EXHIBIT 13

<PAGE>



                              FSF FINANCIAL CORP.
                               1998 ANNUAL REPORT



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TABLE OF CONTENTS
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Corporate Profile and Stock Market Information............................1


Selected Financial and Other Data.........................................2


Letter to Stockholders....................................................3

Management's Discussion and Analysis of
  Financial Condition and Results of Operations...........................4


Independent Auditors' Report.............................................16


Consolidated Statements of Financial Condition...........................17


Consolidated Statements of Income........................................18


Consolidated Statements of Changes in Stockholders' Equity...............19


Consolidated Statements of Cash Flows....................................20


Notes to Consolidated Financial Statements...............................22


Selected Quarterly Financial Data........................................41


Office Locations.........................................................42


Corporate Information....................................................43
<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 Company operates two wholly owned  subsidiaries,  Insurance Planners and the
Bank.  Insurance Planners (the "Agency") is an independent property and casualty
insurance  agency  located in  Hutchinson,  MN. The Agency was  acquired  by the
Company on June 1, 1998. Furthermore, on November 17, 1998, the Company acquired
Homeowners Mortgage Corporation ("Homeowners"),  Vadnais Heights, MN. Homeowners
is a mortgage banking company.

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 law as administered 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
residential   real  estate,   commercial   real  estate,   multi-family   loans,
construction loans,  agricultural loans, commercial business 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 of "FFHH".  For a listing of the stock price
as published by the Nasdaq statistical report, see "Selected Quarterly Financial
Data."

The number of  stockholders  of record of common  stock as of the record date of
November 30, 1998,  was  approximately  511. This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage  firms. At November 30, 1998,  there were 2,972,513  shares issued and
outstanding.

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.

                                       1
<PAGE>

FSF FINANCIAL CORP.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
----------------------------------------------------------------------------------------------------------------------------------
September 30,                                                  1998        1997          1996            1995           1994
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>           <C>            <C>             <C>     
Total assets                                               $416,232     $388,135      $354,636       $304,605        $281,467
Loans held for sale                                           2,672          204           443            230             729
Loans receivable, net                                       280,603      260,390       216,727        170,921         116,591
Mortgage-backed securities                                   36,418       38,539        38,557         37,110          33,267
Mortgage-backed securities available for sale                16,574       16,699        16,336         16,141          16,338
Debt securities                                              24,412       37,876        44,349         41,914          22,897
Debt securities available for sale                            3,010        1,000             -              -               -
Equity securities available for sale                         19,459       19,311        18,231         16,165          14,172
Cash and cash equivalents (1)                                22,597        6,135        11,756         14,855          69,991
Savings deposits                                            226,542      208,246       189,074        171,516         156,479
Other borrowings                                            144,177      133,817       114,693         73,807          37,688
Stockholders' equity                                         42,518       43,362        47,649         57,351          20,508

Summary of Operations (Dollars in Thousands)  (2)
----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                       1998        1997          1996            1995           1994
----------------------------------------------------------------------------------------------------------------------------------

Interest income                                            $ 29,981     $ 27,315      $ 23,244       $ 19,079        $ 15,320
Interest expense                                             18,499       16,346        13,609          9,472           7,544
Net interest income                                          11,482       10,969         9,635          9,607           7,776
Provision for loan losses                                       302          120            42             24              33
Non-interest income                                           2,269        1,510         1,354          1,127             184
Non-interest expense (3)                                      8,395        7,130         8,178          6,966           5,964
Income before cummulative effect                                                                               
     of change in accounting principle                        3,030        3,124         1,668          2,243           1,135
Net income (3)                                                3,030        3,124         1,668          2,625           1,135

Other Selected Data
----------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                      1998         1997          1996           1995            1994
----------------------------------------------------------------------------------------------------------------------------------

Return on average assets before cum. eff.                      0.74%        0.84%         0.69%          0.82%           0.50%
Return on average assets after cum. eff.                       0.74%        0.84%         0.69%          0.95%           0.50%
Return on average equity before cum. eff.                      6.94%        6.87%         4.25%          3.83%           5.58%
Return on average equity after cum. eff.                       6.94%        6.87%         4.25%          4.48%           0.56%
Average equity to average assets                              10.70%       12.25%        15.93%         21.31%           8.96%
Net interest rate spread (4)                                   2.44%        2.54%         2.36%          2.78%           3.41%
Non-performing assets to total assets                          0.19%        0.15%         0.06%          0.12%           0.20%
Allowance for loan losses to total loans                       0.34%        0.30%         0.33%          0.41%           0.61%
Basic earnings per share before cum. eff. (3)               $  1.14      $  1.13       $  0.49        $  0.57             N/A
Diluted earnings per share before cum. eff. (3)             $  1.05      $  1.04       $  0.47        $  0.55             N/A
Basic earnings per share after cum. eff. (3)                $  1.14      $  1.13       $  0.49        $  0.67             N/A
Diluted earnings per share after cum. eff. (3)              $  1.05      $  1.04       $  0.47        $  0.65             N/A
Cash dividends declared per share                           $  0.50      $  0.50       $  0.50        $ 0.375             N/A
</TABLE>
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(1)  Consists  of cash due from  banks,  interest-bearing  deposits,  and  other
     investments with original maturities of less than three months.
(2)  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.
(3)  Includes a one-time  special  assessment of $1,030,000 to recapitalize  the
     SAIF for the year ended September 30, 1996.
(4)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities
                                       2

<PAGE>

To Our Stockholders:

FSF Financial  Corp. has continued its growth since  becoming a publicly  traded
company in 1994,  and we are confident  that  profitable  growth will  continue.
During the first four years, total assets have increased by $135 million or 48%.

We announced the  acquisitions of Insurance  Planners in May, 1998 and announced
the acquisition of Homeowners  Mortgage in October,  1998.  Diversification is a
key to  becoming a one-stop  financial  services  provider.  Insurance  Planners
provides  commercial and personal  property and casualty  insurance.  Homeowners
Mortgage will become our residential  mortgage origination and sales subsidiary.
Firstate  Services,  a  subsidiary  of  First  Federal  fsb,  seeks  to meet the
investment needs of our customers.  Acquisition of banking  institutions,  while
still  an  option,  has  not  been  utilized  aggressively  due  to  unrealistic
expectations  on  the  part  of  sellers.   Those  expectations  made  potential
acquisitions   dilutive  to  our  shareholders  and  therefore  an  unacceptable
alternative.

Additional  value to our  shareholders  has  been  created  as a  result  of the
investment made in the repurchase of stock by the Company. During fiscal 1998 we
invested  $5.5  million in our own stock.  Our company  has  invested a total of
$25.9 million in the repurchase of shares since  initiating our first repurchase
program in 1995.  Furthermore,  officers and directors of the company  increased
their ownership during fiscal 1998 by exercising 135,957 options.

Asset  diversification  was a major  focus  during  1998 and should  continue to
enhance  performance  in the  future.  Agricultural  Lending was  introduced  in
December 1997 and represents 7.6% of total loans. We strongly believe in being a
proactive partner with our agricultural customers. Community and private banking
have helped in  increasing  commercial  business  loans from 2.9% of total loans
last  year  to 7.0% of  total  loans  at  September  30,  1998.  As  assets  are
diversified,  the risk  inherent  in the loans  also  increases.  Therefore  the
provision  for loan losses was  increased  from  $120,000 in 1997 to $302,000 in
1998 and the loss reserve increased from $852,000 to $1,035,000.

Even though we are decreasing  our dependence on residential  lending within our
loan portfolio, we are not abandoning our efforts to promote homeownership.  The
acquisition of Homeowners Mortgage provides us with enhanced products, economies
of scale,  and a more  diversified  market while allowing us to concentrate  our
efforts at the Bank level,  in  construction  lending and other  non-residential
lending areas.

We will  continue to assess  potential  acquisitions,  utilize  technology  when
economically feasible,  diversify our balance sheet and income stream, and train
our employees to provide superior  customer  service.  We are confident that our
commitment to continued, profitable growth will provide additional return to our
shareholders.

Thank you for your confidence and investment in FSF Financial Corp. We hope that
you are using some of our many products and services.  If not,  please  consider
doing so. Our best sales people are our customers.

Sincerely,




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

                                       3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

The  Private  Securities  Litigation  Reform Act of 1995  contains  safe  harbor
provisions regarding forward-looking  statements.  When used in this discussion,
the words  "believes",  "anticipates",  "contemplates",  "expects",  and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties  which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of integrating newly
acquired  businesses,  the ability to control  costs and  expenses,  and general
economic  conditions.  FSF Financial Corp.  undertakes no obligation to publicly
release the results of any revisions to those forward looking  statements  which
may be made to  reflect  events or  circumstances  after  the date  hereof or to
reflect the occurrence of unanticipated events.

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. The Corporation  also receives
interest income on its investments.

The  earnings of the  Corporation  depend  primarily  on the Bank's net interest
income and to a lesser extent,  income from its recently  acquired  wholly owned
subsidiaries:  Insurance Planners (June 1998) and Homeowners  Mortgage (November
1998).  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 on deposit accounts,
other service  charges and fees,  commission  income and income from the sale of
loans to the secondary market.  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.

Asset/Liability Management

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 loans, 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 of various  interest rate scenarios on the
Bank's capital.

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 rather than 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 by the way it
structures its assets and liabilities. The Bank sells all fixed rate residential
mortgages 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 1998 fiscal year, the Bank originated $9.5 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  $11.5  million  of single  family  mortgage  loans that have a
balloon payment due in three to seven years. Originations of

                                       4
<PAGE>
construction  and land  development  loans,  which  generally have a contractual
maturity of two years or less,  totaled  $24.5  million.  At September 30, 1998,
$127.9 million of real estate mortgages were adjustable rate mortgages,  balloon
mortgages,  or construction and land development  loans,  representing  42.4% of
total loans and 31% 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 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,  1998,  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
                                              ---------    ---------    ----------     ---------   ----------
                                                                   (Dollars in Thousands)
<S>                                         <C>          <C>           <C>           <C>          <C>      
Interest-earning assets:                                            
   Mortgage loans                             $  57,326    $  60,622     $  41,995     $  56,731    $ 216,674
   Other loans                                   47,803       31,060         5,071         1,001       84,935
   Investment securities                         93,274       10,641         7,088         6,240      117,243
                                              ---------    ---------     ---------     ---------    ---------
Total interest-earning assets                   198,403      102,323        54,154        63,972      418,852
                                              ---------    ---------     ---------     ---------    ---------

Interest-bearing liabilities:
   Noninterest bearing deposits                    --           --            --            --           --
   NOW and Super now accounts                    20,557         --            --            --         20,557
   Savings accounts                              53,984         --            --            --         53,984
   Money market deposit accounts                  2,264         --            --            --          2,264
   Certificates                                  81,745       58,526         1,988          --        142,259
   Other borrowed money                           3,000       78,677        62,500          --        144,177
                                              ---------    ---------     ---------     ---------    ---------
Total interest-bearing liabilities              161,550      137,203        64,488          --        363,241
                                              ---------    ---------     ---------     ---------    ---------

Interest sensitivity gap                      $  36,853    $ (34,880)    $ (10,334)    $  63,972    $  55,611
                                              =========    =========     =========     =========    =========

Cumulative interest sensitivity gap           $  36,853    $   1,973     $  (8,361)    $  55,611
                                              =========    =========     =========     =========

Cumulative ratio of interest-earning assets
   to interest-bearing liabilities                 1.23%        1.01%         0.98%         1.15%
                                              =========    =========     =========     =========

Cumulative ratio of cumulative interest
   sensitivity gap to total assets                 8.85%        0.47%        -2.01%        13.36%
                                              =========    =========     =========     =========

</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 

                                       5
<PAGE>
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  change  in  interest  rate,
prepayment  levels and decay rates on core  deposits  may deviate  significantly
from those assumed in calculating the table.

Market Risk Management

Market risk is the risk of loss arising from  adverse  changes in market  prices
and rates.  The Bank's market risk is comprised  primarily of interest rate risk
resulting  from its core  banking  activities  of lending  and  deposit  taking.
Interest  rate risk is the risk that  changes  in market  interest  rates  might
adversely  affect the Bank's net interest  income or the  economic  value of its
portfolio of assets,  liabilities and off-balance  sheet  contracts.  Management
continually  develops and applies  strategies to mitigate this risk.  Management
does not believe that the Bank's  primary  market risk  exposures  and how those
exposures  are managed in Fiscal 1998 have changed when compared to Fiscal 1997.
Market risk limits have been  established by the Board of Directors based on the
Bank's tolerance for risk.

