CORPORATE PROFILE AND STOCK MARKET INFORMATION
--------------------------------------------------------------------------------


CORPORATE PROFILE

FSF Financial Corp. ("the Corporation") is the holding company for First Federal
fsb  ("First  Federal")  and  Insurance  Planners.   Insurance  Planners  is  an
independent  property  and  casualty  insurance  agency  located in  Hutchinson,
Minnesota.   Additionally,  on  November  17,  1998,  the  Corporation  acquired
Homeowners Mortgage  Corporation  ("HMC"), a mortgage banking company located in
Vadnais  Heights,  Minnesota.  As of June  1,  2000,  HMC  became  an  operating
subsidiary of First Federal ("the Bank") following  regulatory  approval.  Since
becoming an operating subsidiary of the Bank, HMC has become an integral part of
the  residential  construction  lending  function.  The terms  "First  Federal,"
"Bank,"  and "HMC" are  synonymous  when used in  conjunction  with  residential
lending and residential construction lending in this document.

First  Federal's  business  consists  primarily of attracting  deposits from the
general public and using such deposits, together with borrowings and other funds
to make a variety of loans. The Federal Deposit Insurance  Corporation,  subject
to applicable  limits,  insures  deposits with First  Federal.  At September 30,
2003, First Federal operated 13 retail-banking offices in Minnesota.

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 Minneapolis Tribune, 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, 2003,  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 29, 2003,  there were 2,303,514  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>
SELECTED FINANCIAL AND OTHER DATA FOR FSF FINANCIAL CORP.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Condition  (DOLLARS IN THOUSANDS)

Year Ended September 30,                                    2003         2002         2001         2000          1999
----------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>          <C>          <C>           <C>
Total assets                                           $ 541,152    $ 532,160    $ 473,631    $ 466,515     $ 418,094
Loans held-for-sale                                       17,122       29,242       12,082        3,191         5,334
Loans receivable, net                                    358,708      382,690      340,484      341,813       278,290
Mortgage-backed securities held-to-maturity                    -       20,679       25,731       26,986        27,587
Mortgage-backed securities available-for-sale             29,923       29,196       27,481       15,369        15,979
Debt securities held-to-maturity                               -       12,447       12,420       18,393        19,937
Debt securities available-for-sale                        12,178            -        3,055       12,728        12,794
Equity securities available-for-sale                      12,009       12,046       12,021       12,321        12,909
Cash and cash equivalents (1)                             80,601       14,615       12,594        8,482        19,265
Savings deposits                                         391,015      381,924      312,541      294,823       231,651
Other borrowings                                          93,000       98,000      113,500      127,500       140,967
Stockholders' equity                                      51,187       45,881       41,941       39,765        42,325

Summary of Operations  (DOLLARS IN THOUSANDS)

Year Ended September 30,                                    2003         2002         2001         2000          1999
----------------------------------------------------------------------------------------------------------------------

Interest income                                         $ 33,518     $ 35,174     $ 35,310     $ 32,877      $ 29,420
Interest expense                                          14,686       17,248       21,900       19,753        18,198
Net interest income                                       18,832       17,926       13,410       13,124        11,222
Provision for loan losses                                  1,228          811        1,077          216           456
Noninterest income                                        10,799        8,975        6,599        4,825         5,259
Noninterest expense                                       18,627       16,131       12,815       11,979        11,826
Net income                                                 6,089        6,032        3,733        3,504         2,505

Other Selected Data

Year Ended September 30,                                    2003         2002         2001         2000          1999
----------------------------------------------------------------------------------------------------------------------

