities:                                   
     Loan originations and principal                                    
       payments on loans, net                   (28,770)    (33,767)        991
     Purchase of loans                          (17,447)    (20,993)          -
     Principal payments on securities held                              
       to maturity                                   49          84      13,503
     Purchase of mortgage-related securities                            
       held to maturity                          (1,494)     (3,924)    (16,044)
     Purchase of securities available                                   
       for sale                                  (1,963)     (1,900)          -
     Purchase of  securities held to maturity   (19,552)    (22,063)    (11,411)
     Proceeds from maturities of securities                             
       held to maturity                          17,150       3,100       2,000
     Investment in foreclosed real estate           (21)        (35)        (24)
     Proceeds from sale of foreclosed real                              
       estate                                       112         502         233
     Proceeds from sale of fixed assets               2          16           -
     Purchase of single premium insurance                               
       policies                                       -           -        (605)
     Purchase of equipment and property                                 
       improvements                                (311)       (481)       (145)
                                              ----------   ----------   --------

Net cash (used in) investing activities        $(52,245)   $(79,461)   $(11,502)
                                              ----------   ----------   --------
</TABLE>

        The accompanying notes are an integral part of these statements
                                                               
                                       20

<PAGE>

                   FSF FINANCIAL CORP. AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


                                               Years Ended September 30,

                                              ----------------------------
                                                1996      1995     1994
                                              ----------------------------
Cash flows from financing activities:               (In thousands)
     Net increase (decrease) in deposits,      $ 17,558 $ 15,036 $ (4,286)
     Net increase in short-term borrowings       40,886   36,119    7,216
     Net increase (decrease) in mortgage
      escrow funds                                    6       53      (51)
     Expenses related to stock offering               -   (1,496)       -
     Treasury stock purchased                   (10,559)  (2,589)       -
     Proceeds from stock offering                     -        -   60,339
     Refund of proceeds from stock offering           -  (23,032)       -
     Dividends on common stock                   (1,758)  (1,513)       -
     Purchase of stock for MSP                        -   (1,905)       -
     Proceeds from exercise of stock options         53       32        -
                                              ----------------------------
Net cash provided by financing activities        46,186   20,705   63,218
                                              ----------------------------

Net increase in cash and cash equivalents        (3,099) (55,136)  55,325

Cash and cash equivalents:
     Beginning of year                           14,855   69,991   14,666
                                              ----------------------------

     End of year                               $ 11,756  $14,855  $69,991
                                              ============================

Supplemental disclosures of cash flow information:
     Cash payments for:
        Interest on advances and other
          borrowed money                       $  5,368  $ 2,834  $ 1,442
        Interest on deposits                      8,258    6,725    6,102
        Income taxes                              1,656    1,338    1,159

Supplemental schedule of noncash investing
  and financing activities:
Federal Home Loan Bank stock dividends         $     81  $     -  $     -
Reinvested amounts of capital gains and
  dividends from mutual fund investments            163      607        -
Refinancings of sales of real estate owned            -      436      113
Transfer of loans for sale to loans held for
  investment                                          -        -   18,480
Transfer of deposits to stock subscriptions           -        -    4,061

        The accompanying notes are an integral part of these statements

                                       21

<PAGE>


                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


 (1)  Summary of Significant Accounting Policies

The following comprise the significant  accounting  policies FSF Financial Corp.
(the Corporation) follows in preparing and presenting its consolidated financial
statements:

Principles of Consolidation
The  consolidated  financial  statements  include the accounts of FSF  Financial
Corp.  and its wholly owned  subsidiary,  First Federal fsb (the Bank),  and its
wholly owned  subsidiary,  Firstate  Services Inc., which markets  insurance and
investment  products.  Significant  intercompany  accounts and  transactions are
eliminated in consolidation. Certain amounts in the financial statements for the
prior years have been  reclassified  to conform to current  financial  statement
presentation.

Organization
On October 6, 1994, the Bank converted from a federally chartered mutual savings
and loan  association to a federally  chartered stock savings bank pursuant to a
Plan of Conversion (the  Conversion) via the issuance of common stock.  The Bank
received $64.4 million in subscriptions  for common stock in the Corporation and
an order for 359,720  shares of common stock from the Employee  Stock  Ownership
Plan (the ESOP).  In  conjunction  with the  Conversion,  the  Corporation  sold
4,496,500 shares of common stock which, after giving effect to offering expenses
of $1.5 million,  resulted in net proceeds of $44.0 million and refunds of $23.0
million of the stock subscription  proceeds held at September 30, 1994. Pursuant
to the Conversion, the Bank transferred all of its outstanding shares to a newly
organized  holding company,  FSF Financial Corp., in exchange for 50% of the net
proceeds.

Upon the Conversion, the preexisting liquidation rights of the depositors of the
Bank were  unchanged.  Such rights are accounted for by the Bank for the benefit
of such  depositors  in  proportion  to their  liquidation  interests  as of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as defined.

The Bank resulted from the merger of First Federal Savings and Loan  Association
of Hastings,  Minnesota and First State Federal Savings and Loan  Association of
Hutchinson,  Minnesota . The merger was  consummated  on September 30, 1994, and
was  accounted  for  as  a  pooling  of  interests.   Accordingly,  the  assets,
liabilities and retained  earnings of the respective  Associations were combined
as of that date and recorded at historical  cost. All financial  information for
the year ended September 30, 1994,  contained  herein relates solely to the Bank
and its subsidiary.

Nature of Business
The  Corporation is a unitary thrift holding company whose  subsidiary  provides
financial services.  The Bank's business is that of a financial intermediary and
consists primarily of attracting deposits from the general public and using such
deposits,  together with  borrowings  and other funds,  to make  mortgage  loans
secured by residential real estate located primarily in Minnesota.  At September
30, 1996, the Bank operated 11 retail banking offices in Minnesota.  The Bank is
subject to significant  competition  from other financial  institutions,  and is
also subject to regulation by certain  federal  agencies and undergoes  periodic
examinations by those regulatory authorities.

Use of Estimates
In preparing the consolidated  financial  statements,  management is required to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  as  of  the  date  of  the  consolidated  statements  of  financial
condition,  and income and expenses for the period.  Actual results could differ
from those estimates.  Material  estimates that are particularly  susceptible to
significant  change relate to the  determination  of the allowance for losses on
loans and the valuation of real estate acquired in connection with  foreclosures
or in  satisfaction  of  loans.  In  connection  with the  determination  of the
allowances for losses on loans and foreclosed  real estate,  management  obtains
independent  appraisals  for  significant  properties.   While  management  uses
available  information to recognize  losses on loans and foreclosed real estate,
future  additions to the allowances  may be necessary  based on changes in local
economic conditions.  In addition,  regulatory agencies,  as an integral part of
their examination  process,  periodically review the Bank's allowance for losses
on loans and  foreclosed  real  estate.  Such  agencies  may require the Bank to
recognize  additions to the allowance based on their judgments about information
available to them at the time of their examination.

Cash Equivalents
For  purposes of the  consolidated  statements  of cash flows,  the  Corporation
considers all highly liquid debt instruments  with original  maturities of three
months or less and money market funds to be cash  equivalents.  The  Corporation
held cash  equivalents  of $3,341 and,  $9,865 at September 30, 1996,  and 1995,
respectively.

                                       22
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



Debt and Equity Securities
The  Corporation   classifies  its  investments,   including  marketable  equity
securities,  mortgage-backed securities, and mortgage-related securities, in one
of three categories:

    Trading Account Securities
    Securities  held  principally for resale in the near term, are classified as
    trading  account  securities  and recorded at their fair values.  Unrealized
    gains and losses on trading account securities are included in other income.
    The Corporation did not hold any trading securities at September 30, 1996 or
    1995.