The Bank  primarily  relies on its Net  Portfolio  Value  Model  (the  Model) to
measure its  susceptibility to interest rate changes.  Net portfolio value (NPV)
is defined as the present  value of  expected  cash flows from  existing  assets
minus the present  value of expected  net cash flows from  existing  liabilities
plus or minus  the  present  value of net  expected  cash  flows  from  existing
off-balance  sheet  contracts.  The Bank does not currently  own any  derivative
financial instruments whose values are determined from underlying instruments or
market  indices,  and  whose  notional  or  contractual  amounts  would  not  be
recognized in the financial statements. The Model estimates the current economic
value of each type of asset,  liability,  and  off-balance  sheet contract after
various assumed instantaneous,  parallel shifts in the Treasury yield curve both
upward and downward.

The NPV Model uses an option-based  pricing approach to value one to four family
mortgages,  mortgages  serviced by others, and firm commitments to buy, sell, or
originate  mortgages.  This approach  makes use of an interest  rate  simulation
program to generate  numerous  random  interest rate paths that, in  conjunction
with a prepayment  model, are used to estimate  mortgage cash flows.  Prepayment
options  and  interest   rate  caps  and  floors   contained  in  mortgages  and
mortgage-related  securities introduce significant uncertainty in estimating the
timing  of cash  flows  for  these  instruments  that  warrants  the use of this
sophisticated  methodology.  All other financial  instruments are valued using a
static  discounted cash flow method.  Under this approach,  the present value is
determined by discounting  the cash flows the instrument is expected to generate
by the yields currently  available to investors from an instrument of comparable
risk and duration.

The  following  table  sets forth the  present  value  estimates  of the Bank at
September 30, 1998,  as calculated by its NPV Model.  The table shows the NPV of
the Bank under rate shock scenarios of -400 basis points to +400 basis points in
increments of 100 basis points.  As market rates  increase,  the market value of
the  Bank's  large   portfolio  of  mortgage  loans  and   securities   declines
significantly  and prepayments are slow. As rates decrease,  the market value of
mortgage  loans and  securities  increase only modestly due to prepayment  risk,
periodic rate caps, and other embedded  options.  Actual changes in market value
will differ from estimated  changes set forth in this table due to various risks
and uncertainties.
<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>           <C>     
                +400 bp         $  38,329            (13,268)            (25.71) %      9.61         (243) bp
                +300 bp            40,987            (10,610)            (20.56)       10.11         (193) bp
                +200 bp            44,044             (7,553)            (14.64)       10.68         (136) bp
                +100 bp            47,558             (4,039)             (7.83)       11.32          (72) bp
                 0 bp              51,597                  -                  -        12.04            -
                -100 bp            56,243              4,646               9.00        12.85           81  bp
                -200 bp            61,591              9,994              19.37        13.76          172  bp
                -300 bp            67,751             16,154              31.31        14.78          274  bp
                -400 bp            74,857             23,260              45.08        15.92          388  bp
</TABLE>
This table shows that the Bank's  economic  value of equity would  decrease with
rising  interest rates while  increasing with falling  interest rates.  However,
computations of prospective  effects of  hypothetical  interest rate changes are
based on numerous  

                                       6
<PAGE>

assumptions, including relative levels of market interest rates, loan repayments
and  deposit  runoffs,  and  may  not  be  indicative  of  actual  results.  The
computations  do not reflect any actions the Bank may  undertake  in response to
changes in interest  rates  although  management  cannot always  predict  future
interest rates or their effect on the Bank. Certain shortcomings are inherent in
the  method of  analysis  presented  in the  computation  of NPV.  For  example,
although  certain assets and liabilities may have similar  maturities or periods
to  repricing,  they may react in  differing  degrees to changes in market  area
interest rates.  Additionally,  certain  assets,  such as adjustable rate loans,
have features that  restrict  changes in interest  rates during the initial term
and over the remaining life of the asset.  Further,  in the event of a change in
interest   rates,   prepayment  and  early   withdrawal   levels  could  deviate
significantly  from those  assumed in the table.  Finally,  the  ability of many
borrowers to service their  adjustable rate debt may decrease in the event of an
interest rate increase.



                                       7
<PAGE>


Average Balances

The following table sets forth information relating to the Corporation's 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   and   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,                     
                                          ------------------------------------------------------------------------------------------
                                              1998                                   1997                         1996
                                          ------------------------------------------------------------------------------------------
                                                                Average                     Average                         Average
                                             Average   Income/  Yield/    Average   Income/  Yield/    Average    Income/   Yield/
                                             Balance   Expense   Cost     Balance   Expense   Cost     Balance    Expense    Cost
                                          ------------------------------------------------------------------------------------------
<S>                                      <C>         <C>       <C>    <C>        <C>        <C>    <C>         <C>         <C>  
Interest-Earning Assets                       (in thousands)                (in thousands)             (In thousands)
   Loans receivable (1)                   $ 276,730   $23,512   8.50%  $ 237,475  $ 20,066   8.45%  $ 193,202   $16,077     8.32%
   Mortgage-backed securities                54,657     3,006   5.50%     55,062     3,384   6.15%     54,208     3,270     6.03%
   Investment securities (2)                 65,238     3,463   5.31%     66,734     3,865   5.79%     69,676     3,897     5.59%
                                          --------------------         --------------------         --------------------
      Total interest-earning assets         396,625    29,981   7.56%    359,271    27,315   7.60%    317,086    23,244     7.33%
                                          --------------------         --------------------         --------------------

Interest-Bearing Liabilities
   NOW and money market accounts          $  28,626       407   1.42%   $ 27,463       389   1.42%   $ 25,697       443     2.41%
   Passbook savings                          50,699     1,690   3.33%     48,381     1,524   3.15%     49,120     1,576     3.52%
   Certificates of deposit                  136,407     7,985   5.85%    127,211     7,426   5.84%    108,665     6,243     5.75%
                                          --------------------         --------------------         --------------------
      Total deposits                        215,732    10,082   4.67%    203,055     9,339   4.60%    183,482     8,262     4.50%
   FHLB advances                            145,459     8,417   5.79%    120,093     7,007   5.83%     90,408     5,347     5.91%
                                          --------------------         --------------------         --------------------
      Total interest-bearing liabilities    361,191    18,499   5.12%    323,148    16,346   5.06%    273,890    13,609     4.97%
                                          --------------------         --------------------         --------------------
Net Interest Income                                   $11,482                     $ 10,969                      $ 9,635
                                                     ========                    ==========                     =========
Net Interest Rate Spread  (3)                                   2.44%                        2.54%                          2.36%
Net Interest Rate Margin  (4)                                   2.89%                        3.05%                          3.04%
Ratio of average interest-earning assets  
  to average interest-bearing liabilities      1.10x                        1.11x                        1.16x
                                          =========                    =========                     ========
</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, 1998 vs 1997:                         (In Thousands)
<S>                                        <C>            <C>           <C>                 <C>     
Interest income:
   Loans Receivable                         $  109         $  3,317      $     20            $3,446
   Mortgage-backed securities                 (350)             (25)           (3)             (378)
   Investment securities                      (308)             (87)           (7)             (402)
                                            ------         --------      --------             ----- 
      Total change in interest income         (549)           3,205            10             2,666

Interest expense:
   Savings accounts                            151              583             9               743
   FHLB Borrowings                             (59)           1,479           (10)            1,410
                                            ------         --------      --------            ------ 
      Total change in interest expense          92            2,062           (1)             2,153
                                            ------         --------      --------            ------ 
Net change in net interest income           $ (641)        $  1,143      $     11            $  513
                                            ======         ========      ========            ====== 

Year Ended September 30, 1997 vs 1996:
Interest income:
   Loans Receivable                         $  247         $  3,684      $     58            $3,989
   Mortgage-backed securities                   55               51             8               114
   Investment securities                       117             (164)           15              (32)
                                            -------        --------      --------            ------ 
      Total change in interest income          419            3,571            81             4,071

Interest expense:
   Savings accounts                           (813)           1,849            41             1,077
   FHLB Borrowings                             (70)           1,754           (24)            1,660
                                            -------        --------      --------            ------ 
      Total change in interest expense        (883)           3,603            17             2,737
                                            -------        --------      --------            ------ 
Net change in net interest income           $1,302         $    (32)     $     64            $1,334
                                            =======        ========      ========            ====== 
</TABLE>

                                       9

<PAGE>
Changes in Financial Condition

                    General.  Total  assets  increased  from  $388.1  million at
September  30, 1997,  to $416.2  million at September  30, 1998,  an increase of
$28.1 million or 7.2%.  The Bank  continues to experience  good demand for loans
and supplemented the internal loan originations  ($147.6 million) with purchases
of other loans ($10.8  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 $148,000  during the 1998 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.  The net unrealized losses on securities available for sale increased
from  $606,000 at  September  30, 1997 to $832,000 at September  30, 1998.  This
increase was primarily due to the market rate of interest decreasing compared to
the contractual rate. Debt securities  available for sale increased $2.0 million
due to the purchase of such securities for liquidity  purposes.  Mortgage-backed
and related securities remained about the same.

                    Securities  Held  to  Maturity.   Debt  securities  held  to
maturity decreased from $37.9 million to $24.4 million due to maturities and the
exercise of call options by issuers. Mortgage-backed securities held to maturity
decreased  from $38.5  million  to $36.4  million  during  fiscal  1998,  due to
principal  repayments.  The net unrealized losses on securities held to maturity
decreased  from $1.8 million at September  30, 1997 to $1.5 million at September
30, 1998.  These  increases  were  primarily  due to the market rate of interest
decreasing compared to the contractual rate.

     Loans  Held for  Sale.  Loans  held for sale  increased  from  $204,000  at
September  30, 1997,  to  $2,672,000  at September  30, 1998.  The Bank had firm
commitments  to sell  all of the  loans  held  for  sale  that  were  closed  by
September, 1998.

     Loans  Receivable.  Loans  receivable  increased  from  $260.4  million  at
September  30, 1997,  to $280.6  million at September  30, 1998,  an increase of
$20.2 million or 7.8%. The increase was
primarily comprised of increases in agricultural and commercial business loans.

     Deposits.  Total deposits  increased by $18.3  million,  or 8.8% during the
1998 fiscal year.  The increase in deposits  can be primarily  attributed  to an
increase in savings and certificates of deposit.  The increase in total deposits
was accompanied by an increase in the weighted  average cost of funds from 4.60%
to 4.67% for the years  ended  September  30, 1997 and 1998,  respectively.  The
increase in cost is primarily  attributable  to the change in the composition of
deposits.

     Borrowings. In addition to the growth in deposits, additional borrowings of
$10.4  million  were needed  utilized  to fund the growth in assets.  Management
utilizes a least cost,  at the margin,  approach  to fund  assets.  As a result,
borrowings  are utilized as a funding source when it provides the least cost, at
the margin.  FHLB advances are used to fund lending and  investment  activities,
withdrawals from deposit accounts and other ordinary business activity.

     Stockholders' Equity.  Stockholders' equity decreased from $43.4 million at
September  30, 1997,  to $42.5 million at September 30, 1998, a decrease of $0.9
million.  The Corporation  repurchased 288,218 shares of its common stock during
the year at an average price of $19.05,  thereby reducing  stockholders' equity.
The  repurchase  of shares also reduced the total number of  shareholders.  Book
value per share  decreased  from  $16.24 at  September  30,  1997,  to $16.22 at
September 30, 1998.

Comparison of Years Ended September 30, 1998 and 1997

     Net  Income.  Net  income  decreased  to $3.0  million  for the year  ended
September 30, 1998, from $3.1 million for the year ended September 30, 1997. The
decrease was primarily due to an increase in non-interest expense.