Return on average assets                                   1.12%        1.18%        0.80%        0.81%         0.59%
Return on average equity                                  12.49%       13.69%        9.09%        8.54%         5.74%
Average equity to average assets                           8.96%        8.62%        8.86%        9.49%        10.26%
Net interest rate spread (2)                               3.50%        3.53%        2.77%        2.93%         2.39%
Nonperforming assets to total assets                       1.33%        0.94%        0.65%        0.28%         0.13%
Allowance for loan losses to net loans                     0.45%        0.41%        0.44%        0.44%         0.48%
Basic earnings per share                                  $ 2.70       $ 2.77       $ 1.68       $ 1.46        $ 0.94
Diluted earnings per share                                $ 2.55       $ 2.63       $ 1.61       $ 1.43        $ 0.90
Cash dividends declared per share                         $ 1.20       $ 1.00       $ 0.60       $ 0.50        $ 0.50
Dividend payout ratio                                     43.70%       36.02%       34.90%       34.40%        53.10%

<FN>
1.   Consists of cash due from banks,  interest-bearing  deposits, and other
     investments with original maturities of less than three months.
2.   Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
</FN>
</TABLE>

                                       2
<PAGE>
TO OUR SHAREHOLDERS:

This annual report  includes  information on the financial  performance  for FSF
Financial  Corp., and we would like to take this opportunity to provide you with
some of the significant accomplishments and highlights.


Net income of $6.1 million was a new record for the Corporation. Even though net
income  increased over the level of one year ago,  earnings per share  decreased
slightly  due to an  increase in the number of shares  outstanding.  We view the
increase in the number of shares outstanding as a positive event, even though it
resulted in a reduction in earnings per share. A number of individuals exercised
stock  options  and are  holding  the  shares  for  investment  purposes.  Their
confidence in the performance of the Corporation is rewarding.

We continue to focus on residential  construction lending. During the last year,
we  originated  almost  $220  million of  residential  construction  loans,  the
majority  of which were made to the  owner-occupant  of the home.  The loans are
short-term  (maturing in one year or less);  provide interest  earnings at rates
that are generally above market rates;  and when the  construction is completed,
the majority of the loans are modified and sold into the secondary  market.  The
risk profile  associated with construction  loans is generally higher than other
residential  lending and is the main reason for  earnings  that are greater than
current  market rates.  As we have  experienced  losses  within our  residential
construction portfolio, we have tightened our credit standards, strengthened our
reserves,  resolved various nonperforming loans, and implemented fraud detection
software.   During  a  year  when  refinance  activity  contributed  heavily  to
noninterest income for many financial institutions,  we experienced a diminished
impact.  In fiscal  2002,  we had total gains from the sale of mortgages of $4.3
million,  and  $1.5  million  of that  total  was  attributable  to  residential
construction  loans.  In  fiscal  2003,  the  gains  from the sale of  mortgages
increased to $5.0 million, and $3.0 million of that amount came from residential
construction  loans. We believe that this market segment  provides a sustainable
source of future income,  both interest income during the construction phase and
noninterest  income when the  mortgage is sold,  that may not be as sensitive to
interest rate changes as other types of lending.

During the last year, we introduced our on-line banking product.  We are excited
about  the  usage  and  acceptance  of this  additional  delivery  vehicle.  The
electronic  banking segment (on-line banking,  bill payment,  telephone banking,
and ACH activity) accounts for more than 50% of our banking transactions. We are
pleased  that we are able to  provide a variety  of  delivery  systems  that are
cost-effective to our customers and shareholders alike.

We achieved a return on assets  ("ROA") of 1.12% and a Return on Equity  ("ROE")
of 12.49% for the year ended  September 30, 2003. We believe that these measures
compare   favorably  to  statistics   compiled  by  the  FDIC  for  all  savings
institutions with total assets of $500 million to $1 billion. There are 140 such
institutions  and  through  June 30,  2003,  the  latest  reported  period,  the
institutions achieved an average ROA of 0.98% and an ROE of 9.43%.

Book value of the  Corporation  increased  from $20.79 at September  30, 2002 to
$22.30 this year. In October 2002, your Board of Directors announced an increase
in the  quarterly  dividend  of $0.05 to $0.30,  providing  a dividend  yield in
excess of 3%.