    Securities Held to Maturity
    Debt securities which the Corporation has the positive intent and ability to
    hold to maturity are reported at cost,  adjusted for premiums and  discounts
    that are  recognized in interest  income using the interest  method over the
    period  to  maturity.  Unrealized  losses  on  held to  maturity  securities
    reflecting a decline in value judged to be other than  temporary are charged
    to income.

    Securities Available for Sale
    Available for sale securities  consist of equity securities and certain debt
    securities  not  classified  as trading  securities  nor as held to maturity
    securities.  Unrealized  holding gains and losses,  net of income taxes,  on
    available  for sale  securities  are  reported as a net amount in a separate
    component of  shareholders'  equity until realized.  Gains and losses on the
    sale of available  for sale  securities  are  determined  using the specific
    identification  method.  Any decision to sell available for sale  securities
    would be based on various  factors,  including  movements in interest rates,
    changes in the maturity  mix of the  Corporation's  assets and  liabilities,
    liquidity  demands,  regulatory  capital  considerations,  and other similar
    factors.  Premiums and discounts are recognized in interest income using the
    interest method over the period to maturity.  Unrealized losses on available
    for sale  securities  reflecting  a decline in value judged to be other than
    temporary are charged to income.

The  Corporation  adopted the  provisions  of Statement of Financial  Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"  as of October 1, 1994.  Prior to the  adoption of SFAS No. 115, the
Corporation  classified  and accounted for its held to maturity debt  securities
using the same criteria  required by SFAS No. 115. Held for sale debt securities
were  carried  at the lower of cost or market  with  unrealized  losses  thereon
included in the  determination of net income.  Marketable equity securities were
recorded at the lower of cost or market  with  unrealized  losses  recorded as a
reduction in retained  earnings.  Upon  adoption of SFAS No. 115,  held for sale
debt securities were  reclassified as available for sale. The cumulative  effect
of the change in  accounting  method for debt  securities  is  reported,  net of
income  tax,  in the  consolidated  statements  of income  and the  consolidated
statements of changes in stockholders'  equity. If SFAS No. 115 had been applied
earlier,  the pro-forma effect on fiscal 1994 would have been an increase in net
income in an amount equal to the amount of the cumulative effect on fiscal 1995.

The Bank,  as a member of the  Federal  Home Loan Bank  System,  is  required to
maintain an  investment  in capital  stock of the Federal  Home Loan Bank of Des
Moines (FHLB) in varying amounts based on balances of outstanding home loans and
on  amounts  borrowed  from the FHLB.  Because no ready  market  exists for this
stock, and it has no quoted market value, the Bank's investment in this stock is
carried at cost.

Loans Held for Sale
Mortgage  loans  originated  and intended for sale in the  secondary  market are
carried at the lower of cost or  estimated  market value in the  aggregate.  Net
unrealized  losses are  recognized  through a valuation  allowance by charges to
income.

Loans Receivable
Loans receivable for which management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid balances  reduced by any charge-offs or specific  valuation  accounts and
net of any deferred fees or costs on originated  loans, or unamortized  premiums
or discounts on purchased loans.

Discounts  on first  mortgage  loans are  amortized to income using the interest
method  over  the  remaining  period  to  contractual  maturity,   adjusted  for
anticipated  prepayments.  Discounts on consumer loans are  recognized  over the
lives of the loans using the interest method.

The Bank adopted SFAS No. 114,  "Accounting  for Creditors  for  Impairment of a
Loan," and SFAS No. 118,  "Accounting  by Creditors  for  Impairment of a Loan -
Income   Recognition   and   Disclosures,"   on  October  1,  1995.   These  two
pronouncements  require  measurement of impairment based on the present value of
expected future cash flows discounted at the loan's  effective  interest rate or
the fair value of the collateral if the loan is collateral dependent. Regardless
of the  measurement  method,  impairment  is  based  on the  fair  value  of the
collateral when the Bank determines that  foreclosure is probable.  The adoption
of these  statements  did not impact the Bank's results of operations for fiscal
1996 or any prior period.  

                                       23

<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The allowance for loan losses is increased by charges to income and decreased by
charge-offs  (net  of  recoveries).  Management's  periodic  evaluation  of  the
adequacy  of the  allowance  is based on the Bank's  past loan loss  experience,
known and inherent risks in the portfolio,  adverse  situations  that may affect
the borrower's ability to repay,  estimated value of any underlying  collateral,
and current economic conditions.

Uncollectible interest on loans that are contractually past due for three months
is charged off or an allowance is established,  based on  management's  periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued,  and income is subsequently  recognized only to
the extent cash  payments are received  until,  in  management's  judgment,  the
borrower's  ability to make periodic interest and principal  payments returns to
normal, in which case the loan is returned to accrual status.

Loan origination fees and certain direct  origination  costs are capitalized and
recognized as an adjustment to the yield of the related loan.

Foreclosed Real Estate
Real estate  properties  acquired  through,  or in lieu of, loan foreclosure are
initially  recorded at fair value at the date of foreclosure  establishing a new
cost  basis.  After  foreclosure,   valuations  are  periodically  performed  by
management  and the real  estate is carried at the lower of (1) cost or (2) fair
value minus  estimated  costs to sell.  Revenue and expenses from operations and
changes to the valuation allowance are included in operations.

Income Taxes
Deferred  income  taxes are  recognized  for the tax  consequences  of temporary
differences by applying  enacted  statutory tax rates applicable to future years
to differences  between the financial  statements  carrying  amounts and the tax
bases of existing  assets and  liabilities.  The effect on  deferred  taxes of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date. The measurement of deferred tax assets is reduced, if necessary,
by the amount of any tax benefits  that,  based on available  evidence,  are not
expected  to be  realized.  The effect of a change in the  beginning-of-the-year
balance of a valuation  allowance  that results from a change in judgment  about
the realizability of deferred tax assets is included in income.

Premises and Equipment
Land, buildings,  leasehold improvements and equipment are carried at cost, less
accumulated   depreciation  and   amortization.   Buildings  and  equipment  are
depreciated  using the  straight-line  method over the estimated useful lives of
the assets.  The cost of leasehold  improvements  is being  amortized  using the
straight-line  method over the terms of the related leases. Net gains and losses
on disposal  or  retirement  of premises  and  equipment  are  included in other
income.

Mortgage Loan-Servicing Rights
The Bank adopted SFAS No. 122,  "Accounting for Mortgage  Servicing  Rights - An
Amendment of SFAS No. 65,"  prospectively  as of October 1, 1995.  Issued in May
1995,  SFAS No. 122 amends  certain  provisions  of SFAS No. 65 to eliminate the
accounting  distinction between rights to service mortgage loans for others that
are acquired  through loan  origination  activities and rights acquired  through
purchase  transactions.  The statement  requires a mortgage banking  enterprise,
which sells or  securitizes  loans and retains  the related  mortgage  servicing
rights,  to  allocate  the  total  cost of the  mortgage  loans to the  mortgage
servicing rights and the loans (without the mortgage  servicing rights) based on
their  relative fair values.  The effect of adopting SFAS No. 122 did not have a
material  impact  of  the  Bank's  financial  condition  or the  results  of its
operations.

The cost of mortgage  servicing  rights is amortized in proportion  to, and over
the  period  of,  estimated  net  servicing  revenues.  Impairment  of  mortgage
servicing  rights is  assessed  based on the fair  value of those  rights.  Fair
values are  estimated  using  discounted  cash flows  based on a current  market
interest  rate.  The Bank  evaluates  the mortgage  servicing  rights strata for
impairment by  estimating  the fair value based on  anticipated  future net cash
flows,  taking  into  consideration  prepayment  predictions.   The  predominant
characteristics  used as the basis for  stratifying  are loan  types,  period of
origination,  and interest  rates.  The amount of  impairment  recognized is the
amount by which the capitalized  mortgage  servicing rights for a stratum exceed
their fair value.