     Interest  Income.  Total  interest  income  increased $2.7 million to $30.0
million for the year ended  September 30, 1998,  from $27.3 million for the year
ended  September 30, 1997.  Interest  income on loans  increased by $3.4 million
from $20.1  million for the year ended  September 30, 1997, to $23.5 million for
the year ended  September 30, 1998,  as a result of a $39.3 million  increase in
the average  balance of loans  receivable  from $237.5  million at September 30,
1997, to $276.7  million at September 30, 1998.  Furthermore,  the average yield
increased  from 8.45% at  September  30, 1997,  to 8.50% at September  30, 1998.
Interest income on  mortgage-backed  securities  decreased from $3.4 million for
the year ended  September 30, 1997, to $3.0 million for the year ended September
30, 1998.  The decrease was  primarily  the result of a decrease in average rate
from  6.15% for the 1997  fiscal  year to 5.50% for the 1998  fiscal  year.  The
average  balance of investment  securities  decreased by $1.5 million during the
fiscal year and the yield  decreased from 5.79% to 5.31%.  The decrease in yield
for investment  securities was primarily impacted by maturities and the exercise
of call options by issuers. The yield on interest-earning  assets decreased from
7.60%  for the year  ended  September  30,  1997,  to 7.56%  for the year  ended
September  30, 1998.  Interest  income  increased by $3.3 million as a result of
increased  volume  during the year while the  changes in rates  caused  interest
income to decrease by $549,000 and the  rate/volume  change  increased  interest
income by $10,000.
                                       10
<PAGE>


     Interest  Expense.  Total interest  expense  increased to $18.5 million for
1998 from $16.3 million for 1997 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 $583,000 while
the  increase  associated  with a change in  interest  rates  was  approximately
$151,000.  The cost associated  with interest  bearing  deposits  increased from
4.60% for the year ended  September 30, 1997, to 4.67% for the same period ended
September 30, 1997. The cost  associated  with borrowed funds decreased to 5.79%
for fiscal 1998  compared to 5.83% for fiscal  1997.  $59,000 of the decrease in
the cost of borrowed  funds was a result of increases in rates,  $1.5 million of
the  increase  was  attributable  to the  increased  volumes  and $10,000 of the
decrease was rate/volume related.

     Net Interest  Income.  Net interest income increased  $513,000.  Changes in
interest  rates  caused a decrease in net interest  income of $641,000,  volumes
accounted for an increase in net interest income of $1.1 million and rate/volume
differences increased $11,000.

     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  $120,000  for the year ended
September  30, 1997, to $302,000 for the year ended  September 30, 1998,  due to
the change in composition of the loan portfolio.  The Bank's  allowance for loan
losses was  $1,035,000  at September  30, 1998.  The  allowance  for loan losses
represents .34% of total loans  outstanding  and 127.6% 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 $759,000 to
$2.3 million for the year ended  September  30, 1998,  from $1.5 million for the
year ended September 30, 1997. Gains on loans sold increased from $48,000 in the
1997 fiscal year to $360,000 in the 1998 fiscal year.  The gains are a result of
fixed-rate  mortgages that were 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  $422,000 for the year ended  September 30, 1997 to $457,000 for
the year ended September 30, 1998. Service charges on deposit accounts increased
$105,000 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.

Commission  income increased from $227,000 for the year ended September 30, 1997
to $543,000 for the year ended September 30, 1998.  $214,000 of the increase was
a result of the  acquisition  of  Insurance  Planners,  $50,000  was a result of
increased  investment  sales and  $45,000  was due to the sale of  federal  crop
insurance (an ancillary activity to our agricultural lending).

     Non-interest Expense.  Total non-interest expense increased to $8.4 million
for the year ended  September  30,  1998,  from $7.1  million for the year ended
September  30, 1997, or 18.3%.  Compensation  and benefits  increased  from $4.5
million to $5.4 million or 20.2%,  due to the acquisition of Insurance  Planners
($122,000),  the hiring of critical  management and related  support  positions,
including  Agricultural Lending,  Marketing,  Community Banking,  internal audit
($400,000) and merit  increases,  which  averaged 4.5%.  Occupancy and equipment
expense  increased  $46,000.  The Company  expects  increased  compensation  and
property costs in fiscal 1999, due to the acquisition of Homeowners  Mortgage in
November, 1998. Deposit insurance premiums decreased $36,000.  Professional fees
increased  from  $235,000 for fiscal year 1997 to $258,000 for fiscal year 1998.
Data processing increased $99,000 to $492,000 for the period ended September 30,
1998, due to processing expense associated with increased delivery of electronic
services  to  customers,  the  introduction  of  agricultural  lending  and  the
expansion of commercial lending and to a lesser extent, as a result of the costs
associated with the Corporation's Year 2000 compliance program.

     Furthermore,  due to the acquisitions of Insurance  Planners and Homeowners
Mortgage,  the Company will experience  approximately $115,000 in annual expense
due to the amortization, over a 25 year period, of goodwill associated with such
acquisitions.

     Income Tax  Expense.  Income tax expense  decreased to $2.0 million for the
year ended  September 30, 1998,  from $2.1 million for the year ended  September
30,  1997.  The decrease was  primarily  due to a decrease in pre-tax  income of
$175,000.

                                       11

<PAGE>
Comparison of Years Ended September 30, 1997 and 1996

     Net Income.  Net income  increased  by $1.4 million to $3.1 million for the
year ended  September 30, 1997,  from $1.7 million for the year ended  September
30, 1996.  The increase was primarily due to an increase in net interest  income
and non-interest income and the decrease of non-interest expense.

     Interest  Income.  Total  interest  income  increased $4.1 million to $27.3
million for the year ended  September 30, 1997,  from $23.2 million for the year
ended  September 30, 1996.  Interest  income on loans  increased by $4.0 million
from $16.1  million for the year ended  September 30, 1996, to $20.1 million for
the year ended  September 30, 1997,  as a result of a $44.3 million  increase in
the average  balance of loans  receivable  from $193.2  million at September 30,
1996, to $237.5  million at September 30, 1997.  Furthermore,  the average yield
increased  from 8.32% at  September  30, 1996,  to 8.45% at September  30, 1997.
Interest income on  mortgage-backed  securities  increased from $3.3 million for
the year ended  September 30, 1996, to $3.4 million for the year ended September
30, 1997.  The increase was  primarily the result of an increase in average rate
from  6.03% for the 1996  fiscal  year to 6.15% for the 1997  fiscal  year.  The
average  balance of investment  securities  decreased by $3.0 million during the
fiscal year and the yield  increased from 5.59% to 5.79%.  The increase in yield
for investment  securities was primarily impacted by maturities and the exercise
of call options by issuers. The yield on interest-earning  assets increased from
7.33%  for the year  ended  September  30,  1996,  to 7.60%  for the year  ended
September  30, 1997.  Interest  income  increased by $3.6 million as a result of
increased  volume  during the year while the  changes in rates  caused  interest
income to increase by $419,000 and the  rate/volume  change  increased  interest
income by $81,000.

     Interest  Expense.  Total interest  expense  increased to $16.3 million for
1997 from $13.6 million for 1996 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  $1.8 million
while the decrease  associated with a change in interest rates was approximately
$813,000.  The cost associated  with interest  bearing  deposits  increased from
4.50% for the year ended  September 30, 1996, to 4.60% for the same period ended
September 30, 1997. The cost  associated  with borrowed funds decreased to 5.83%
for fiscal 1997  compared to 5.91% for fiscal  1996.  $70,000 of the decrease in
the cost of borrowed  funds was a result of increases in rates,  $1.8 million of
the  increase  was  attributable  to the  increased  volumes  and $24,000 of the
decrease was rate/volume related.

     Net Interest Income. Net interest income increased $1.3 million. Changes in
interest  rates  caused an  increase  in net  interest  income of $1.3  million,
volumes  accounted  for a  decrease  in  net  interest  income  of  $32,000  and
rate/volume differences increased net interest income by $64,000.

     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  $42,000  for the year  ended
September  30, 1996, to $120,000 for the year ended  September 30, 1997,  due to
the change in composition of the loan portfolio.  The Bank's  allowance for loan
losses was  $852,000  at  September  30,  1997.  The  allowance  for loan losses
represents  .30% of total  loans  outstanding  and 149% 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 $156,000 to
$1.5 million for the year ended  September  30, 1997,  from $1.4 million for the
year ended September 30, 1996. Gains on loans sold increased from $38,000 in the
1996 fiscal year to $48,000 in the 1997 fiscal  year.  The gains are a result of
long-term  fixed-rate  mortgages (with an amortization of greater than 20 years)
that were sold in the secondary market because they do not fit the interest rate
risk profile of the Bank. Other service charges and fees decreased from $430,000
for the year ended  September 30, 1996 to $422,000 for the year ended  September
30, 1997.  Service  charges on deposit  accounts  increased  $177,000 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 decreased to $7.1 million
for the year ended  September  30,  1997,  from $8.2  million for the year ended
September  30, 1996, or 13.4%.  Compensation  and benefits  increased  from $4.4
million to $4.5 million or 1.9%, primarily due to merit increases. Occupancy and
equipment  expense remained  unchanged.  Deposit  insurance  premiums  decreased
58.9%,  as a result of the  reduction  in the SAIF  premium and the absence of a
one-time
                                       12
<PAGE>
$1.0 million charge to recapitalize the SAIF in fiscal 1996.  Professional  fees
decreased from $249,000 for fiscal year 1996 to $235,000 for fiscal year 1997.

     Income Tax  Expense.  Income tax expense  increased to $2.1 million for the
year ended  September 30, 1997,  from $1.1 million for the year ended  September
30, 1996,  or 91.2%.  The increase was  primarily  due to an increase in pre-tax
income of $2.5 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 $1.3  million,  $3.8  million  and $3.0
million during the years ended September 30, 1998, 1997, and 1996, respectively.
In fiscal 1997 and 1996,  the cash flow in operating  activities  was  primarily
influenced by the changes in accrued liabilities  associated with the accrual of
the SAIF special  assessment in fiscal 1996,  which was paid out in fiscal 1997.
In fiscal 1998, the cash flow in operating  activities was influenced  primarily
by the change in loans held for sale.

Investing activities used $8.0 million,  $39.5 million, and $52.2 million during
the years ended September 30, 1998, 1997, and 1996, respectively.  During fiscal
1997 and fiscal 1996, the cash used in investing activities was primarily due to
the origination and purchase of loans, and to a lesser extent, the result of the
purchase  of  securities.  The  use of cash  in  those  periods  was  offset  by
maturities  or the  exercise of call options by the issuer of  investments.  Net
cash used in investing activities in fiscal 1998 was substantially  reduced from
fiscal 1997 and fiscal 1996. The net of loan originations and principal payments
on loans used $10 million of cash flow in 1998 versus $41.2 million in 1997. The
reduction is a result of an increase in loans originated for sale ($27.4 million
in 1998 and $2.3 million in 1997),  and an increase in  prepayments  of loans as
mortgage refinancing  continued at high levels. The purchase of loans used $10.8
million in fiscal 1998 and was largely  comprised of commercial  business  loans
that  represented  participation  interests with other  financial  institutions.
Investment  activities  provided  $13.4  million  net, as a result of  principal
payments,  maturity  of  securities,  and the  exercise  of call  provisions  by
issuers.

The primary  activity  of the Bank is  originating  and  purchasing  loans,  and
purchasing  investment and  mortgage-backed  securities.  During the years ended
September 30, 1998,  1997, and 1996, the Bank originated loans in the amounts of
$147.6 million,  $119.2 million and $97.6 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.  Funding of loans purchased was $10.8 million,  $2.4 million and
$17.4 million for the 1998, 1997 and 1996 fiscal years, respectively.  Purchases
of investment and  mortgage-backed  securities held to maturity totaled $0, $3.0
million,  and $21.0  million,  and  securities  available  for sale totaled $3.7
million,  $2.0 million and $2.0  million  during the years ended  September  30,
1998,  1997,  and  1996,  respectively.  Other  investment  activities  included
investments in U. S. Government and federal agency obligations,  and FHLB of Des
Moines stock.

For the year ended  September 30, 1998,  $18.3 million in cash was provided as a
result of an increase in deposits  and $10.4  million in cash was  provided as a
result of an increase  in  borrowings.  The  purchase  of  treasury  stock,  and
dividends on common stock used $5.5  million,  and $1.4  million,  respectively.
During the fiscal  year ended  September  30,  1997,  $19.2  million in cash was
provided as a result of an increase in deposits  and $19.1  million was provided
as a result of an increase in  borrowings.  The purchase of treasury  stock used
$7.2 million and  dividends  on common  stock used $1.4 million  during the 1997
fiscal year.  Basic and diluted  earnings per share for the year ended September
30,  1998,  were $1.14 and $1.05,  respectively.  A portion of the  earnings per
share was a result of the  purchase of treasury  stock  during the fiscal  year.
Financing activities provided $23.2 million, $30.0 million, and $46.2 million in
cash during the years ended  September  30, 1998,  1997 and 1996,  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, 1998,  such
borrowed  funds  totaled  $144.2  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.
                                       13
<PAGE>
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. In December of 1997, the OTS reduced
the  requirement for banks to maintain liquid assets from 5% to not less than 4%
of its  net  withdrawable  accounts  plus  short  term  borrowings.  The  Bank's
regulatory  liquidity was 6.05%,  5.12%,  and 6.08% at September 30, 1998, 1997,
and 1996,  respectively.  The options from the previous  method were used in the
current period, which are more restrictive.