We are also  encouraged by the movement in our stock price during the last year.
At September 30, 2002, the common stock of FSF Financial Corp. closed at $19.80,
and at September 30, 2003, the closing price was $30.82.

Insurance Planners,  Homeowners Mortgage Corporation,  and Firstate Investments,
FSF  Financial  Corp.'s  family of companies,  continue to provide  high-quality
products and services that  complement  and supplement the offerings of the Bank
and contribute to the continued profitability of our Corporation.

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 satisfied customers.

Sincerely,

/s/ Donald A. Glas                                  /s/ George B. Loban

Donald A. Glas                                      George B. Loban
Co-Chairman/Chief Executive Officer                 Co-Chairman/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," and "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and  uncertainties  that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the affect 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  that
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.  The  earnings of the
Corporation  depend primarily on the Bank's net interest income, and to a lesser
extent, income from its wholly owned subsidiary Insurance Planners. 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 the average rate of interest earned on assets
and the average rate paid on  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.  The level of
construction loans outstanding has impacted the Bank's interest income. The Bank
originates  construction  loans,  and all  construction  loans are closed in the
Bank's name and administered and monitored by the Bank's personnel.

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.  When  construction  loans  are  complete,  a
modification agreement is executed and the loan is sold in the secondary market,
any gain on sale  appears  on the  Bank's  income  statement.  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.


                                       4
<PAGE>
RATE/VOLUME ANALYSIS

The table below sets forth  certain  information  regarding  changes in interest
income and interest  expense for the Corporation  during the periods  indicated.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes attributable to (1) changes in rates (changes
in rate  multiplied by old average  volume),  (2) changes in volume  (changes in
average volume  multiplied by old rate),  and (3) total changes in  rate/volume.
The  combined  effects  of  changes  in both  volume  and rate  that  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            TOTAL
                                                   --------------   --------------   ---------------

YEAR ENDED SEPTEMBER 30, 2003 VS. 2002:                             (In Thousands)
<S>                                                    <C>               <C>              <C>
Interest income:
   Loans receivable                                    $ (2,509)         $  1,545         $   (964)
   Mortgage-backed securities                              (330)             (449)            (779)
   Securities                                              (417)              504               87
                                                       --------          --------         --------
      Total change in interest income                    (3,256)            1,600           (1,656)

Interest expense:
   Deposit accounts                                      (2,887)            1,009           (1,878)
   Federal Home Loan Bank borrowings                       (286)             (398)            (684)
                                                       --------          --------         --------
      Total change in interest expense                   (3,173)              611           (2,562)
                                                       --------          --------         --------
Net change in net interest income                      $    (83)         $    989         $    906
                                                       ========          ========         ========
<CAPTION>

                                                   -------------------------------------------------
                                                       RATE            VOLUME            TOTAL
                                                   --------------   --------------   ---------------
YEAR ENDED SEPTEMBER 30, 2002 VS. 2001:                             (In Thousands)
<S>                                                    <C>               <C>              <C>
Interest income:
   Loans receivable                                    $ (2,623)         $  3,376         $    753
   Mortgage-backed securities                              (298)              333               35
   Investment securities                                   (874)              (50)            (924)
                                                       --------          --------         --------
      Total change in interest income                    (3,795)            3,659             (136)

Interest expense:
   Deposit accounts                                      (5,576)            2,228           (3,348)
   Federal Home Loan Bank borrowings                       (290)           (1,014)          (1,304)
                                                       --------          --------         --------
      Total change in interest expense                   (5,866)            1,214           (4,652)
                                                       --------          --------         --------
Net change in net interest income                      $  2,071          $  2,445         $  4,516
                                                       ========          ========         ========
</TABLE>