Prior to SFAS No. 122, when participating interests in loans sold having average
contractual  interest rate,  adjusted for normal  servicing  fees, that differed
from the agreed yield to the purchaser, gains or losses were recognized equal to
the present value of such differential over the estimated remaining life of such
loans.  The  resulting  "excess  servicing  receivable"  or "deferred  servicing
revenue" is amortized over the estimated life using the interest method.

Quoted market prices are not  available  for the excess  servicing  receivables.
Thus,  the  excess  servicing  receivables  and  the  amortization  thereon  are






periodically  evaluated  in relation to  estimated  future  servicing  revenues,
taking into consideration  changes in interest rates,  current prepayment rates,
and expected  future cash flows.  The Bank  evaluates the carrying  value 
                                       24
<PAGE>

of the excess servicing receivables by estimating the future servicing income of
the  excess  servicing  receivables  based  on  management's  best  estimate  of
remaining loan lives and discounted at the original discount rate.

Long-Lived Assets
The  Corporation  adopted  SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to be Disposed of," in fiscal year
1996.  This statement  requires  impairment  losses to be recorded on long-lived
assets used in operations when indicators of impairment are present.  Impairment
would be considered when the  undiscounted  cash flows estimated to be generated
by those assets are less than the assets'  carrying  amount.  Implementation  of
this statement had no effect on the consolidated financial statements.

Earnings Per Share
Earnings  per share of common stock for the years ended  September  30, 1996 and
1995,  has been  determined by dividing the income before  cumulative  effect of
change in accounting  principle and net income by the weighted average number of
shares of common stock and common stock equivalents  outstanding during the year
of 3,384,930 and 3,931,000,  respectively.  Stock options are regarded as common
stock equivalents  computed using the treasury stock method.  Shares acquired by
the employee  stock  benefit plans are not  considered  in the weighted  average
shares  outstanding  until shares are  committed to be released to an employee's
individual account or have been earned. The difference between primary and fully
diluted earnings per share is not material.

Earnings per share has not been presented for the year ended September 30, 1994,
because the Bank was a mutual savings and loan association for that period.

Treasury Stock
Treasury  stock is recorded at cost.  In the event of  subsequent  reissue,  the
treasury  stock account will be reduced by the cost of such stock on the average
cost basis with any excess  proceeds  credited to  additional  paid-in  capital.
Treasury stock is available for general corporate purposes.

Fair Values of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:

     Cash and cash equivalents - The carrying value of cash and cash equivalents
          approximate fair value.
     Debt and equity securities - Fair values of debt and equity securities have
          been estimated using quoted market prices.
     Loansreceivable - For variable-rate  loans, loans with balloon  maturities,
          loans  with  relatively   near-term   maturities   (such  as  consumer
          installment  loans) carrying values  approximate fair values. The fair
          value of long-term  fixed rate loans has been estimated  using present
          value cash flows,  discounted at a rate  approximating  current market
          rates and giving consideration to estimated prepayment risk and credit
          loss factors. The estimated fair value of loans held for sale is based
          on  quoted  market  prices  of  similar  instruments  trading  in  the
          secondary market.
     Originated mortgage  servicing  rights - The carrying amounts of originated
          mortgage servicing rights approximate fair values.
     Accrued  interest - The  carrying  amounts of accrued  interest  receivable
          approximate their fair values
     Deposit  liabilities  -  The  fair  values  of  demand   deposits  are,  by
          definition,  equal to the amount  payable  on demand at the  reporting
          date  (that is,  their  carrying  amounts).  The  carrying  amounts of
          variable-rate,  fixed-term  money market accounts and  certificates of
          deposits  approximate  their fair values at the reporting  date.  Fair
          values for fixed-rate  certificates  of deposit are estimated  using a
          discounted cash flow calculation that applies interest rates currently
          being offered on  certificates  to a schedule of  aggregated  expected
          monthly maturities on time deposits.
     Short-term  borrowings - The carrying  amounts of advances from the Federal
          Home  Loan  Bank  (FHLB)  of  Des  Moines   maturing  within  90  days
          approximate their fair values.
     Long-term  borrowings  - The  carrying  amounts  of  amounts  of  long-term
          borrowings are estimated using  discounted cash flow analyses based on
          the Bank's current  incremental  borrowing  rates for similar types of
          borrowing arrangements.
     Off-balance-sheet  items  -  Fair  value  for   off-balance-sheet   lending
          commitments are based on fees currently  charged to enter into similar
          agreements,  taking into account the remaining terms of the agreements
          and the counterparties' credit standings.  The carrying value and fair
          value of commitments to extend credit are not considered  material for
          disclosure.

                                       25
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



 (2)  Debt and Equity Securities  (in thousands)

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets according to management's  intent.  The carrying amount of securities and
their approximate fair values at September 30 are presented as follows:
<TABLE>
<CAPTION>

                                                 September 30, 1996
                                   ----------------------------------------------
                                                Gross         Gross
                                   Amortized  Unrealized   Unrealized      Fair
                                    Cost        Gains         Losses       Value    
                                   --------     -------     --------     --------
Available for sale securities:
     Equity securities:
<S>                                 <C>          <C>         <C>          <C>    
          Fund Investments          $12,522      $    -      $   426      $12,096
          Stock in FHLB               5,736           -            -        5,736
          Preferred Stock               398           1            -          399
                                    --------     -------     --------     --------
                    Total            18,656      $    1      $   426      $18,231
                                    ========     =======     ========     ========
                                                                         
     Mortgage backed securities:                                         
          REMICs                    $16,980      $    -      $   644       16,336
                                   ========     =======     ========     =========
                                                                         
Held to maturity securities:                                             
     Debt securities:                                                    
          U. S. Government and
            Agency                  $44,349      $   30      $2,753        41,626
                                   --------     -------     --------     --------
                    Total           $44,349      $   30      $2,753       $41,626
                                   ========     =======     ========     ========
                                                                         
     Mortgage backed securities:                                         
          REMICs                    $38,468      $   46       1,693      $36,821
          GNMA certificates              80           4           -           84
          FHLMC certificates              9           1           -           10
                                   --------     -------     --------     --------
                    Total           $38,557      $   51      $1,693      $36,915
                                   ========     =======     ========     ========
</TABLE>
                                                                         
                                                                         
The amortized cost of debt and mortgage-backed securities at September 30, 1996,
included  unamortized  premiums  of  $255  and  unaccreted  discounts  of  $462,
respectively.                                                            

                                       26
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

<TABLE>
<CAPTION>
                                                September 30, 1995
                                  ----------------------------------------------
                                                Gross        Gross
                                   Amortized  Unrealized   Unrealized     Fair
                                    Cost        Gains        Losses       Value   
                                   --------    -------     --------     --------
Available for sale securities:
     Equity securities:
<S>                                <C>          <C>         <C>          <C>      
          Fund Investments         $12,522      $    -      $   451      $12,071  
          Stock in FHLB              3,692           -            -        3,692
          Preferred Stock              396           6            -          402
                                  --------     ------- -    -------     --------
                    Total          $16,610      $    6      $   451      $16,165
                                  ========     ======= =    =======     ========
                                                                       
     Mortgage backed securities:                                       
          REMICs                   $16,979      $    -      $   838       16,141
                                  ========     ======= =    =======     ========
                                                                       
Held to maturity securities:                                           
     Debt securities:                                                  
          U. S. Government and                                         
           Agency                  $40,914      $  215      $ 2,027       39,102
          Corporate debt                                               
            securities               1,000           -            5          995
                                  --------     ------- -    -------     --------
                    Total          $41,914      $  215 $      2,032      $40,097
                                  ========      ====== =    =======     ========
                                                                       
     Mortgage backed securities:                                               
          REMICs                   $36,986      $   14 $      2,013      $34,987
          CMOs                          24           -            -           24
          GNMA certificates             88           1            -           89
          FHLMC certificates            12           -            -           12
                                  --------     -------     --------     --------
                    Total          $37,110      $   15      $ 2,013      $35,112
                                  ========     =======     ========     ========
</TABLE>


The amortized cost of debt and mortgage backed securities at September 30, 1995,
includes  unamortized  premiums  of  $276  and  unaccreted  discounts  of  $494,
respectively.