The amount of  certificate  accounts  which are  scheduled to mature  during the
twelve months ending September 30, 1999, was approximately $81.7 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,  1998,  the Bank had  commitments  to extend  credit of $31.7
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 4% of assets,  of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required to maintain  risk-based capital equal to 8% of total risk-based assets.
The Bank's regulatory capital exceeded its tangible equity, tier 1 (risk based),
tier 1 (core) and risk-based capital requirements by 7.6%, 5.1%, 11.5% and 8.0%,
respectively.

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.

Year 2000

The Year 2000 problem  exists  because many computer  programs use only the last
two  digits to refer to a year.  This  convention  could  affect  date-sensitive
calculations  that treat "00" as the year 1900,  rather than 2000. An additional
issue is that 1900 was not a leap  year,  whereas  the year 2000 is.  Therefore,
some programs may not properly provide for February 29, 2000. This anomaly could
result in miscalculations  when processing critical  date-sensitive  information
after December 31, 1999.

The following  discussion of the  implications  of the Year 2000 problem for the
Bank, contains numerous forward looking statements based on inherently uncertain
information.  The cost of the  project  and the date on which the Bank  plans to
complete the internal Year 2000  modifications  are based on  management's  best
estimates,  which are derived utilizing a number of assumptions of future events
including the continued  availability of internal and external resources,  third
party modifications and other factors.  However,  there can be no guarantee that
these  statements  will be achieved and actual  results could differ.  Moreover,
although management believes it will be able to make the necessary modifications
in advance,  there can be no guarantee  that failure to modify the systems would
not have a material adverse effect on the Bank.

The Bank places a high degree of reliance on computer  systems of third parties,
such as customers, suppliers, and other financial and governmental institutions.
Although  the Bank is  assessing  the  readiness  of  these  third  parties  and
preparing contingency plans, there can be no guarantee that the failure of these
third  parties to modify their systems in advance of December 31, 1999 would not
have a material adverse affect on the Bank.

During fiscal 1998,  the Bank adopted a Year 2000  Compliance  Plan (the "Plan")
and  established  a  Year  2000  Compliance  Committee  (the  "Committee").  The
objectives  of the Plan and the  Committee  are to prepare  the Bank for the new
millennium.  As  recommended  by the  Office  of  Thrift  Supervision,  the Plan
encompasses the following phases: Awareness, Assessment,  Renovation, Validation
and Implementation. These phases will enable the Bank to identify risks, develop
an action  plan,  perform  adequate  testing and complete  affirmation  that its
processing  systems will be Year 2000 ready.  Execution of the Plan is currently
on target. The Bank is currently in Phase 4, Validation,  which involves testing
of changes to hardware and software,  accompanied by monitoring and testing with
vendors.  Concurrently,  the Bank is also  addressing  some  issues  related  to
subsequent  phases.  Prioritization  of the most critical  applications has been
addressed,  along with  contract  and  service  agreements.  The  material  data
processing  functions for the Bank are performed and maintained by a third party
vendor.  The Bank has  maintained  ongoing  contact  with  this  vendor  so that
modification  of the software  for Year 2000  readiness is a top priority and is
expected to be accomplished, though there is no assurance, by June 30, 1999. The
Bank has contacted all other material vendors and suppliers regarding their Year
2000 state of  readiness.  Each of these  third  parties has  delivered  written
assurance  to the Bank that they expect to be Year 2000  compliant  prior to the
Year  2000.  The  Bank has  completed  contacting  all  material  customers  and
non-information  technology suppliers (i.e., utility systems,  telephone systems
and  security  systems)  regarding  their  Year  2000  state of  readiness.  The
Validation phase is targeted for completion by June 30, 1999. The 

                                       14
<PAGE>

Implementation  phase is to certify that systems are Year 2000 ready, along with
assurances  that any new systems are  compliant on a  going-forward  basis.  The
Implementation phase is targeted for completion by September 30, 1999.

Monitoring  and managing the Year 2000 project will result in additional  direct
and indirect costs to the Bank.  Direct costs include potential charges by third
party  software  vendors for  product  enhancements,  costs  involved in testing
software  products  for  Year  2000  compliance,  and any  resulting  costs  for
developing and implementing  contingency  plans for critical  software  products
which are not  enhanced.  Indirect  costs will  principally  consist of the time
devoted by existing  employees in managing  software  vendor  progress,  testing
enhanced  software  products and implementing any necessary  contingency  plans.
Total direct costs are  estimated  not to exceed  $50,000.  Actual costs will be
charged to earnings over the next five quarters, as incurred.

The Bank is developing  remediation  contingency  plans and business  resumption
contingency  plans  specific  to the Year 2000.  Remediation  contingency  plans
address the actions to be taken if the current  approach to remediating a system
is falling behind schedule or otherwise  appears to be in jeopardy of failing to
deliver a Year 2000 ready system when needed.  Business  resumption  contingency
plans address the actions that would be taken if critical business functions can
not be carried out in the normal  manner upon  entering  the next century due to
system or supplier failure.

Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business  relationships with the
Bank, such as customers,  vendors,  payment system providers and other financial
institutions, makes it impossible to assure that a failure to achieve compliance
by one or more of these entities  would not have material  adverse impact on the
operations of the Bank.

Impact of Inflation and Changing Prices

The financial  statements and related data have been prepared in accordance with
generally  accepted  accounting  principles  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 AUDITOR'S REPORT


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

We have audited the accompanying  consolidated statements of financial condition
of FSF Financial Corp. and  Subsidiaries  (the  Corporation) as of September 30,
1998, and 1997, 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,  1998.   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  Subsidiaries as of September 30, 1998, and 1997, and the consolidated
results of their operations and their cash flows for each of the fiscal years in
the  three-year  period ended  September 30, 1998, in conformity  with generally
accepted accounting principles.







Bertram Cooper & Co., LLP
Waseca, Minnesota
October 23, 1998
                                       16

<PAGE>



                      FSF FINANCIAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                                                     September 30,
                                                                                       --------------------------------------
                                                                                                 1998               1997
                                                                                       --------------------------------------
                                                                                                  (In thousands)
                                          ASSETS
<S>                                                                                    <C>                 <C>        
Cash and cash equivalents                                                                $     22,597         $    6,135
Securities available for sale, at fair value:
   Equity securities                                                                           19,459             19,311
   Mortgage-backed and related securities                                                      16,574             16,699
   Debt securities                                                                              3,010              1,000
Securities held to maturity, at amortized cost:
   Debt securities (Fair value of $23,953 and $37,065)                                         24,412             37,876
   Mortgage-backed and related securities (Fair value of $35,369 and $37,535)                  36,418             38,539
Loans held for sale                                                                             2,672                204
Loan receivable, net                                                                          280,603            260,390
Foreclosed real estate                                                                            502                 72
Accrued interest receivable                                                                     3,089              2,436
Premises and equipment                                                                          4,111              3,772
Other assets                                                                                    2,785              1,701
                                                                                       --------------------------------- 

          Total Assets                                                                   $    416,232        $   388,135
                                                                                       =================================

                                          LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Demand deposits                                                                     $     30,299        $    28,059
     Savings accounts                                                                          53,984             47,847
     Certificates of deposit                                                                  142,259            132,340
                                                                                       --------------------------------- 
          Total deposits                                                                      226,542            208,246
     Federal Home Loan Bank borrowings                                                        144,177            133,817
     Advances from borrowers for taxes and insurance                                              819                773
     Other liabilities                                                                          2,176              1,937
                                                                                       ---------------------------------  
          Total liabilities                                                                   373,714            344,773

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 4,501,277 shares issued                                                   450                450
     Additional paid in capital                                                                43,382             43,334
     Retained earnings, substantially restricted                                               25,451             23,779
     Treasury stock at cost (1,603,663 and 1,491,562 shares)                                  (23,298)           (20,267)
     Unearned ESOP shares at cost (198,773 and 234,745 shares)                                 (1,988)            (2,347)
     Unearned MSP stock grants at cost (77,214 and 104,604 shares)                               (818)            (1,108)
     Unrealized (loss) on securities available for sale                                          (661)              (479)
                                                                                       ---------------------------------
          Total stockholders' equity                                                           42,518             43,362
                                                                                       ---------------------------------

          Total Liabilities and Stockholders' Equity                                     $    416,232        $   388,135
                                                                                       =================================
</TABLE>

        The accompanying notes are an integral part of these statements



                                       17
<PAGE>


                      FSF FINANCIAL CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                               Years Ended September 30,
                                                                      ----------------------------------------
                                                                           1998         1997           1996
                                                                      ----------------------------------------
                                                                                 (In thousands)
<S>                                                                    <C>           <C>            <C>     
Interest income:
     Loans receivable                                                   $ 23,512      $ 20,066       $ 16,077
     Mortgage-backed and related securities                                3,006         3,384          3,270
     Investment Securities                                                 3,463         3,865          3,897
                                                                      ----------------------------------------
          Total interest income                                           29,981        27,315         23,244
                                                                      ----------------------------------------
Interest expense:
     Deposits                                                             10,082         9,339          8,262     
     Borrowed funds                                                        8,417         7,007          5,347
                                                                      ----------------------------------------
          Total interest expense                                          18,499        16,346         13,609
                                                                      ----------------------------------------
          Net interest income                                             11,482        10,969          9,635     
     Provision for loan losses                                               302           120             42
                                                                      ----------------------------------------
          Net interest income after provision for loan losses             11,180        10,849          9,593
                                                                      ----------------------------------------
Non-interest income:
     Gain (loss) on loans - net                                              360            48             38     
     Other service charges and fees                                          457           422            430     
     Service charges on deposit accounts                                     822           717            540     
     Commission income                                                       543           227            231     
     Other                                                                    87            96            115
                                                                      ----------------------------------------          
Total non-interest income                                                  2,269         1,510          1,354
                                                                      ----------------------------------------
Non-interest expense:
     Compensation and benefits                                             5,393         4,487          4,404     
     Occupancy and equipment                                                 846           800            797     
     Deposit insurance premiums                                              131           167            406     
     SAIF special assessment                                                   -             -          1,030     
     Data processing                                                         492           393            379     
     Professional fees                                                       258           235            249
     Other                                                                 1,275         1,048            913
                                                                      ----------------------------------------
          Total non-interest expense                                       8,395         7,130          8,178
                                                                      ----------------------------------------
          Income before provision for income taxes                         5,054         5,229          2,769
Income tax expense                                                         2,024         2,105          1,101
                                                                      ----------------------------------------
     Net income                                                            3,030         3,124          1,668
                                                                      ========================================
Basic earnings per share                                                 $  1.14       $  1.13        $  0.49
Diluted earnings per share                                               $  1.05       $  1.04        $  0.47

</TABLE>
        The accompanying notes are an integral part of these statements

                                       18
<PAGE>
<TABLE>
<CAPTION>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (In thousands)

                                                                           Unallocated                          Unrealized
                                                                Retained      Common      Unearned               (Loss) on
                                                  Additional    Earnings      Stock        Stock                Securities
                                         Common    Paid-in   Substantially   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, 1995             $  450   $ 43,069     $ 22,158     $ (3,103)      $(1,688) $  (2,589)    $  (946)  $ 57,351

  Net earnings                               -          -        1,668            -             -          -           -      1,668

  Treasury stock acquired                    -          -            -            -             -    (10,560)          -    (10,560)

  Stock issued for stock options             -          6            -            -             -         54           -         60

  Amortization of MSP shares                 -          -            -            -           290          -           -        290

  Common stock dividends
  ($0.50 per share)                          -          -       (1,758)           -             -          -           -     (1,758)

  Allocated ESOP shares                      -         75            -          384             -          -           -        459

  Adjust valuation allowance for
  securities available for sale              -          -            -            -             -          -         139        139
                                       ---------------------------------------------------------------------------------------------

Balance September 30, 1996                 450     43,150       22,068       (2,719)       (1,398)   (13,095)       (807)    47,649

  Net earnings                               -          -        3,124            -             -          -           -      3,124

  Treasury stock acquired                    -          -            -            -             -    (7,245)           -     (7,245)

  Stock issued for stock options             -        (12)           -            -             -         73           -         61

  Amortization of and tax on MSP shares      -         40            -            -           290          -           -        330

  Common stock dividends                                                             
  ($0.50 per share)                          -          -       (1,413)           -             -          -           -     (1,413)

  Allocated ESOP shares                      -        156            -          372             -          -           -        528