                                       5
<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  for the
periods indicated. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
                                                                              YEARS ENDED SEPTEMBER 30,
                                                  -----------------------------------------------------------------------------
                                                      2003                                   2002
                                                  -----------------------------------------------------------------------------
                                                                               AVERAGE                                AVERAGE
                                                     AVERAGE      INCOME/      YIELD/       AVERAGE       INCOME/      YIELD/
                                                     BALANCE      EXPENSE       COST        BALANCE       EXPENSE       COST
                                                  -----------------------------------------------------------------------------
                                                        (in thousands)                         (in thousands)
<S>                                                   <C>          <C>             <C>       <C>           <C>            <C>
INTEREST-EARNING ASSETS
   Loans receivable (1)                               $ 403,388    $  30,425       7.54%     $ 383,892     $  31,389      8.18%
   Mortgage-backed securities                            41,022        1,651       4.02%        51,415         2,430      4.72%
   Securities (2)                                        70,158        1,442       2.06%        48,519         1,355      2.79%
                                                  ---------------------------            ----------------------------
      Total interest-earning assets                     514,568       33,518       6.51%       483,826        35,174      7.27%
                                                  ---------------------------            ----------------------------
INTEREST-BEARING LIABILITIES
   NOW and money market accounts                      $  64,959          334       0.51%     $  56,294           411      0.73%
   Passbook savings                                      87,558        1,011       1.15%        92,974         1,585      1.70%
   Certificates of deposit                              242,015        8,255       3.41%       211,294         9,482      4.49%
                                                  ---------------------------            ----------------------------
      Total deposits                                    394,532        9,600       2.43%       360,562        11,478      3.18%
   FHLB advances and other borrowed funds                93,699        5,086       5.43%       100,871         5,770      5.72%
                                                  ---------------------------            ----------------------------
      Total interest-bearing liabilities                488,231       14,686       3.01%       461,433        17,248      3.74%
                                                  ---------------------------            ----------------------------
Net Interest Income                                                $  18,832                               $  17,926
                                                                =============                          ==============
NET INTEREST RATE SPREAD  (3)                                                      3.50%                                  3.53%
NET INTEREST RATE MARGIN  (4)                                                      3.66%                                  3.70%
Ratio of average interest-earning assets
  to average interest-bearing liabilities                 1.05x                                  1.05x
                                                  ==============                         ==============
<CAPTION>
                                                          YEARS ENDED SEPTEMBER 30,
                                                  ----------------------------------------
                                                      2001
                                                  ----------------------------------------
                                                                                AVERAGE
                                                     AVERAGE       INCOME/      YIELD/
                                                     BALANCE       EXPENSE       COST
                                                  ----------------------------------------
                                                        (in thousands)
<S>                 <C>                               <C>           <C>             <C>
INTEREST-EARNING ASSETS
   Loans receivable (1)                               $ 344,470     $  30,636       8.89%
   Mortgage-backed securities                            44,791         2,395       5.35%
   Securities (2)                                        50,262         2,279       4.53%
                                                  ----------------------------
      Total interest-earning assets                     439,523        35,310       8.03%
                                                  ----------------------------

INTEREST-BEARING LIABILITIES
   NOW and money market accounts                      $  35,305           266       0.75%
   Passbook savings                                      87,064         3,491       4.01%
   Certificates of deposit                              176,336        11,069       6.28%
                                                  ----------------------------
      Total deposits                                    298,705        14,826       4.96%
   FHLB advances and other borrowed funds               117,957         7,074       5.99%
                                                  ----------------------------
      Total interest-bearing liabilities                416,662        21,900       5.26%
                                                  ----------------------------
Net Interest Income                                                 $  13,410
                                                                ==============
NET INTEREST RATE SPREAD  (3)                                                       2.77%
NET INTEREST RATE MARGIN  (4)                                                       3.05%
Ratio of average interest-earning assets
  to average interest-bearing liabilities                 1.05x
                                                  ==============
</TABLE>
1.   Average  balances  include  nonaccrual  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.