There were no sales of  securities  during the three years ended  September  30,
1996.

The scheduled  maturities of securities  held-to-maturity  and securities (other
than equity  securities)  available-for-sale  at  September  30,  1996,  were as
follows:

                                   Held-to-Maturity    Available-for-Sale
                                       Securities          Securities
                                   ------------------- --------------------
                                   Amortized   Fair     Amortized   Fair      
                                    Cost      Value      Cost       Value   
                                   --------   -------   --------   --------
Due in one year or less            $  2,496   $ 2,506    $     -    $     -
Due from one to five years           12,571    12,271          -          -
Due from five to ten years           15,118    13,599          -          -
Due after ten years                  52,721    50,165     16,980     16,336
                                   --------   -------   --------   --------
              Total                 $82,906   $78,541    $16,980    $16,336
                                   ========   =======   ========   ========
                                                                 


For purposes of the maturity table,  mortgage-backed  securities,  which are not
due at a single maturity date, have been allocated over maturity groupings based
on the weighted-average  contractual  maturities of underlying  collateral.  The
mortgage-backed  securities  may  mature  earlier  than  their  weighted-average
contractual maturities because of principal prepayments.

Securities  carried at  approximately  $26.9  million at September  30, 1996 and
$13.2 million at September 30, 1995,  were pledged to secure public deposits and
for other purposes required or permitted by law.

                                       27
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




 (3)  Loans Receivable  (in thousands)

Loans receivable are summarized as follows:

                                                        September 30,
                                                    ---------------------
                                                     1996         1995     
                                                    --------     --------
First mortgage loans:                                           
     Secured by one-to-four                                     
       family residences                           $149,659     $120,894  
     Secured by other properties                     14,996        8,332
     Construction and land                                      
       development loans                             27,070       30,425
                                                   --------     --------
                                                    191,725      159,651
                                                                
     Less:                                                      
          Undisbursed portion of construction and               
            land development loans                  (13,401)     (15,010)
          Unearned discounts                            (23)         (25)
          Net deferred loan                                     
            origination fees                           (889)        (691)
                                                   --------     --------
                    Sub-total                                   
                      first mortgage loans          177,412      143,925
                                                   --------     --------
Consumer and other loans:                                       
     Consumer loans                                  17,709       16,144
     Home equity and second                                     
       mortgages                                     15,430        8,282
     Commercial                                       6,234        2,715
     Secured by savings                                 563          516
                                                   --------     --------
                                                     39,936       27,657
                                                                
     Add:  net deferred loan origination costs          155          103
                                                   --------     --------
                    Sub-total consumer and                                  
                      other loans                    40,091       27,760
                                                   --------     --------
                    Sub-total all loans             217,503      171,685
     Less:  allowance for loan losses                  (776)        (764)
                                                   --------     --------
                                                                
                      Total                        $216,727     $170,921
                                                   ========     ========
                                                            

A summary of the activity in the allowance for loan losses is as follows:

                                            Years Ended September 30,
                                            -------------------------
                                              1996     1995     1994
                                            ------- -------- --------
Balance, beginning of period                 $ 764    $ 748    $ 721
Provision for losses                            42       24       33
Charge-offs                                    (34)     (20)      (6)
Recoveries                                       4       12        -
                                            ------  -------  -------
Balance, end of period                       $ 776    $ 764    $ 748
                                            ======= ======== ========


Recorded  investments in impaired loans were $74 at September 30, 1996, and $89,
at September 30, 1995. The average recorded  investment in impaired loans during
1996 and 1995 was $46 and  $111,  respectively.  The  total  allowance  for loan
losses  related to these loans was $7 and $9, on September  30, 1996,  and 1995,
respectively.  No interest  income on these loans was  recognized or received in
1996 and 1995.

Loans having carrying values of $73 and $340 were transferred to foreclosed real
estate in 1996 and 1995, respectively.

The Bank is not committed to lend  additional  funds to debtors whose loans have
been modified.

The  aggregate  amount  of loans to  executive  officers  and  directors  of the
Corporation  were $648, and $637 at September 30, 1996, and 1995,  respectively.
During 1996 repayments on loans to executive  officers and directors  aggregated
$132 and loans originated aggregated $142.

 (4)  Loan Servicing (in thousands)

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans  serviced for others was $41,133 and $44,452 at  September  30, 1996
and 1995, respectively.

                                       28
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing, and included in demand deposits, were approximately, $235 and $239 at
September 30, 1996 and 1995, respectively.

Mortgage  servicing rights of $23 were capitalized in 1996 with a carrying value
of $21 at September 30, 1996. The valuation  allowance on September 30, 1996 and
changes in the valuation allowance during this period were not significant.

Capitalized  mortgage  servicing  rights and excess  servicing  receivables  are
summarized as follows:

                                                 September 30,
                                            -------------------------
                                             1996    1995     1994
                                            ------- -------- --------
Beginning balance, net of
  accumulated amortization                   $ 155    $ 163    $ 132
Amounts capitalized                             23        3       55
Amortization                                   (18)      (9)     (14)
Valuation adjustments                           (3)      (2)     (10)
                                            ------  -------  -------
Balance, end of period                       $ 157    $ 155    $ 163
                                            ======= ======== ========


 (5)  Foreclosed Real Estate

Gain on foreclosed real estate, including net revenues from operations,  was not
material  for the  three  years  ended  September  30,  1996.  The Bank  held no
foreclosed real estate at September 30, 1996 and 1995.

 (6)  Premises and Equipment (in thousands)

Premises and equipment are summarized as follows:

                                                     September 30,
                                                    -----------------
                                                      1996     1995
                                                    -------- --------
Land                                                $   490  $   490
Buildings and improvements                            3,592    3,514
Furniture, equipment and
  automobiles                                         2,598    2,708
Leasehold improvements                                  142       26
                                                   -------- --------
Total costs                                           6,822    6,738
Less accumulated depreciation                         3,094    2,980
                                                   -------- --------
Total                                               $ 3,728  $ 3,758
                                                   ======== ========



At September 30, 1996,  the Bank was  obligated  under  noncancelable  operating
leases for office space. Net rental expense under operating leases,  included in
occupancy and equipment, was $39, $69, and $76 for the years ended September 30,
1996, 1995, and 1994, respectively.

The  projected  minimum  rental  commitments  under the  terms of the  leases at
September 30, 1996, are as follows:

                                   Rental Income    Rental Expense
Fiscal                               as Lessor        as Lessor
------                               ---------        ---------
1997                                $   14           $   34
1998                                    10               26
                                    ------           ------
                                    $   24           $   60
                                   ========         ========


 (7)  Deposits  (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of  $100,000,   was   approximately   $16,008  and  $14,228  in  1996  and  1995
respectively.