  Adjust valuation allowance for
  securities available for sale              -          -            -            -             -          -         328        328
                                       ---------------------------------------------------------------------------------------------

Balance September 30, 1997                 450     43,334       23,779       (2,347)       (1,108)   (20,267)       (479)    43,362

  Net earnings                               -          -        3,030            -             -          -           -      3,030

  Treasury stock acquired                    -          -            -            -             -    (5,492)           -     (5,492)

  Stock issued for stock options             -       (341)           -            -             -      1,911           -      1,570

  Amortization of and tax on MSP shares      -        100            -            -           290          -           -        390

  Common stock dividends                                                             
  ($0.50 per share)                          -          -       (1,358)           -             -          -           -     (1,358)

  Purchase of subsidiary                     -        106                                                550                    656

  Allocated ESOP shares                      -        183            -          359             -          -           -        542

  Adjust valuation allowance for
  securities available for sale              -          -            -            -             -          -        (182)      (182)
                                       ---------------------------------------------------------------------------------------------

Balance September 30, 1998              $  450   $ 43,382     $ 25,451    $  (1,988)      $  (818)  $(23,298)    $  (661)  $ 42,518
                                       =============================================================================================
</TABLE>

        The accompanying notes are an integral part of these statements

                                       19

<PAGE>




                      FSF FINANCIAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               Years Ended September 30,
                                                                  -----------------------------------------------
                                                                       1998              1997             1996
                                                                  -----------------------------------------------
                                                                                    (In thousands)
<S>                                                                 <C>               <C>              <C>     
Cash flows from operating activities:                                       
     Net income                                                      $   3,030         $   3,124        $   1,668
     Adjustments to reconcile net income to net cash
        provided by operating activities:
     Depreciation                                                          359               329              340
     Net amortization of discounts and premiums on                                                
        securities held to maturity                                        (42)              (31)             (36)
     Provision for loan losses                                             302               120               42
     Net market value adjustment on ESOP shares                            185               141               89
     Tax benefit on stock options                                          254                10                -
     Amortization of ESOP and MRP stock compensation                       650               669              674
     Amortization of intangibles                                            10                 -                -
     Net gain on sale of assets                                            (18)                -               (5)
     Federal Home Loan Bank stock dividends                                  -                 -              (81)
     Net loan fees deferred and amortized                                 (194)              214              283
     (Increase) decrease in:
        Loans held for sale                                             (2,469)             (160)            (213)
        Accrued interest receivable                                       (653)             (111)            (228)
        Other assets                                                      (142)              132              (72)
     Increase (decrease) other liabilities                                  67              (589)             499
                                                                  ------------------------------------------------
Net cash provided by operating activities                                1,339             3,848            2,960

Cash flows from investing activities:
     Loan originations and principal payments on loans, net             (9,928)          (41,245)         (28,770)
     Purchase of loans                                                 (10,832)           (2,445)         (17,447)
     Principal payments on securities held to maturity                   2,125                19               49
     Purchase of mortgage-related securities held to maturity                -                 -           (1,494)
     Purchase of securities available for sale                          (3,671)           (1,956)          (1,963)
     Purchase of  securities held to maturity                                -            (3,000)         (19,552)
     Proceeds from securities available for sale                           411                 -                -
     Proceeds from maturities of securities available for sale           1,000                 -                -
     Proceeds from maturities of securities held to maturity            13,500             9,500           17,150
     Investment in foreclosed real estate                                  (12)               (2)             (21)
     Proceeds from sale of REO                                              24                22              112
     Proceeds from sale of fixed assets                                      5                 -                2
     Purchase of equipment and property improvements                      (666)             (373)            (311)
                                                                  ------------------------------------------------
Net cash (used in) investing activities                              $  (8,044)        $ (39,480)       $ (52,245)


</TABLE>

        The accompanying notes are an integral part of these statements

                                       20
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
                                                                           Years Ended September 30,
                                                               --------------------------------------------
                                                                1998               1997              1996
                                                               --------------------------------------------
Cash flows from financing activities:                                          (In thousands)
<S>                                                            <C>             <C>              <C>      
     Net increase in deposits,                                   $  18,297       $  19,171        $  17,558
     Net increase in short-term borrowings                          10,359          19,124           40,886
     Net increase in mortgage escrow funds                              46             305                6
     Treasury stock purchased                                       (5,492)         (7,245)         (10,559)
     Dividends on common stock                                      (1,358)         (1,413)          (1,758)
     Proceeds from exercise of stock options                         1,315              69               53
                                                               --------------------------------------------  
Net cash provided by financing activities                           23,167          30,011           46,186
                                                               -------------------------------------------- 

Net increase in cash and cash equivalents                           16,462          (5,621)          (3,099)

Cash and cash equivalents:
     Beginning of year                                               6,135          11,756           14,855
                                                               -------------------------------------------- 

     End of period                                               $  22,597       $   6,135        $  11,756
                                                               ============================================ 

Supplemental disclosures of cash flow information: 
Cash payments for:
        Interest on advances and other borrowed money            $   8,464       $   6,976        $   5,368
        Interest on deposits                                        10,220           9,188            8,258
        Income taxes                                                 1,850           1,999            1,656
        Loans originated for sale                                   27,421           2,342            2,138

     Cash received:
        Loans sold                                                  25,156           2,103            1,852

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                                121              22              163
     Foreclosed real estate                                            449              20               74
     Stock acquisition of Insurance Planners                           656               -                -

</TABLE>

        The accompanying notes are an integral part of these statements


                                       21
<PAGE>


      (1)      Summary of Significant Accounting Policies

The unaudited  consolidated  financial statements as of and for the period ended
September  30,  1998,   include  the  accounts  of  FSF  Financial  Corp.  ("the
Corporation")  and  its  wholly  owned   subsidiaries,   Insurance  Planners  of
Hutchinson,  Inc.  ("Insurance  Planners"),  First  Federal fsb ("the Bank") and
Firstate  Services,  a wholly owned  subsidiary of the Bank.  The  Corporation's
business is conducted principally through the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation.

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, 1998, 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.  Insurance Planners is a property
and casualty insurance agency.

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 (In thousands)

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.  Cash and cash
equivalents  include  interest  bearing  deposits  of  $15,299  and,  $3,645  at
September 30, 1998, and 1997, respectively.

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, 1998 or 1997.

         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,


                                       22
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

         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 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  that  management  has the intent and  ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal  adjusted by any charge-offs,  the allowance for loan losses,  and any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased  loans.  Discounts and premiums on purchased  real estate loans are
amortized  to income  using the  interest  method over the  remaining  period to
contractual  maturity,  adjusted  for  anticipated  prepayments.  Discounts  and
premiums on purchased  consumer loans are recognized  over the expected lives of
the loans using the level yield method.

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. Loans are considered impaired if full principal
or interest payments are not anticipated in accordance with the contractual loan
terms.  Impaired loans are carried at the present value of expected  future cash
flows discounted at the loan's  effective  interest rate or at the fair value of
the collateral if the loan is collateral  dependent.  A portion of the allowance
for loan losses is  allocated  to  impaired  loans if the value of such loans is
deemed  to be less  than the  unpaid  balance.  If these  allocations  cause the
allowance  for loan losses to require an increase,  such an increase is reported
as a component of the provision for loan losses.

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 with
the net fee or cost  recognized as an  adjustment  to interest  income using the
interest method.

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  carrying  amount or
fair value minus estimated  costs to sell.  Revenue and expenses from operations
and changes to the valuation allowance are included in operations.

Income Taxes
The Corporation calculates income taxes on the liability method, under which the
net deferred tax asset or  liability is  determined  based on the tax effects of
the  differences  between  the book  and tax  bases of the  various  assets  and
liabilities  of the  Corporation  giving  current  recognition to changes in tax
rates and laws.

Premises and Equipment
Land is carried at cost.  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

                                       23

<PAGE>


                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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 has  established  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  Bank,  and  the   derecognition  of  financial  assets  and
liabilities when control is extinguished.  Liabilities and derivatives  incurred
or obtained in conjunction with the transfer of financial assets are measured at
fair value,  if  practicable.  Servicing  assets and other retained  interest in
transferred  assets are measured by allocating  the carrying  amount between the
assets sold and the interest retained, based on their relative fair value.

Mortgage  servicing  rights are 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.

Earnings Per Share
The Corporation adopted Statement of Financial  Accounting Standard ("SFAS") No.
128,   "Earnings  Per  Share,"  during  the  year  ended   September  30,  1998.
Accordingly,  all prior period  earnings per share amounts have been restated in
accordance with this standard.

Basic  income per share  amounts are  computed by dividing the net income by the
weighted average number of common shares  outstanding.  Diluted income per share
amounts were computed by dividing net income, adjusted for the effect of assumed
conversions,  by the weighted  average number of common shares  outstanding plus
dilutive potential common shares calculated for stock options  outstanding using
the treasury stock method.

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.

Stock-Based Compensation
Effective for the year ended  September 30, 1998,  the  Corporation  has adopted
SFAS No. 123, "Accounting for Stock-Based  Compensation." As allowed by SFAS No.
123,  the  Corporation  has elected to  continue  using the  accounting  methods
prescribed  by  Accounting  Principles  Board  (APB)  Opinion No. 25 and related
interpretations,  which  measure  compensation  cost using the  intrinsic  value
method.  See Note 10 for the  impact of the fair value of  employee  stock-based
compensation plans on net income and earnings per share on a pro forma basis for
awards granted after October 1, 1995.

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.

     Loans receivable - 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.

                                       24
<PAGE>


                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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.

    (2)      Business Combination


On June 1, 1998, the Corporation  acquired 100% of the outstanding  common stock
of  Insurance  Planners.  The  business  combination  was  accounted  for by the
purchase method and the financial  statements  reflect the operating  results of
Insurance  Planners  for the four month  period ended  September  30, 1998.  The
Corporation  issued  38,691  shares of common  stock held as treasury  shares to
complete the  acquisition.  The  acquisition  price of $750,000,  resulted in an
acquired identifiable customer based intangible asset of $674,628, which will be
amortized using the straight line method over twenty five years. The acquisition
did not have a material  pro-forma  effect on the results of operations  for the
twelve month periods ending September 30, 1998, 1997 and 1996.

    (3)      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, 1998
                                     --------------------------------------------------------------------
                                                            Gross             Gross
                                        Amortized        Unrealized        Unrealized          Fair
                                          Cost              Gains            Losses           Value
                                     ---------------    -------------    --------------   ---------------
<S>                                 <C>                <C>              <C>              <C>      

Available for sale securities:       
     Equity securities
           Fund Investments               $  12,522          $     -          $    426         $  12,096
           Stock in FHLB                      7,363                -                 -             7,363
                                     ---------------    -------------    --------------   ---------------
                      Total               $  19,885          $     -          $    426         $  19,459
                                     ===============    =============    ==============   ===============

     Mortgage backed securities:
           REMICs                         $  16,980          $     -          $    406         $  16,574
                                     ===============    =============    ==============   ===============

     Debt Securities:                     $   3,000          $    10          $      -         $   3,010
                                     ===============    =============    ==============   ===============

Held to maturity securities:
     Debt securities:
           U.S. Government and Agenc      $  24,412         $    646          $  1,105         $  23,953
                                     ===============    =============    ==============   ===============

     Mortgage backed securities:
           REMICs                         $  36,363          $    65          $  1,120         $  35,308
           GNMA certificates                     49                6                 -         $      55
           FHLMC certifiactes                     6                -                 -         $       6
                                     ---------------    -------------    --------------   ---------------
                      Total               $  36,418          $    71          $  1,120         $  35,369
                                     ===============    =============    ==============   ===============
</TABLE>
                                       25
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


The amortized cost of debt and mortgage-backed  securities at September 30, 1998
included  unamortized  premiums  of  $232  and  unaccreted  discounts  of  $392,
respectively.
<TABLE>
<CAPTION>

                                                                     September 30, 1997
                                          ---------------------------------------------------------------------
                                                                Gross            Gross
                                             Amortized        Unrealized       Unrealized              Fair
                                                Cost            Gains            Losses               Value
                                         --------------   ----------------   ----------------   ---------------

<S>                                      <C>                <C>              <C>               <C>      
Available for sale securities:            
     Equity securities
           Fund Investments                    $  12,522          $     -          $    325          $  12,197
           Stock in FHLB                           6,692                -                 -              6,692
           Preferred Stock                           399               23                 -                422
                                          ---------------   --------------    --------------     --------------
                      Total                    $  19,613          $    23          $    325          $  19,311
                                          ===============   ==============    ==============     ==============

     Mortgage backed securities:
           REMICs                              $  16,980          $     -          $    281          $  16,699
                                          ===============   ==============    ==============     ==============

     Debt Securities:                          $   1,000          $     -          $      -          $   1,000
                                          ===============   ==============    ==============     ==============

Held to maturity securities:
     Debt securities:
           U.S. Government and Agency          $  37,876          $   372          $  1,183          $  37,065
                                          ===============   ==============    ==============     ==============

     Mortgage backed securities:
           REMICs                              $  38,469          $    90          $  1,103          $  37,456
           GNMA certificates                          63                8                 -                 71
           FHLMC certifiactes                          7                1                 -                  8
                                          ---------------   --------------    --------------     --------------
                      Total                    $  38,539          $    99          $  1,103          $  37,535
                                          ===============   ==============    ==============     ==============
</TABLE>


The amortized cost of debt and mortgage backed securities at September 30, 1997,
includes  unamortized  premiums  of  $241  and  unaccreted  discounts  of  $444,
respectively.