                                       6
<PAGE>
CHANGES IN FINANCIAL CONDITION

General
Total  assets  increased  from $532.2  million at  September  30, 2002 to $541.2
million at September  30, 2003.  This increase of $9.0 million was mainly funded
by deposit  growth and  resulted in an  increase  in cash and cash  equivalents,
offset by a decrease in loans receivable,  loans held-for-sale,  and securities.
The Bank has continued to experience good demand for loans and  supplemented the
internal  loan  origination  of $572.3  million  with  purchases  of other loans
totaling  $4.0 million that met the interest  rate risk and credit risk criteria
established by management.

Securities Available-for-Sale
Equity securities  decreased by $37,000 due to a decrease in the market value of
fund  investments.  During the current fiscal year, the Corporation  transferred
all  its  held-to-maturity  debt  securities  and  mortgage-backed  and  related
securities  to  the  available-for-sale   category.  The  fair  value  of  these
securities at the time of transfer was $31.0 million,  and the unrealized  gain,
net of income  taxes,  was  $561,000.  During this fiscal year,  $9.0 million of
securities  available-for-sale  were  purchased.  The net  unrealized  losses on
securities  available-for-sale  increased from $123,000 at September 30, 2002 to
an unrealized  gain of $640,000 at September 30, 2003. This change was primarily
due to the transfer of securities from  held-to-maturity  to  available-for-sale
and the market rate of interest  decreasing as compared to the contractual  rate
of interest on securities held in the portfolio.

Securities Held-to-Maturity
During  the  current  fiscal  year,  the  Bank  transferred  all the  securities
held-to-maturity to available-for-sale.

Loans Held-for-Sale
Net loans  held-for-sale  decreased  from $29.2 million at September 30, 2002 to
$17.1 million at September 30, 2003. The Bank had firm commitments to sell these
loans held-for-sale that were closed by September 30, 2003.

Loans Receivable
Net loans  receivable  decreased  from $382.7  million at September  30, 2002 to
$358.7  million at September  30,  2003.  This  decrease of $24.0  million was a
result of decreases in other real estate  mortgages  totaling $24.5 million,  an
increase in net  construction  loans totaling $19.0  million,  and  agricultural
loans  in  the  amount  of  $1.1  million,  partially  offset  by a  decline  in
one-to-four-family loans of $18.1 million.

The  composition  of the loans  originated  was  indicative of the change in the
Corporation's  loan  portfolio.  During the last five years,  one-to-four-family
residential  mortgages  decreased  from 38.8% of all loans to 8.5%. The interest
rate risk profile of residential  mortgages causes the Bank to sell the majority
of such loans in the secondary market. The diversification of the loan portfolio
helped to mitigate the impact of interest  rate  reductions on the average yield
in the loan portfolio, which decreased to 7.54% for the year ended September 30,
2003,  as  compared to 8.18% in the prior year.  While this yield  decreased  64
basis  points,  the cost of funds  decreased  by 73 basis  points.  See "Average
Balances" on page 6.

Deposits
Deposits,  after interest  credited,  increased from $381.9 million at September
30, 2002 to $391.0  million at September  30, 2003, an increase of $9.1 million.
Overall  cost of funds on deposits  during the period  decreased 75 basis points
(100 basis points  equals 1%) as the Bank  attempted to maintain  deposit  rates
consistent  with  market  place  competitors.  Demand  deposits  increased  $7.0
million,  or 11.2%,  from  September  30, 2002 to September  30,  2003.  Savings
account  balances   decreased  $2.4  million  during  the  same  period,   while
certificates of deposit increased $4.5 million.  The Bank utilized this increase
in deposits to fund the  continued  loan growth and to reduce  Federal Home Loan
Bank ("FHLB")  borrowings.  Borrowings  decreased by $5.0 million  during fiscal
2003  due to  principal  payments.  The  Bank  was  able  to  fund  lending  and
investments with loan repayments and deposit growth.