                                       29
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




Interest expense on deposits is summarized as follows:

                                                 September 30,
                                            -------------------------
                                              1996    1995     1994
                                            ------- -------- --------
Savings accounts                            $1,576   $1,669   $1,496
Demand deposits                                443      673      796
Certificates of deposit                      6,243    4,411    3,810
                                            ------- -------- --------
                                            $8,262   $6,753   $6,102
                                            ======= ======== ========



At September 30, 1996, the scheduled  maturities of  certificates of deposit are
as follows:

                          Years Ending September 30,
                          --------------------------
                                   1997                      $ 80,721
                                   1998                        22,438
                                   1999                         9,405
                                   2000                             -
                                   2001 and thereafter            575
                                                             --------
                                                             $113,139
                                                             ========


 (8)  Borrowed Funds  (in thousands)

Borrowings  by the Bank from the Federal Home Loan Bank of Des Moines (FHLB) are
summarized as follows:

                                             September 30,
                                   ----------------------------------
                                          1996             1995
                                   ---------------- -----------------
Fiscal Year of Maturity

                                           Weighted         Weighted
                                   Amount    Rate   Amount     Rate
                                   -------- ------- -------- -------
1996                               $     -       -  $12,300   5.96%
1997                                 22,100    5.74    1,600   6.84
1998                                 56,900    5.80   40,900   5.90
1999                                  3,000    6.55        -     -
2000                                  7,693    6.11    8,007   6.16
2001                                 15,000    6.00        -     -

Line of Credit from FHLB             10,000  variable 11,000  variable
                                   -------- ------- -------- --------
                                   $114,693    5.88% $73,807   5.82%
                                   ========         ========



At September 30, 1996,  borrowed funds are  collateralized by stock in the FHLB,
first  mortgage  loans  with  carrying  value of  $147,435  and  mortgage-backed
securities  with carrying  values of $45,250 under a collateral  agreement.  The
line of credit has a variable rate of interest  that is adjusted  daily based on
the FHLB's short-term investment return. The interest rate on the line of credit
was 6.18% and 6.02% at September  30, 1996,  and 1995,  respectively.  The total
amount  available  to the Bank on its line of credit was  $15,000 and $14,000 at
September 30, 1996 and 1995, respectively.

 (9)  Employee and Stock Benefit Plans  (in thousands except shares)

Simplified Employee Pension Plan
The Bank has a Simplified  Employee  Pension Plan (SEPP) covering all qualifying
employees meeting certain eligibility requirements. Contributions are determined
annually by the Board of Directors.  The Bank had no expense for the years ended
September 30, 1996 and 1995,  and the Bank's expense was $339 for the year ended
September 30, 1994.

Salary Continuation Plans
The Bank has  adopted  insured  salary  continuation  plans for the  benefit  of
selected  members of  management  by providing  them with  retirement  and death
benefits. The estimated liability under the agreements is charged to income over
the expected  remaining  years of  employment.  The Bank's policy is to fund the
costs accrued with insurance contracts.  Salary continuation expense amounted to
$134, $141, and $60 for the three years ended September 30, 1996, respectively.

                                       30
<PAGE>

                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Employee Stock Ownership Plan
At the time of the stock  conversion,  the Bank  established  an Employee  Stock
Ownership Plan (ESOP) covering all employees,  over the age of 21, with at least
one year of service and who work at least 1,000  hours  during a plan year.  The
ESOP borrowed  funds from the  Corporation to purchase a total of 359,720 shares
of the Corporation's  Common Stock, the loan being  collateralized by the Common
Stock.  Contributions by the Bank, along with dividends  received on unallocated
shares,  are being used to repay the loan with shares  being  released  from the
Corporation's lien proportional to the loan repayments.  Annually,  on September
30, the released shares are allocated to the participants in the same proportion
that their  wages  bear to the total  compensation  of all of the  participants.
Unreleased  ESOP shares are not considered  outstanding in calculating  earnings
per share.

The Corporation presents these financial statements in accordance with the AICPA
Statement of Position (SOP) No. 93-6,  "Employers' Accounting for Employee Stock
Ownership  Plans." The price of the shares issued and  unreleased are charged to
unearned compensation, a contra-equity account, and shares released are reported
as compensation  expense equal to the current market value price of the released
shares.  Dividends paid on allocated shares are charged to retained earnings and
those on unallocated shares are charged to expense.  The total amount charged to
expense in the fiscal year ended  September 30, 1996 and 1995 was $449 and $525,
respectively.

A summary of the ESOP share allocation is as follows:

                                                     September 30,
                                                    -----------------
                                                      1996     1995
                                                    -------- --------
Shares allocated beginning of year                   49,461        -

Shares allocated during year                         38,409   49,461

Unreleased shares                                   271,850  310,259
                                                   -------- --------
Total ESOP shares                                   359,720  359,720
                                                   ======== ========

Fair value of unreleased shares                    $  3,466 $  4,074

                                                   ======== ========


Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended  September  30, 1995.  Following  shareholder  approval of the MSP on
January 17, 1995, the Bank purchased 179,860 shares of the Corporation's  common
stock in the open  market  at $10.59  per share to be  awarded  to  officers  in
accordance  with the provisions of the MSP. The cost of the shares awarded under
these plans are recorded as unearned compensation,  a contra equity account, and
are recognized as an expense in accordance with the vesting  requirements  under
the plan.  For the fiscal year ended  September 30, 1996,  and 1995,  the amount
included in compensation expense was $290 and $218, respectively

                            Unawarded     Awarded   
                            Shares        Shares
                            -------       --------
 Purchased by Plan          179,860             -
 Granted                   (136,896)      136,896
 Vested                           -             -
                            -------      --------
 At September 30, 1995       42,964       136,896
                            -------      --------
 Granted                          -             -
 Vested                           -        27,379
                            -------      --------
 At September 30, 1996       42,964       109,517
                            =======      ========
                      

Stock Option Plan
The  Corporation  established  a stock option plan for  directors,  officers and
employees.  The stock  option plan was approved by  shareholders  on January 17,
1995,  and in  accordance  with the terms of the plan,  the  exercise  price was
established at $9.50 per share, the fair market price on the date of shareholder
approval.  Awards made under the plan may be incentive  stock options as defined
by Section  422 of the  Internal  Revenue  Code of 1986 or  options  that do not
qualify. All options expire on January 16, 2005.

                                       31
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



The following table summarizes the stock option transactions:

                            Available           Options      
                            for Grant         Outstanding
                            -------            --------
 At inception                449,650                 -
 Granted                    (442,163)          442,163
 Exercised                         -            (3,405)
                             -------          --------
 At September 30, 1995         7,487           438,758
                             -------          --------
 Granted                           -                 -
 Exercised                         -            (6,000)
                             -------          --------
 At September 30, 1996         7,487           432,758
                             =======          ========
                                  

(10)  Income Taxes  (in thousands)

The Corporation and its Subsidiary file consolidated income tax returns.  Income
tax expense (benefit) is summarized as follows:

                                                 September 30,
                                            -------------------------
                                              1996    1995     1994
                                            ------- -------- --------
Current
     Federal                                $1,263   $1,274  $   583
     State                                     403      424      186
                                            ------- -------- --------
          Subtotal                           1,666    1,698      769
                                            ------- -------- --------
Deferred
     Federal                                  (423)    (148)      45
     State                                    (142)     (49)      14
                                            ------- -------- --------
          Subtotal                            (565)    (197)      59
                                            ------- -------- --------
              Total income tax provision    $1,101   $1,501  $   828
                                            ======= ======== ========


The State of Minnesota  follows the Internal Revenue Code for the  determination
of taxable income, in connection with temporary  differences.  The State portion
of deferred tax assets and liabilities is approximately 25 percent.