Gross realized  gains on sales of available for sale  securities was $11 for the
year ended September 30, 1998. There were no sales of securities  during the two
years ended September 30, 1997 and 1996.

The scheduled  maturities of securities  held-to-maturity  and securities (other
than equity  securities)  available-for-sale  at  September  30,  1998,  were as
follows:
<TABLE>
<CAPTION>
                                                      Held-to-Maturity                Available-for-Sale
                                                         Securities                       Securities
                                            ----------------------------------   --------------  --------------
                                                Amortized           Fair            Amortized         Fair
                                                   Cost             Value             Cost            Value
                                            ---------------    ---------------   --------------  --------------
<S>                                              <C>                <C>               <C>             <C>      
Due in one year or less                           $  3,502           $  3,502         $       -       $       -
Due from one to five years                           7,628              7,313             3,000           3,010
Due from five to ten years                           7,065              6,382                 -               -
Due after ten years                                 42,635             42,125            16,980          16,574
                                            ---------------    ---------------   --------------  --------------
                                     Total        $ 60,830           $ 59,322         $  19,980       $  19,584
                                            ===============    ===============   ==============  ==============
</TABLE>
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.

                                       26
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Debt and  mortgage-backed  securities carried at approximately  $26.7 million at
September  30, 1998 and $27.5  million at September  30,  1997,  were pledged to
secure public deposits and for other purposes required or permitted by law.

     (4)  Loans Receivable (in thousands)

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>

                                                                                        September 30,
                                                                            --------------------------------------
                                                                                  1998                  1997
                                                                            -----------------     ----------------
<S>                                                                               <C>                  <C>      
First mortgage loans:
     Secured by one-to-four family residences                                      $ 154,668            $ 170,366
     Secured by other properties                                                      25,235               28,364
     Construction and Land Development loans                                          34,098               34,384
                                                                            -----------------     ----------------
                                                                                     214,001              233,114
     Less:
           Undisbursed portion of construction and land development loans            (16,658)             (20,364)
           Unearned discounts                                                              -                  (22)
           Net deferred loan origination fees                                           (850)              (1,014)
                                                                            -----------------     ----------------
                       Sub-total first mortgage loans                                196,493              211,714
Consumer and other loans:
     Consumer loans                                                                   17,275               20,417
     Home equity and second mortgages                                                 23,606               20,812
     Commercial                                                                       21,095                8,114
     Agricultural loans                                                               22,960                    -
                                                                            -----------------     ----------------
                                                                                      84,936               49,343
     Add:  net deferred loan origination costs                                           209                  185
                                                                            -----------------     ----------------
                       Sub-total consumer and other loans                             85,145               49,528
                                                                            -----------------     ----------------
                                  Sub-total all loans                                281,638              261,242
     Less: allowance for loan losses                                                  (1,035)                (852)
                                                                            -----------------     ----------------
                                             Total                                 $ 280,603            $ 260,390
                                                                            =================     ================
</TABLE>


A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>

                                               Years Ended Spetember 30,
                                -----------------------------------------------------
                                      1998              1997              1996
                                -----------------  ----------------  ----------------
<S>                                  <C>                <C>               <C>     
Balance, beginning of period            $    852          $    776          $    764
Provision for losses                         302               120                42
Charge-offs                                 (132)              (50)              (34)
Recoveries                                    13                 6                 4
                                -----------------  ----------------  ----------------
Balance, end of period                  $  1,035          $    852          $    776
                                =================  ================  ================
</TABLE>


Recorded  investments  in impaired loans were $0 at September 30, 1998, and $82,
at September 30, 1997. The average recorded  investment in impaired loans during
1998 and 1997 was $178 and  $137,  respectively.  The total  allowance  for loan
losses related to these loans was $3, on September 30, 1997. No interest  income
on these loans was recognized or received in 1998 and 1997.

Loans having carrying values of $449 and $20 were transferred to foreclosed real
estate in 1998 and 1997, respectively.

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

                                       27
<PAGE>



                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


The  aggregate  amount  of loans to  executive  officers  and  directors  of the
Corporation  were $489, and $639 at September 30, 1998, and 1997,  respectively.
During 1998 repayments on loans to executive  officers and directors  aggregated
$55 and $94 was advanced.

      (5)      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 $46,456 and $42,734 at  September  30, 1998
and 1997, respectively.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing,  and included in demand deposits, were $274 and $237 at September 30,
1998 and 1997, respectively.

Capitalized  mortgage  servicing  rights and excess  servicing  receivables  are
summarized as follows:
<TABLE>
<CAPTION>

                                                                   Years Ended Spetember 30,
                                                    ----------------------------------------------------
                                                          1998               1997             1996
                                                    -----------------  ---------------- ----------------
<S>                                                       <C>               <C>              <C>     
Beginning balance,net of accumulated amortization           $    148          $    157         $    155
Amounts capitalized                                               98                20               23
Amortization                                                     (42)              (30)             (18)
Valuation adjustments                                             (3)                1               (3)
                                                    -----------------  ---------------- ----------------
Balance, end of period                                      $    201          $    148         $    157
                                                    =================  ================ ================
</TABLE>

      (6)      Foreclosed Real Estate  (In thousands)


Gain on foreclosed real estate, including net revenues from operations,  was not
material for the three years ended  September 30, 1998. The Bank held foreclosed
real  estate  at  September  30,  1998  and  1997  amounting  to $502  and  $72,
respectively.

      (7)      Premises and Equipment (in thousands)

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
                                                   September 30,
                                        ---------------------------------
                                              1998             1997
                                        ---------------- ----------------
<S>                                            <C>              <C>     
Land                                           $    685         $    490
Buildings and improvements                        3,787            3,693
Furniture, equipment and automobiles              2,818            2,685
Leasehold improvements                               40               40
                                        ---------------- ----------------
   Total costs                                    7,330            6,908
Less accumulated depreciation                     3,219            3,136
                                        ---------------- ----------------
   Total                                       $  4,111         $  3,772
                                        ================ ================
</TABLE>


At September 30, 1998,  the Bank was  obligated  under  noncancelable  operating
leases for office space. Net rental expense under operating leases,  included in
occupancy and equipment, was $51, $58, and $59 for the years ended September 30,
1998, 1997, and 1996, respectively.

                                       28
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The  projected  minimum  rental  commitments  under the  terms of the  leases at
September 30, 1998, are as follows:

                 Rental Income          Rental Expense
Fiscal             as Lessor              as Lessee
------      -----------------------   -------------------

1999                $     18              $     45        
2000                       5                    36
2001                       -                    36
2002                       -                    28
2003                       -                    28
                  -----------            ----------
                    $     23              $    173
                  ===========            ==========
                      
      (8)      Deposits  (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of $100,000, was $24,311 and $30,938 in 1998 and 1997 respectively.

Interest expense on deposits is summarized as follows:

                                          September 30,
                       -----------------------------------------------------
                            1998                1997              1996
                       ----------------  -----------------  ----------------
Savings accounts             $   1,690           $  1,548          $  1,576
Demand deposits                    407                389               443
Certificates of deposit          7,985              7,402             6,243
                       ----------------  -----------------  ----------------
                             $  10,082           $  9,339          $  8,262
                       ================  =================  ================

At September 30, 1998, the scheduled  maturities of  certificates of deposit are
as follows:

      Years Ending September 30,
      --------------------------
      
           1999                        $  81,745
           2000                           43,626
           2001                           12,204
           2002                            2,278
           2003 and thereafter             2,406
                                    -------------
                                       $ 142,259
                                    =============

      (9)      Federal Home Loan Bank Borrowings  (in thousands)

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

                                                                 September 30,
                                         --------------------------------------------------------
                                                     1998                         1997
                                         ---------------------------- ---------------------------
                                                                         
Fiscal Year of Maturity - Advances                      Weighted                      Weighted
----------------------------------                                       
                                            Amount        Rate            Amount        Rate
                                         ------------- -------------- -------------  ------------
<S>                                          <C>         <C>             <C>         <C>  
1998                                          $      -           - %      $  90,400      5.75 %
1999                                             3,000        6.55           13,000      6.03
2000                                            24,677        5.89            7,417      5.89
2001                                            24,000        5.80           15,000      6.00
2002                                            30,000        5.46                -         -
2003 and thereafter                             62,500        5.01                -         -
                                         -------------                   ---------- 
   Total                                       144,177                      125,817
Line of Credit from FHLB                             -    variable            8,000  variable
                                         ------------- --------------    ---------- -------------
                                              $144,177        5.42        $ 133,817      5.83
                                         ============= ============== ============= =============
</TABLE>

                                       29                             
<PAGE>                                                


                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


At September 30, 1998,  borrowed funds are  collateralized by stock in the FHLB,
first   mortgage   loans  with   carrying   value  of  $155,197   and  debt  and
mortgage-backed  securities  with carrying  values of $44,149 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  5.37%  and  5.75%  at  September  30,  1998,   and  1997,
respectively.  The total amount  available to the Bank on its line of credit was
$12,500 and $17,000 at September 30, 1998 and 1997, respectively.

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

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
$151, $142, and $134 for the three years ended September 30, 1998, respectively.

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,  1998,  1997 and 1996 was $668,
$549 and $449, respectively.

A summary of the ESOP share allocation is as follows:
<TABLE>
<CAPTION>

                                                             September 30,
                                        ------------------------------------------------------
                                              1998               1997               1996
                                        ----------------   ----------------   ----------------
<S>                                           <C>                <C>                <C>    
Shares allocated beginning of year              124,975             87,870             49,461
Shares allocated during year                     35,972             37,105             38,409
Unreleased shares                               198,773            234,745            271,850
                                        ----------------   ----------------   ----------------
Total ESOP                                      359,720            359,720            359,720
                                        ================   ================   ================

Fair value of unreleased shares                $  3,131           $  4,607           $  3,466
                                        ================   ================   ================
</TABLE>


Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended  September  30, 1998.  Following  shareholder  approval of the MSP in
January 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 is recorded as unearned  compensation,  a contra equity account, and
is recognized as an expense in accordance with the vesting  requirements defined
by the MSP.  For each of the three fiscal years ended  September  30, 1998,  the
amount  included  in  compensation  expense  related  to the MSP was  $290.  The
following summarizes the activity in the MSP for the three years ended September
30, 1998.

                                       30
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                              Unawarded              Awarded
                                Shares                Shares
                         ------------------     ----------------
   
At September 30, 1995               42,964              136,896
          Vested                         -              (27,379)
                         ------------------     ----------------
At September 30, 1996               42,964              109,517
          Vested                         -              (27,379)
                         ------------------     ----------------
At September 30, 1997               42,964               82,138
          Vested                         -              (27,379)
                         ------------------     ----------------
At September 30, 1998               42,964               54,759
                         ==================     ================


Director's Stock Compensation Plan
In  January  1998,  the  shareholders  of  the  Corporation   approved  a  stock
compensation plan for its non-employee directors.  The plan granted 6,000 shares
of common stock issued from  treasury  that vests over a four year period,  with
1,200 shares awarded in January 1998. The compensation cost associated with this
plan is the fair  value  of the  stock  ($19.42/share)  on the date the plan was
approved  by  shareholders.  Compensation  cost  included  in  the  accompanying
financial  statements for the year ended September 30, 1998 was $40,814.  During
the year ended  September 30, 1998,  1,200 shares of the total grant were vested
to the plan recipients.