Stockholders' Equity
At September 30, 2003,  total  stockholders'  equity  increased  $5.3 million to
$51.2  million  from $45.9  million at  September  30,  2002.  The  increase was
primarily due to net income of $6.1 million  during the period  coupled with the
exercise of stock options and an increase in  accumulated  comprehensive  income
offset by stock repurchases and dividends paid.

                                       7
<PAGE>

Accumulated other  comprehensive  income increased as a result of changes in the
net unrealized loss on the securities  available-for-sale due to fluctuations in
interest rates and the transfer of securities from held-to-maturity. Pursuant to
accounting  principles  generally  accepted  in the  United  States of  America,
securities  available-for-sale  are  recorded  at current  market  value and net
unrealized gains or losses on such securities are excluded from current earnings
and  reported  net of  income  taxes  as part  of  comprehensive  income,  until
realized.  Because of interest rate volatility,  the  Corporation's  accumulated
other  comprehensive  income could materially  fluctuate for each interim period
and year end. Unrealized losses on investment securities available-for-sale will
not affect the Corporation's net income until the securities are sold.

COMPARISON OF YEARS ENDED SEPTEMBER 30, 2003 AND 2002

Net Income
Net income  increased to $6.1 million for the year ended September 30, 2003 from
$6.0 million for the year ended  September 30, 2002.  The increase was primarily
due to an increase in noninterest  income of $1.8 million and an increase in net
interest  income of $906,000  less an increase  in  noninterest  expense of $2.5
million.

Interest Income
Total interest  income  decreased to $33.5 million for the year ended  September
30, 2003 from $35.2  million for the year ended  September  30,  2002.  Interest
income on loans  decreased  by  $964,000  from $31.4  million for the year ended
September 30, 2002 to $30.4 million for the year ended  September 30, 2003. This
was a  result  of a $19.5  million  increase  in the  average  balance  of loans
receivable  from  $383.8  million at  September  30,  2002 to $403.3  million at
September 30, 2003. The average yield decreased from 8.18% at September 30, 2002
to 7.54% at September 30, 2003.  Interest income on  mortgage-backed  securities
decreased  $779,000 from  September 30, 2002 to September 30, 2003.  The average
balance of securities increased by $21.6 million during the fiscal year, and the
yield  decreased  from  2.79% to  2.06%.  The yield on  interest-earning  assets
decreased  from 7.27% at  September  30, 2002 to 6.51% at  September  30,  2003.
Interest income increased by $1.6 million as a result of increased volume during
the year while the changes in rates caused  interest  income to decrease by $3.2
million. Details are contained in the tables at pages 5 and 6.

Interest Expense
Total interest expense  decreased to $14.7 million for the 2003 fiscal year from
$17.2  million  for the  2002  fiscal  year,  as the  average  balance  of total
interest-bearing  liabilities  increased  $26.8  million and the average cost of
funds decreased 73 basis points. The increased cost of deposits attendant to the
growth of balances was approximately $1.0 million, while the decrease associated
with a change in rate was approximately  $2.9 million.  The cost associated with
interest-bearing  deposits decreased from 3.18% for the year ended September 30,
2002 to 2.43% for the same period ended  September 30, 2003. The cost associated
with borrowed funds  decreased to 5.43% for fiscal 2003 as compared to 5.72% for
fiscal  2002.  Decreased  volumes  reduced  interest  expense by  $398,000,  and
$286,000 of the decrease was rate  related.  Details are contained in the tables
at pages 5 and 6.

Net Interest Income
Net interest income increased  $906,000 during the 2003 fiscal year.  Changes in
interest  rates  caused a  decrease  in net  income of  $83,000,  while  volumes
accounted for an increase in net interest income of $989,000.

Provision For Loan Losses
The allowance for losses on loans is maintained at a level that is considered by
management to be  appropriate  to absorb  probable  incurred  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.

                                       8
<PAGE>

The  Bank's  loan loss  provision  increased  from  $811,000  for the year ended
September 30, 2002 to $1.2 million for the year ended  September  30, 2003.  The
Bank's  allowance  for loan losses was $1.7 million at September  30, 2003.  The
allowance for loan losses represents 0.45% of net loans outstanding and 23.7% of
total nonperforming assets.