                                       32
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



Temporary  differences  between the financial statement carrying amounts and the
tax basis of assets  and  liabilities  that can create  deferred  tax assets and
liabilities are as follows:

                                                     September 30,
                                                    -----------------
                                                      1996     1995
                                                    -------- --------
Deferred tax assets:
     Deferred compensation                          $   396  $   286
     Deferred net loan fees                             297      238
     Deferred SAIF premium                              417        -
     Securities unrealized loss                         423      522
     Allowance for loan losses                          314      309
                                                   -------- --------
          Subtotal                                    1,847    1,355

     Less:  Valuation allowance                         172      183
                                                   -------- --------
                    Total                             1,675    1,172
                                                   -------- --------
Deferred tax liabilities:
     FHLB Stock                                         241      209
     Tax bad debt reserves                              252      190
     Premises and equipment                             273      244
     Installment obligation sale
       of former building                                30       30
     Mortgage servicing rights                            8        -
     Discount of loans                                   21       39
     Section 475 "For Sale Assets"                      273      360
                                                   -------- --------
                    Total                             1,098    1,072
                                                   -------- --------
Net deferred tax asset                               $  577   $  100
                                                   ======== ========


The valuation allowance was established to reduce the deferred tax asset related
to the unrealized loss on equity securities because management is uncertain that
more likely than not it will be realized.  The Bank has paid sufficient taxes in
prior  carryback  years  which will  enable it to recover the balance of the net
deferred tax assets,  and  therefore,  no  additional  valuation  allowance  was
required at September 30, 1996 and 1995.

The actual income tax expense varied from the expected tax expense  (computed by
applying the United States  federal  corporate  income tax rate of 34 percent to
earnings before income taxes) as follows:

                                            Years Ended September 30,
                                            -------------------------
                                             1996    1995     1994
                                            ------- -------- --------
Computed "expected" tax expense            $  941   $1,273   $   667
Exempt dividends                              (20)      (5)        -
State income taxes, net of
  federal tax benefit                         173      247      130
Other, net                                      7      (14)      31
                                          ------- -------- --------
 Total income tax provision                $1,101   $1,501   $  828
                                          ======= ======== ========


If certain  conditions  are met,  savings and loan  associations  were allowed a
special bad debt  deduction in determining  income for tax purposes,  based on a
specified  experience  formula or a  percentage  of taxable  income  before such
deduction. The Bank used the percentage method in fiscal 1996.

Retained  earnings at September 30, 1996,  includes $6,492 for which no deferred
federal  income tax liability  has been  recognized.  This amount  represents an
allocation of income to bad-debt  deductions for tax purposes only that arose in
tax years beginning before September 30, 1988, (that is, the base-year  amount).
Reduction of the amount so allocated for purposes other than tax bad-debt losses
or adjustments  arising from this carryback of net operating losses would create
income  for tax  purposes  only,  which  would be  subject  to the  then-current
corporate  income-tax rate. The unrecorded deferred income-tax  liability on the
above amount was approximately $2,600 at September 30, 1996.

On August 31, 1996 legislation was signed into law which repealed the percentage
of taxable  income method for tax bad debt  deductions.  The repeal is effective
for the  Bank's  taxable  year  beginning  October  1, 1996.  In  addition,  the
legislation requires the Bank to include in taxable income its bad debt reserves
in excess of its base year  reserves  over a six,  seven,  or eight year  period
depending  upon the  attainment of certain loan  origination  levels.  Since the
percentage of taxable income method for bad debt deduction and the corresponding
increase  in the tax bad debt  reserve  in  excess  of the base  year  have 

                                       33
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


been recognized as temporary  differences  pursuant to SFAS No. 109, this change
in the tax law will not have a material effect on the  Corporation's  operations
or financial condition.

(11)  Contingencies  (in thousands)

Loans Sold
During 1982, the Bank sold loans subject to recourse provisions.  The balance of
these loans at September 30, 1996, and 1995 was $413 and $465, respectively. The
loans had interest  rates ranging from 9.50% to 9.875% with an original  balance
of $3,400 and were sold to FHLMC.

(12)  Regulatory Capital  (in thousands)

The Bank is subject to various regulatory capital  requirements  administered by
the  Office  of  Thrift  Supervision  (OTS).  Failure  to meet  minimum  capital
requirements   can  initiate  certain   mandatory  -  and  possibly   additional
discretionary - actions by regulators  that, if undertaken,  could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities  and certain  off-balance  sheet items as calculated
under  regulatory   accounting   practices.   The  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

The OTS  includes  an interest  rate risk  component  in its risk based  capital
requirements.  Institutions  with a  greater  than  normal  interest  rate  risk
exposure (as defined) must take a deduction - from the total  capital  available
to meet their  risk based  capital  requirement  - equal to half the  difference
between the institution's actual measured exposure and a defined normal level of
exposure.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below)  of  total  and  Tier  1  capital  (as  defined  in the  regulations)  to
risk-weighted  assets  (as  defined),  and of  tangible  and Tier 1 capital  (as
defined) to adjusted  total  assets (as  defined).  Management  believes,  as of
September 30, 1996,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.

As of September 30, 1996,  and 1995, the most recent  notification  from the OTS
categorized  the Bank as well  capitalized  under the  regulatory  framework for
prompt  corrective  action.  To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below.  There are no  conditions  or events since that
notification that management believes have changed the institution's category.

The  Bank's  actual  regulatory  capital  amounts,  with  reconciliation  to the
Corporation's  investment in the Bank  determined in accordance  with  Generally
Accepted Accounting  Principles (GAAP), and ratios as of September 30, 1996, are
also presented in the table below.
<TABLE>
<CAPTION>

                                                                                To Be Well      
                                                                             Capitalized Under
                                                          For Capital        Prompt Corrective
                                             Actual     Adequacy Purposes    Action Provisions
                                           ---------    -----------------    -----------------
<S>                                         <C>          <C>       <C>         <C>    <C>          <C>   

GAAP capital                                $38,856
Add:  Unrealized losses on debt                                       
       securities held for sale                 383
                                            -------
Tangible capital and ratio to                
       adjusted total assets                $39,239      11.3%     $ 5,218     1.5%   
                                           ------------------       ---------------
Tier 1 (Core) capital and                  
       ratio to adjusted total assets       $39,239      11.3%     $10,436     3.0%  $17,393        5.0% 
                                           ------------------      ----------------  -------------------
Tier 1 capital and ratio to                
       risk-weighted assets                 $39,239      22.3%     $7,023      4.0%  $10,534        6.0% 
                                                    ----------     ----------------  -------------------
Tier 2 capital, allowance                  
        for loan losses                         776
                                            -------
Total risk-based capital                   
        and ratio to risk-weighted assets   $40,015      22.8%     $14,046     8.0%%  $17,557      10.0% 
                                           ==================      =================  ==================
</TABLE>
                                
The Bank may not declare or pay cash dividends to the  Corporation if the effect
would be to reduce GAAP capital below applicable regulatory capital requirements
or  if  such  declaration  and  payment  would  otherwise   violate   regulatory
requirements.


                                       34
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


(13)  Concentration of Credit Risk (in thousands)

The Bank is primarily  engaged in originating real estate loans in the Minnesota
counties of McLeod, Dakota,  Meeker, Wright, Carver,  Washington and Sibley. The
Bank  offers  fixed and  adjustable  rates of interest on these loans which have
amortization  terms ranging up to thirty years. In addition,  the Bank purchases
loans secured by one-to-four  family  residences  located within Minnesota which
have been  originated by other financial  institutions.  The loans are generally
originated on the basis of not more than an 80% loan-to-value  ratio,  which has
historically  provided the Bank with more than adequate  collateral  coverage in
the event of default.  Nevertheless,  the Bank, as with any lending institution,
is subject to the risk that real estate values in the primary  lending area will
deteriorate,  thereby  potentially  impairing  collateral  values in the primary
lending area. However, management believes that real estate values are presently
stable in its  primary  lending  area and that loan  loss  allowances  have been
provided  for  in  amounts  commensurate  with  its  current  perception  of the
foregoing risks in the portfolio.

The  Corporation  had cash on deposit in a  financial  institution  in excess of
Federal deposit insurance limits of approximately $3,463 at September 30, 1996.