Stock Option Plans
The  Corporation   maintains  the  1995  stock  option  plan,  approved  by  the
Corporation's  stockholders  on January 17,  1995 (the 1995 Plan);  and the 1998
stock option plan,  approved by the  Corporation's  stockholders  on January 20,
1998 (the 1998 Plan). These plans permit the granting of stock options,  with an
exercise price equal to the fair value of the Corporation's stock on the date of
the option grant.  All options granted under these plans may be exercised over a
ten-year  period  beginning on the date the option is granted or vested (becomes
exercisable  by the  recipient).  Awards  made under the Plans may be  incentive
stock plans  (ISO's) as defined by Section 422 of the  Internal  Revenue Code or
options that do not  qualify.  Those  options  granted that qualify as ISO's are
generally  exercisable  on the date of the  grant  while  those  not  qualifying
(non-incentive  stock  options  granted  to  executives  and  directors  of  the
Corporation)  vest over 3-5 years. The following  summarizes the activity in the
two Plans for the three years ended September 30, 1998:
<TABLE>
<CAPTION>

                                        Available      Options      Weighted Average
                                        for Grant    Outstanding     Exercise Price
                                      ------------  --------------  -----------------
<S>                                     <C>             <C>           <C>         
At September 30, 1995                       7,487         438,757        $      9.50
           Exercised                            -          (5,599)              9.50
                                      ------------  --------------  -----------------
At September 30, 1996                       7,487         433,158
           Granted                              -          (5,405)              9.50
           Cancelled                        1,500          (1,500)              9.50
                                      ------------  --------------  -----------------
At September 30, 1997                       8,987         426,253                  -
           1998 Plan Created              300,000               -                  -
           Granted                       (145,601)        145,601              19.18
           Exercised                            -        (135,957)              9.50
                                      ------------  --------------  -----------------
At September 30, 1998                     163,386         435,897       $      12.73
                                      ============  ==============  =================
</TABLE>

Shares available for future grants
           1995 Plan                                        7,987
           1998 Plan                                      155,399

                                       31
<PAGE>



                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


The following table summarizes  information  about stock options  outstanding at
December 31, 1998:


--------------------------------------------------------------------------------
                    Options Outstanding                      Options Exercisable
--------------------------------------------------------------------------------
                                     Weighted average
       Exercise         Number     remaining contractual
         price       Outstanding      life in years          Number        Price
--------------------------------------------------------------------------------

       $ 9.500        290,296               6.3             201,864      $ 9.500
        20.000          1,000               9.3                 200       20.000
        19.125        102,601               9.3              33,075       19.125
        19.416         12,000               9.3               2,400       19.416
        19.250         30,000               9.7               7,500       19.250
                  ------------
                      435,897
                  ============


The  Corporation  applies  APB Opinion  No. 25 and  related  Interpretations  in
accounting  for  its  stock  option  and  incentive   plans.   Accordingly,   no
compensation  cost  has been  recognized  for  stock  options  granted.  Had the
compensation  cost  of the  Corporation's  1998  stock  compensation  plan  been
determined  based on the fair value at the grant date for awards  under the plan
consistent with the provisions of SFAS No. 123, the Corporation's net income and
earnings per share for the year ended September 30, 1998 would have been reduced
to the pro forma amounts  indicated in the following table.  Since July 1, 1995,
is the initial phase-in period for the Corporation in applying the provisions of
SFAS No. 123, the results are not necessarily  representative  of the effects on
pro forma  disclosures  of net income and  earnings per share since such results
exclude stock options granted prior to July 1, 1995.


                                                      1998       
                                                 -------------
              Net Income
                         As reported                $   3,030
                         Pro forma                      2,943
              Earnings per common share
                         As reported
                                Basic               $    1.14
                                Diluted                  1.05
                         Pro forma
                                Basic               $    1.10
                                Diluted                  1.02

The above  disclosed pro forma effects of applying SFAS No. 123 to  compensation
costs may not be  representative of the effects on reported pro forma net income
for future years.

The fair value for each option grant is estimated on the date of the grant using
the Black Scholes Model. The Model  incorporates  the following  assumptions for
the 1998 grants:

Risk free interest rate                   5.32%
Expected life                          10 years
Expected volatility                      62.65%
Expected dividends                            -


The weighted average fair value of the options granted in fiscal 1998 was $11.33
per option.

     (11)      Income Taxes  (in thousands)


The Corporation files a consolidated  federal income tax return. The Corporation
and its subsidiaries entered into a tax-sharing  agreement that provides for the
allocation  and payment of federal and state income  taxes.  The  provision  for

                                       32

<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


income  taxes of each  corporation  is  computed  on a separate  company  basis,
subject to certain  adjustments.  Income tax expense  (benefit) is summarized as
follows:
<TABLE>
<CAPTION>

                                                                            September 30,
                                                      --------------------------------------------------------
                                                            1998                 1997               1996
                                                      -----------------    ----------------  -----------------
<S>                                                      <C>                  <C>                <C>     
Current
      Federal                                                $   1,650            $  1,494           $  1,263
      State                                                        534                 498                403
                                                      -----------------    ----------------  -----------------
             Subtotal                                            2,184               1,992              1,666
Deferred
      Federal                                                     (120)                 85               (423)
      State                                                        (40)                 28               (142)
                                                      -----------------    ----------------  -----------------
             Subtotal                                             (160)                113               (565)
                                                      -----------------    ----------------  -----------------
                         Total income tax provision          $   2,024            $  2,105           $  1,101
                                                      =================    ================  =================
</TABLE>


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.

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:
<TABLE>
<CAPTION>

                                                                 September 30,
                                                       -------------------------------
                                                             1998            1997
                                                       ---------------  --------------
<S>                                                      <C>             <C>  
Deferred tax assets:
      Deferred compensation                                  $    866        $    530
      Deferred net loan fees                                      265             336
      Securities unrealized loss                                  324             227
      Allowance for loan losses                                   419             344
                                                       ---------------  --------------
           Subtotal                                             1,874           1,437
      Less:  Valuation allowance                                  172             131
                                                       ---------------  --------------
                        Total                                   1,702           1,306
Deferred tax liabilities:
      FHLB Stock                                                  241             241
      Tax bad debt reserve                                        256             256
      Premises and equipment                                      337             302
      Installment obligation sale of former building               29              29
      Mortgage servcing rights                                     43              14
      Discount of loans                                             7              11
      Section 475 "For Sale Assets"                               161             105
                                                       ---------------  --------------
                        Total                                   1,074             958
                                                       ---------------  --------------
Net deferred tax asset                                       $    628        $    348
                                                       ===============  ==============
</TABLE>


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  Corporation  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, 1998 and 1997.


                                       33
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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:
<TABLE>
<CAPTION>
                                                              Years Ended September 30,
                                                ----------------------------------------------------
                                                      1998              1997              1996
                                                ----------------  ----------------  ----------------
<S>                                                  <C>               <C>               <C>     
Computed "expected" tax expense                        $  1,718          $  1,778          $    941
Exempt dividends                                             (5)               (8)              (20)
State income taxes, net of federal tax benefit              322               336               173
Other, net                                                  (11)               (1)                7
                                                ----------------  ----------------  ----------------
Total income tax provision                             $  2,024          $  2,105          $  1,101
                                                ================  ================  ================
</TABLE>

Retained  earnings at September 30, 1998,  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, 1998.

(12)   Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
                                                                    For the Years ended
                                                                       September 30,
                                                    ------------------------------------------------------
                                                          1998                   1997             1996
                                                    -------------------  ---------------  ----------------

<S>                                                         <C>              <C>            <C>         
Numerator:
   Net income - Numerator for basic earnings
      per share and diluted earnings per share--
      income available to common stockholders                $3,030,000       $3,124,000     $  1,668,000
                                                    ===================  ===============  ================
Denominator:
   Denominator for basic earnings per share--
      weighted-average shares                                 2,669,586        2,763,481        3,384,930

   Effect of dilutive securities:
      Stock - based compensation plans                          222,598          230,656          139,110
                                                    -------------------  ---------------  ----------------
      Denominator for diluted earnings per share--
         adjusted weighted-average shares and
         assumed conversions                                  2,892,184        2,994,137        3,524,040
                                                    ===================  ===============  ================
Basic earnings per share                                     $     1.14       $     1.13     $       0.49
Diluted earnings per share                                   $     1.05       $     1.04     $       0.47
</TABLE>
(13)      Contingencies  (in thousands)

Loans Sold
During 1982, the Bank sold loans subject to recourse provisions.  The balance of
these loans at September 30, 1998, and 1997 was $238 and $302, 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.

(14)      Stockholders' Equity and Regulatory Capital  (in thousands)

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.  Upon the
Conversion,  the  preexisting  liquidation  rights of the depositors of the Bank
were  unchanged.  Such rights are

                                       34

<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


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, in the Conversion.

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.

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, 1998,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.

As of September 30, 1998,  and 1997, 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, 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 captial, September 30, 1998                         $37,220
Add:  Unrealized losses on debt
        securities held for sale                             236
                                                       ----------
Tangible equity capital and ratio to
        adjusted total assets                            $37,456       9.1%        $ 6,168         1.5%       $ 8,229         2.0%
                                                       ---------------------    ------------------------    -----------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                            $37,456       9.1%        $16,457         4.0%       $20,560         5.0%
                                                       ---------------------    ------------------------    -----------------------
Tier 1 capital and ratio to
        risk-weighted assets                             $37,456      15.5%        $ 9,645         4.0%       $14,467         6.0%
                                                                 -----------    ------------------------    -----------------------
Tier 2 capital, allowance for loan losses                  1,035
                                                       ----------
Total risk-based capital and ratio to
        risk-weighted assets, September 30 , 1998        $38,491      16.0%        $19,290         8.0%       $24,112        10.0%
                                                       =====================    ========================    =======================

</TABLE>

                                       35
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
                                                                                                    To Be Well    
                                                                                                 Capitalized Under
                                                                            For Capital          Prompt Corrective
                                                         Actual          Adequacy Purposes       Action Provisions
                                                    -------------------  ----------------------  -----------------------
<S>                                                <C>         <C>       <C>            <C>      <C>            <C>  
GAAP captial, September 30, 1997                     $38,440
Add:  Unrealized losses on debt
        securities held for sale                         168
                                                    ---------
Tangible equity capital and ratio to
        adjusted total assets                        $38,608     10.1%     $ 5,754        1.5%
                                                    -------------------  ----------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                        $38,608     10.1%     $11,509        3.0%     $19,181         5.0%
                                                    -------------------  ----------------------  -----------------------
Tier 1 capital and ratio to
        risk-weighted assets                         $38,608     18.8%     $ 8,221        4.0%     $12,331         6.0%
                                                             ----------  ----------------------  -----------------------
Tier 2 capital, allowance for loan losses                852
                                                    ---------
Total risk-based capital and ratio to
        risk-weighted assets, September 30 , 1997    $39,460     19.2%     $16,523        8.0%     $20,654        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.

     (15)      Concentration of Credit Risk (in thousands)

The Bank is primarily engaged in originating  mortgage,  consumer,  and business
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. 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  economic  conditions  in its  primary
lending area will deteriorate,  thereby potentially impairing collateral values.
However, management believes that the economy is 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 $15,299 at September 30, 1998.

     (16)      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.

                                       36
<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


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, 1998 follows:

Commitments to extend credit             $  31,684
Standby letters of credit                      113
Commitments to sell loans                    5,711


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

<TABLE>
<CAPTION>

                                                                        September 30,
                                             ----------------------------------------------------------
                                                          1998                            1997
                                             -------------------------------     ----------------------
                                                 Carrying        Fair              Carrying    Fair
                                                  Value          Value              Value      Value
                                             -------------------------------     ----------------------
<S>                                           <C>           <C>                <C>          <C>    
Financial assets:
Cash & cash equivalents                        $  22,597     $  22,597           $  6,135     $  6,135
Investment securities                             46,881        46,422             58,187       57,376
Mortgage-backed and related securities            52,992        51,943             55,238       54,234
Loans held for sale                                2,672         2,672                204          220
Loans receivable, net                            280,603       282,857            260,390      259,994
Accrued interest receivable                        3,089         3,089              2,436        2,436

Financial liabilities:
Deposits                                         226,542       226,909            208,246      208,487
Borrowings                                       144,177       146,042            133,817      134,060
</TABLE>

  (17)         Effects of New Financial Accounting Standards

SFAS No. 130, "Reporting  Comprehensive income" - issued June 1997,  establishes
standards for reporting and displaying  comprehensive  income and its components
in  general-purpose  financial  statements.  Comprehensive  income  includes net
income and several other items that current  accounting  standards require to be
recognized  outside of net income.  This statement  requires entities to display
comprehensive  income  and its  components  in the  financial  statements,  with
presentation of the accumulated  balances of other comprehensive income reported
in  stockholders'  equity  separately  from  retained  earnings  and  additional
paid-in-capital.  SFAS No. 130 is effective for the quarter ending  December 31,
1998.  Reclassification  of financial  statements  for earlier  periods that are
presented for comparative purposes is required.

SFAS  No.  131,  "Disclosures  about  Segments  of and  Enterprise  and  Related
Information" - issued June 1997, requires public business  enterprises to report
information  about  their  operating  segments  in a complete  set of  financial
statements to  shareholders.  This statements  also requires  entities to report
enterprise-wide  information about their products and services, their activities
in different  geographic  areas, and their reliance on major customers.  Certain
segment information is also to be reported in interim financial statements.  The
basis for determining an enterprise's  operating segments is the manner in which
management  operates  the  business.  Specifically,   financial  information  is
required  to be  reported  on  the  basis  that  it is  used  internally  by the
enterprise's  chief  operating  decision  maker in 

                                       37
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


making decisions related to resource  allocation and segment  performance.  SFAS
No. 131 is effective beginning October 1, 1998.

SFAS No. 132,  "Employers'  Disclosures About Pensions and Other Post Retirement
Benefits" - issued February 1998,  revises  disclosures  about pension and other
postretirement   benefits  to  the  extent   practicable,   requires  additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful.  It is effective for the fiscal year beginning  October 1,
1998.


SFAS No. 134,  "Accounting  for  Mortgage-Backed  Securities  Retained after the
Securitization Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking  Enterprise" - issued October 1998, revises the accounting
and reporting  standard for certain  activities of mortgage banking  enterprises
and other enterprises that conduct operations that are substantially  similar to
the primary operations of a mortgage banking enterprise.  It requires that after
the  securitization  of a  mortgage  loan held for sale,  an entity  engaged  in
mortgage banking activities classify the resulting mortgage-backed security as a
trading  security.  It also requires that after the  securitization  of mortgage
loans  held,  an entity  engaged in mortgage  banking  activities  classify  the
resulting  mortgage-backed  securities or other retained  interests based on its
ability  and  intent  to sell or  hold  those  investments.  This  statement  is
effective for the fiscal quarter beginning January 1, 1999.

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

SFAS No. 133,  "Accounting For Derivative  Instruments and Hedging Activities" -
issued June 1998,  establishes accounting and reporting standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for the fiscal year beginning October
1, 1999.  On the date of  adoption,  the  Corporation  may  transfer any held to
maturity  security  into the  available  for sale  category  and then be able to
designate the transferred  security as a hedge item. Any unrealized holding gain
or loss on transferred  securities will be reported in net income or accumulated
other comprehensive  income.  Management has not determined its strategy for the
adoption of Statement No. 133 or its effect on the financial statements.  If the
Corporation  elects to apply hedge accounting,  it is required to establish,  at
the  inception  of  the  hedge,  the  method  it  will  use  for  assessing  the
effectiveness  of the  hedging  activities  and  the  measurement  approach  for
determining the ineffective aspect of the hedge.


                                       38

<PAGE>

                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


  (18)        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 and MSP adjustments.
The  investment in the Bank  subsidiary is carried net of the Banks'  unrealized
loss on securities available for sale.


                        STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

                                                                             September 30,
                                                                  -----------------------------------
 ASSETS                                                                1998                1997
                                                                  ---------------     ---------------
<S>                                                                 <C>                 <C>      
         Cash and cash equivalents                                      $  2,916            $  1,412
         Investment securites available for sale                                                 423
                                                                               -
         Investment securities held to maturity                            1,568               3,062
         Investment in Bank subsidiary                                    37,220              38,440
         Investment in Insurance subsidiary                                  660      
                                                                                                   -
         Loan to Bank ESOP                                                 1,988               2,347
         Other assets                                                        286                  66
                                                                  ---------------     ---------------
                                                                        $ 44,638            $ 45,750
                                                                  ===============     ===============
 LIABILITIES AND STOCKHOLDERS' EQUITY
         Other liabilities                                              $    132            $     41

         Stockholders' equity:
              Common stock                                                   450                 450
              Additional paid-in capital                                  43,382              43,334
              Unrealized gain on securities available for sale                                    14
                                                                               -
              Treasury stock                                             (23,298)            (20,267)
              Unearned MSP stock                                            (818)             (1,108)
              Retained earnings                                           24,790              23,286
                                                                  ---------------     ---------------
                                       Total stockholders' equity         44,506              45,709
                                                                  ---------------     ---------------
                                                                       $  44,638           $  45,750
                                                                  ===============     ===============
</TABLE>

                               STATEMENT OF INCOME
<TABLE>
<CAPTION>

                                                                            Years Ended September 30,
                                                                       --------------------------------------
 Income:                                                                   1998         1997         1996
                                                                       ------------  -----------  -----------
<S>                                                                    <C>          <C>          <C>     
         Dividends from Bank subsidiary                                   $  4,500     $  4,202     $  3,500
         Interest from
              Bank's ESOP loan                                                 193          222          254
              Investments                                                      309          343          641
              Non-interest income                                               12                
                                                                                              -            -
                                                                       ------------  -----------  -----------
                                                                             5,014        4,767        4,395
 Expense:
         Non-interest expense                                                  615          566          474
                                                                       ------------  -----------  -----------
 Income before income taxes and equity in undistributed                              
    net income of subsidiaries                                               4,399        4,201        3,921
 Income tax (benefit) expense                                                  (54)          (1)         154
                                                                       ------------  -----------  -----------
                                                                             4,453        4,202        3,767
 Subsidiaries dividends received in excess of subsidiaries net income       (1,423)      (1,078)      (2,100)
                                                                       ------------  -----------  -----------
 Net income                                                               $  3,030     $  3,124     $  1,667
                                                                       ============  ===========  ===========
</TABLE>


                                       39
<PAGE>


                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


   (18)  Parent Only Condensed Financial Information - Continued (in thousands)


                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                            Years Ended September 30,
                                                                  ------------------------------------------
                                                                      1998           1997           1996
                                                                  ------------- -------------- -------------
<S>                                                                 <C>            <C>           <C>     
 Cash flows from operating activities:
         Net Income                                                   $  3,030       $  3,124      $  1,667
         Adjustments:
              Subsidiaries dividends received in excess
                 of subsidiaries net income                              1,423          1,078         2,100
              (Increase) decrease in other assets                         (123)            10            97
              Increase (decrease)in other liabilities                       82             27            (7)
              Other                                                        356            115            85
                                                                  ------------- -------------- -------------
 Net cash provided by operations                                         4,768          4,354         3,942

 Cash flows from investing activities:
         Proceeds from maturities of investments                         1,500          1,500         8,650
         Purchase of investment securities                                   -              -        (2,559)
          Proceeds from securities available for sale                       411                 
                                                                                            -             -
                                                                  ------------- -------------- -------------
 Net cash provided by investing activities                               1,911          1,500         6,091


 Cash flows from financing activities:
         Payments received on ESOP bank loan                               360            371           385
         Purchases of treasury stock                                    (5,492)        (7,245)      (10,559)
         Proceeds from exercise of stock options                         1,315             73            52
         Payments of cash dividends                                     (1,358)        (1,413)       (1,758)
                                                                  ------------- -------------- -------------
 Net cash used in financing activities                                  (5,175)        (8,214)      (11,880)
                                                                  ------------- -------------- -------------

 Increase (decrease) in cash and cash equivalents                        1,504         (2,360)       (1,847)
 Cash and cash equivalents:
         Beginning of year                                               1,412          3,772         5,619
                                                                  ------------- -------------- -------------
         End of year                                                  $  2,916       $  1,412      $  3,772
                                                                  ============= ============== =============
</TABLE>


  (19)Subsequent Event

On  November  17,  1998,  the  Company  acquired,  in a  transaction  that was a
combination  of stock  and cash,  all of the  outstanding  shares of  Homeowners
Mortgage Corporation ("Homeowners").  Homeowners originates residential mortgage
loans from three  locations  in  Minnesota.  The main  office is located at 1001
Labore Industrial Court, Vadnais Heights,  Minnesota, and additional offices are
in Hastings and Mankato, Minnesota.  Homeowners was organized in 1988.

The Company acquired 20,000 shares at a price of $125 per share,  resulting in a
purchase price of $2,500,000.  The  acquisition  will be accounted for using the
purchase method of accounting and will result in goodwill of approximately  $2.3
million.

                                       40

<PAGE>




                  Selected Quarterly Financial Data (Unaudited)
                    For Three Years Ended September 30, 1998
<TABLE>
<CAPTION>


                                                    First         Second          Third         Fourth
                                                   Quarter        Quarter        Quarter        Quarter      Year
                                               ---------------------------------------------------------------------
<S>                                                 <C>           <C>            <C>           <C>          <C>    
Fiscal 1998
 Interest income                                    $ 7,364       $ 7,518        $ 7,554       $ 7,545      $29,981
 Interest expense                                     4,548         4,591          4,657         4,703       18,499
                                               ---------------------------------------------------------------------
 Net Interest Income                                  2,816         2,927          2,897         2,842       11,482
 Provision for loan losses                               45            75            107            75          302
 Gain on sale of assets                                  15           107            130           108          360
 Net income                                         $   746       $   810        $   767       $   707      $ 3,030
 Basic earnings per share                              0.28          0.30           0.29          0.27      $  1.14
 Diluted earnings per share                            0.26          0.28           0.27          0.25      $  1.05
 Cash dividends declared per share                  $ 0.125       $ 0.125        $ 0.125       $ 0.125      $  0.50
 Market range:
      High bid (1)                                  $ 20.94       $ 20.88        $ 20.75       $ 18.50      $ 20.94
      Low bid (1)                                   $ 19.00       $ 19.50        $ 18.00       $ 13.38      $ 13.38

Fiscal 1997
 Interest income                                    $ 6,564       $ 6,728        $ 6,933       $ 7,090       27,315
 Interest expense                                     3,886         4,011          4,104         4,345       16,346
                                               ---------------------------------------------------------------------
 Net Interest Income                                  2,678         2,717          2,829         2,745       10,969
 Provision for loan losses                               30            30             30            30          120
 Gain on sale of assets                                                13             15            15           48
                                                          5
 Net income                                         $   722       $   725        $   823       $   854      $ 3,124
 Basic earnings per share                              0.25          0.26           0.31          0.32      $  1.13
 Diluted earnings per share                            0.24          0.24           0.28          0.29      $  1.04
 Cash dividends declared per share                  $ 0.125       $ 0.125        $ 0.125       $ 0.125      $  0.50
 Market range:
      High bid (1)                                  $ 15.13       $ 18.25        $ 18.13       $ 21.00      $ 21.00
      Low bid (1)                                   $ 12.75       $ 14.75        $ 16.38       $ 17.25      $ 12.75

Fiscal 1996
 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             15            15           42
                                                          6
 Gain on sale of assets                                                 9                           21           38
                                                          5                            3
 Net income                                         $   421       $   460        $   684       $   103      $ 1,668
 Basic earnings per share                              0.11          0.13           0.21          0.03      $  0.49
 Diluted earnings per share                            0.11          0.13           0.20          0.03      $  0.47
 Cash dividends declared per share                  $ 0.125       $ 0.125        $ 0.125       $ 0.125      $  0.50
 Market range:
      High bid (1)                                  $ 13.50       $ 13.50        $ 13.00       $ 13.25      $ 13.50
      Low bid (1)                                   $ 12.38       $ 12.38        $ 11.50       $ 11.38      $ 11.38
</TABLE>
--------------------------
 (1)    As reported by the Nasdaq Stock Market. Such over-the-counter quotations
        do not reflect inter-dealer prices, without retail mark-up, mark-down or
        commission and may not necessarily represent actual transactions.


                                       41
<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                             (651) 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                             (651) 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
 (651) 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


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

                               Insurance Planners
                               ------------------
                            135 3rd Avenue Southeast
                              Hutchinson, MN 55350
                                 (320) 587-2299

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

                               Homeowners Mortgage
                               -------------------

                             Vadnais Heights Office
                      1001 Labore Industrial Court, Suite E
                            Vadnais Heights, MN 55110
                                 (651) 415-1020


 Mankato Office                             Hastings Office
 423 Belgrade Avenue                        830 Vermillion Street, Suite 102
 North Mankato, MN 56003                    Hastings, MN 55033

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

                                       42
<PAGE>


43


     
                   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                        James J. Caturia

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                        James J. Caturia

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
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, Ste. 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

                                                                            

                                       43