(14)  Financial Instruments (in thousands)

The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the  financing  needs of its customers and
to reduce its own exposure to fluctuations  in interest  rates.  These financial
instruments  include  commitments  to extend credit and forward  commitments  to
purchase securities.  Those instruments involve, to varying degrees, elements of
credit  and  interest-rate  risk  in  excess  of the  amount  recognized  in the
statement  of  financial  position.  The  contract or  notional  amount of those
instruments  reflect the extent of the Bank's  involvement in particular classes
of financial instruments.

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the financial  instrument for  commitments to extend credit and standby
letters of credit is represented  by the  contractual  notional  amount of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on-balance sheet instruments.

Commitments  to extend  credit are unused  lines of credit and loan  commitments
which are  agreements  to lend to a customer as long as there is no violation of
any condition established in the contract.  Since some of the commitments may be
expected to expire without being drawn upon, the total commitment amounts do not
necessarily  represent  future  cash  requirements.   The  Bank  evaluates  each
customer's  creditworthiness  on a case-by-case  basis. The amount of collateral
obtained,  if it is deemed  necessary by the Bank upon  extension of credit,  is
based on management's  credit  evaluation of the  counterparty.  Collateral held
varies but may  include  accounts  receivable,  inventory,  property,  plant and
equipment, and income producing commercial properties.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee  the  performance  of a customer  to a third  party.  The credit  risk
involved in issuing  letters of credit is essentially  the same as that involved
in extending loan facilities to customers. Typically, the Bank issues letters of
credit to municipalities  and generally does not require  collateral for standby
letters of credit.

Forward  commitments to purchase  securities and mortgages  involve an agreement
whereby  the seller  agrees to make  delivery  at a  specified  future date of a
specified  instrument,  at a  specified  price or yield.  Risks  arise  from the
possible  inability of  counterparties  to meet the terms of their contracts and
from movements in securities values and interest rates.

Forward  commitments  to sell  mortgages  involve an agreement  whereby the bank
agrees to make  delivery at a specified  future date of a specified  loan,  at a
specified  price  or  yield.   Risks  arise  from  the  possible   inability  on
counterparties  to meet the terms of their  contracts and from movements in loan
values and interest rates.

A summary of the notional  amounts of the Bank's  financial  instruments
at September 30, 1996 follows:
          Commitments to extend credit              $17,887
          Standby letters of credit                       5
          Forward commitments to purchase loans       1,494

                                       35
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



The  carrying  value and fair value of the  Corporation's  financial  assets and
financial liabilities are as follows:

                                             September 30,
                                   ----------------------------------
                                         1996             1995
                                   ---------------- -----------------
                                   Carrying  Fair   Carrying  Fair
                                    Value    Value   Value    Value
                                   -------- ------- -------- --------
Financial assets:
Cash & cash equivalents            $11,756 $11,756  $14,855  $14,855
Investment securities               62,580  59,857   58,079   56,262
Mortgage-backed and related 
  securities                        54,893  53,251   53,251   51,253
Loans held for sale                    443     453      230      251
Loans receivable, net              216,727  216,427 170,832  170,767
Accrued interest receivable          2,325   2,325    2,097    2,097

Financial liabilities:
Deposits                           189,074  189,300 171,516  171,827
Borrowings                         114,693  114,797  73,807   73,587



(15)     Effects of New Financial Accounting Standards

SFAS No. 123, "Accounting for Stock-Based  Compensation" - issued October, 1995,
establishes a fair value based method of accounting for stock-based compensation
plans. It encourages entities to adopt that method in place of the provisions of
Accounting  Principles Board (APB) Opinion No. 25,  "Accounting for Stock Issued
to Employees",  for all  arrangements  under which  employees  receive shares of
stock or  other  equity  instruments  of the  employer  if the  employer  incurs
liabilities  to  employees  in  amounts  based on the  price of its  stock.  The
Corporation will continue using the accounting methods prescribed by APB Opinion
No.  25  and  beginning  in  October,  1996,  will  disclose  in  the  footnotes
information on a fair value basis for its stock-based compensation plans.

SFAS No. 125,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments of Liabilities" - issued June, 1996,  establishes accounting and
reporting  standards  for  transfers  and  servicing  of  financial  assets  and
extinguishments  of  liabilities  based  on the  consistent  application  of the
financial-components   approach.  This  approach  requires  the  recognition  of
financial  assets and  servicing  assets that are  controlled  by the  reporting
entity,  and the  derecognition of financial assets and liabilities when control
is extinguished. Liabilities and derivatives incurred or obtained by transferors
in conjunction with the transfer of financial assets are required to be measured
at fair value, if practicable.  Servicing assets and other retained  interest in
transferred  assets are  required  to be  measured by  allocating  the  previous
carrying  amount  between  the  assets  sold,  if any and the  interest  that is
retained,  if any, based on the relative fair value of the assets at the date of
transfer.   The  Corporation  will   prospectively   adopt  this  statement  for
transactions entered into after December 31, 1996.

Management believes adoption of the  above-described  Statements will not have a
material  effect on financial  position and the results of operations,  nor will
adoption require additional capital resources.

                                       36
<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued



(16)   Parent Only Condensed Financial Information  (in thousands)

This  information  should  be  read in  conjunction  with  the  other  Notes  to
Consolidated  Financial  Statements.   Stockholders'  equity  differs  from  the
consolidated  statements by the amount of consolidating  ESOP  adjustments.  The
investment in the Bank  subsidiary is carried net of the Banks'  unrealized loss
on securities available for sale.

                        STATEMENT OF FINANCIAL CONDITION

                                                           September 30,     
                                                         -----------------
 ASSETS                                                   1996      1995
                                                         --------  -------
    Cash and cash equivalents                            $3,772   $5,619
    Investment securites available for sale                 399      402
    Investment securities held to maturity                4,560   10,648
    Investment in Bank subsidiary                        38,856   40,525
    Loan to Bank ESOP                                     2,718    3,103
    Other assets                                             76      171
                                                       --------  -------
                                                      
                                                        $50,381  $60,468     
                                                       ========  =======
 LIABILITIES AND STOCKHOLDERS' EQUITY
    Other liabilities                                   $    14  $    13

    Stockholders'  equity:                                                    
      Common stock                                          450      450      
      Additional paid-in capital                         43,150   43,069
      Unrealized gain on securities available for sale        1        4
      Treasury stock                                    (13,095)  (2,589)     
      Unearned MSP stock                                 (1,398)   (1,688)
      Retained earnings                                  21,259   21,209
                                                       --------  -------
                  Total stockholders' equity             50,367   60,455
                                                       --------  -------
                                                      
                                                        $50,381  $60,468
                                                       ========  =======

                                                      
                               STATEMENT OF INCOME
                                                      
                                                       Years Ended September 30,
                                                       -------------------------
  Income:                                                  1996      1995
                                                         --------  -------
   Dividends from Bank subsidiary                        $  3,500  $ 1,686
    Interest from                                     
      Bank's ESOP loan                                        254      306
      Investments                                             641    1,072
                                                         --------  -------
                                                            4,395    3,064
                                                      
 Expense:                                             
    Non-interest expense                                      474      430
                                                         --------  -------
 Income before income taxes and equity in undistributed                     
    net income of Bank subsidiary                           3,921    2,634
 Income tax expense                                           154      380
                                                         --------  -------
                                                            3,767    2,254
                                                      
 Equity (loss) in undistributed net
   income of Bank subsidiary                               (2,100)     371
                                                         --------  -------
 Net income                                              $  1,667  $ 2,625
                                                          ========  =======
                                                      
                                  
                                       37

<PAGE>
                  FSF FINANCIAL CORP. AND SUBSIDIARY
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




(16) Parent Only Condensed Financial Information - Continued (In thousands)

                             STATEMENT OF CASH FLOWS

                                   Years Ended September 30, 
                                   -------------------------
                                      1996      1995
                                     --------  -------


 Cash flows from operating activities:                                      
    Net Income                                              $  1,667  $  2,625
    Adjustments:                                                           
      (Equity) loss in undistributed net income of    
         Bank subsidiary                                       2,100      (371)
      (Increase) decrease in other assets                         97      (171)
      Increase (decrease) in other liabilities                    (7)       13
      Others                                                      85         -
                                                            --------  --------
 Net cash provided by operations                               3,942     2,096
                                                            --------  --------
                                                           
 Cash flows from investing activities:
    Proceeds from maturities of investments                    8,650     1,000
    Purchase of investment securities                         (2,559)  (12,088)
    Loan to ESOP                                                   -    (3,597)
    Purchase of subsidiary stock                                   -   (21,735)
                                                            --------  -------
 Net cash provided by (used in) investing activities           6,091   (36,420)
                                                            --------  --------
                                                           
 Cash flows from financing activities:
    Net proceeds from sale of stock                                -    43,519
    Payments received on ESOP bank loan                          385       494
    Purchases of treasury stock                              (10,559)   (2,589)
    Proceeds from sale of stock                                   52        32
    Payments of cash dividends                                (1,758)   (1,513)
                                                            --------  --------
 Net cash provided by (used in) financing activities         (11,880)   39,943
                                                            --------  --------
                                                           
 Increase (decrease) in cash and cash equivalents             (1,847)    5,619
 Cash and cash equivalents:                                               
    Beginning of year                                          5,619         -
                                                            --------  --------
    End of year                                             $ 3,772   $  5,619
                                                            ========  ========
                                                           
                                       38
                                                           
                                    


<PAGE>


                       FSF Financial Corp. and Subsidiary
                  Selected Quarterly Financial Data (Unaudited)
                    For Three Years Ended September 30, 1996
                     (In thousands except per share amounts)
<TABLE>
<CAPTION>

                                                      First     Second      Third      Fourth
                                                     Quarter    Quarter    Quarter    Quarter      Year
                                                   --------------------------------------------------------
Fiscal 1996
<S>                                                  <C>       <C>         <C>        <C>         <C>      
 Interest income                                     $   5,488 $    5,583  $   5,898  $    6,275  $  23,244
 Interest expense                                        3,219      3,335      3,427       3,628     13,609
                                                   --------------------------------------------------------
 Net Interest Income                                     2,269      2,248      2,471       2,647      9,635
 Provision for loan losses                                   6          6         15          15         42
 Gain on sale of assets                                      5          9          3          21         38
 Net income                                          $     421 $      460  $     684         103  $   1,668
 Primary earnings per share of common stock:
      Net income                                          0.11       0.13       0.21        0.03       0.48
 Cash dividends declared per share                   $   0.125  $   0.125  $   0.125   $   0.125  $    0.50
 Market range:
      High bid                                       $   13.50  $   13.50  $   13.00  $    13.25  $   13.50
      Low bid                                        $   12.38  $   12.38  $   11.50  $    11.38  $   11.38

Fiscal 1995
 Interest income                                     $   4,451  $   4,604  $   4,836  $    5,188  $  19,079
 Interest expense                                        1,973      2,149      2,523       2,827      9,472
                                                   --------------------------------------------------------
 Net Interest Income                                     2,478      2,455      2,313       2,361      9,607
 Provision for loan losses                                   6          6          6           6         24
 Gain on sale of assets                                      4          -          -           2          6
 Net income before cumulative effect of change
      in accounting principle                              687        565        531         460      2,243
 Net income                                          $   1,069  $     565  $     531  $      460  $   2,625
 Primary earnings per share of common stock:
      Net income before cumulative effect of
           change in accounting for securities       $    0.17  $    0.14  $    0.14  $     0.12  $    0.57
      Net income                                          0.26       0.14       0.14        0.12       0.67
 Cash dividends declared per share                         N/A  $   0.125  $   0.125  $    0.125  $   0.375
 Market range:
      High bid                                       $   10.50  $   10.75  $   12.00  $    13.13  $   13.13
      Low bid                                        $    7.50  $    9.00  $   10.00  $    11.13  $    7.50

Fiscal 1994
 Interest income                                     $   3,747  $   3,669  $   3,806  $    4,098  $  15,320
 Interest expense                                        1,873      1,799      1,857       2,015      7,544
                                                   --------------------------------------------------------
 Net Interest Income                                     1,874      1,870      1,949       2,083      7,776
 Provision for loan losses                                   9         12          7           5         33
 Gain (loss) on sale of assets                              57         83      (402)         174       (88)
 Net income                                          $     391  $     329  $     284  $      131  $   1,135
 Earnings per  share                                       N/A        N/A        N/A         N/A        N/A

</TABLE>

                                       39
<PAGE>




                               FSF Financial Corp.
                               -------------------


                                Corporate Office
                              201 Main Street South
                            Hutchinson, MN 55350-2573
                                 (320) 234-4500


                                FIRST FEDERAL fsb
                                -----------------
                                Office Locations

Hutchinson Main Office                      Hastings Office
201 Main Street South                       1320 South Frontage Road
Hutchinson, MN  55350-2573                  Hastings, MN  55033-2426
(320) 234-4500                              (612) 437-6169

Hutchinson South Office                     Apple Valley Office
905 Hwy. 15 South Frontage Road             14994 Glazier Avenue
Hutchinson, MN  55350                       Apple Valley, MN  55124-7498
(320) 234-4563                              (612) 432-6840

Buffalo Office                              Glencoe Office
19 Central Avenue, PO Box 338               1002 Greeley Avenue
Buffalo, MN  55313-0338                     Glencoe, MN  55336-2128
(320) 682-3035                              (320) 864-5541


Inver Grove Heights Office                  Litchfield Office
6505 Cahill Avenue East                     501 North Sibley Avenue, PO Box 577
Inver Grove Heights, MN  55076-2022         Litchfield, MN  55355-0577
(612) 455-1553                              (320) 693-2861


Waconia Office                              Waite Park Office
200 East Frontage Road, Hwy 5, PO Box 287   113 Waite Avenue South, PO Box 641
Waconia, MN  55387-0287                     Waite Park, MN
(612) 442-2141                              (320) 656-1133

                                 Winthrop Office
                       122 East Second Street, PO Box 424
                             Winthrop, MN 55396-0424
                                 (507) 647-5356

                                       40
<PAGE>
                   Our Board of Directors and Management Team

                    Board of Directors of FSF Financial Corp.

Donald A. Glas, Co-Chair of the Board    George B. Loban, Co-Chair of the Board

Richard H. Burgart                       Carl O. Bretzke

James J. Caturia                         Maurice P. Zweber

Jerome R. Dempsey                        Sever B. Knutson

Roger R. Stearns

                    Board of Directors of First Federal fsb

Donald A. Glas, Co-Chair of the Board    George B. Loban, Co-Chair of the Board

Richard H. Burgart                       Carl O. Bretzke

James J. Caturia                         Maurice P. Zweber

Jerome R. Dempsey                        Sever B. Knutson

Roger R. Stearns

                   Executive Officers of FSF Financial Corp.
                              and First Federal fsb

Donald A. Glas                           George B. Loban
Chief Executive Officer                  President

Richard H. Burgart                       Arliss M. Haag
Chief Financial Officer                  Corporate Secretary

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

Corporate Counsel                        Special Counsel
Mackall Crounse & Moore                  Malizia, Spidi, Sloane & Fisch, P.C.
1400 AT&T Tower                          One Franklin Square
901 Marquette Avenue                     1301 K Street NW, Suite 700 East
Minneapolis, MN  55402                   Washington, DC  20005

Independent Auditors                     Transfer Agent and Registrar
Bertram Cooper & Co., LLP                American Securities Transfer, Inc.
110 Second Avenue SE                     1825 Lawrence
Waseca, MN  56093                        Denver, CO  80202

                                       41