A loan is impaired when, based on current  information and events, the Bank will
be unable to collect all amounts contractually due under a loan agreement.  When
a loan is determined to be impaired,  a valuation allowance is established based
upon the  difference  between  investment  in the loan and the fair value of the
collateral  securing the loan.  While the Bank  maintains its allowance for loan
losses at a level that 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.

Noninterest Income
Total noninterest income increased by $1.8 million to $10.8 million for the year
ended  September  30, 2003 from $9.0  million for the year ended  September  30,
2002.  Gains on loans sold  increased  from $4.3 million for fiscal year 2002 to
$5.0 million for fiscal year 2003  primarily due to an increase in the number of
residential  construction  loans that were  modified  and sold in the  secondary
market.  Other service charges and fees increased from $1.4 million for the year
ended  September 20, 2002 to $1.7 million for the year ended September 30, 2003,
primarily  due to  declining  interest  rates that helped boost the purchase and
refinance markets. Service charges on deposit accounts increased $729,000 due to
an increase in fees charged on overdrafts.

Noninterest Expense
Total  noninterest  expense  increased  from  $16.1  million  for the year ended
September  30, 2002 to $18.6  million  for the year ended  September  30,  2003.
Compensation and benefits increased $2.1 million, as a result of higher indirect
administrative  costs related to the higher levels of mortgage and  construction
lending activities and merit increases and higher ESOP expense due to release of
11,276 extra  shares,  combined  with an increase in the value of the  Company's
stock.  Occupancy  and  equipment  expense  increased  $262,000 due to increased
computer and software depreciation.

Income Tax Expense
Income tax expense decreased  $240,000 to $3.7 million,  which was primarily due
to a  decrease  of  $183,000  in pretax  income.  A state  income  tax refund of
approximately  $119,000,  in addition to a reduction of state income tax for the
current fiscal year,  impacted the nominal tax rate for the comparative  periods
resulting from an apportionment  formula related to the multi-state  residential
construction lending.

COMPARISON OF YEARS ENDED SEPTEMBER 30, 2002 AND 2001

Net Income
Net income  increased to $6.0 million for the year ended September 30, 2002 from
$3.7 million for the year ended  September 30, 2001.  The increase was primarily
due to an increase in noninterest  income of $2.4 million and an increase in net
interest income of $4.5 million less an increase in noninterest  expense of $3.3
million.

Interest Income
Total interest  income  decreased to $35.2 million for the year ended  September
30, 2002 from $35.3  million for the year ended  September  30,  2001.  Interest
income on loans  increased  by  $753,000  from $30.6  million for the year ended
September 30, 2001 to $31.4 million for the year ended  September 30, 2002. This
was a  result  of a $39.4  million  increase  in the  average  balance  of loans
receivable  from  $344.5  million at  September  30,  2001 to $383.8  million at
September 30, 2002. The average yield decreased from 8.89% at September 30, 2001
to 8.18% at September 30, 2002.  Interest income on  mortgage-backed  securities
increased  $35,000 from  September 30, 2001 to September  30, 2002.  The average
balance of  investment  securities  decreased by $1.7 million  during the fiscal
year and the yield decreased from 4.53% to 2.79%. The yield on  interest-earning
assets  decreased  from 8.03% at September  30, 2001 to 7.27% at  September  30,
2002.  Interest income increased by $3.7 million as a result of increased volume
during the year,  while the changes in rates caused  interest income to decrease
by $3.8 million. Details are contained in the tables at pages 5 and 6.

                                       9
<PAGE>

Interest Expense
Total interest expense  decreased to $17.2 million for the 2002 fiscal year from
$21.9  million  for the  2001  fiscal  year,  as the  average  balance  of total
interest-bearing  liabilities  increased  $61.9  million and the average cost of
funds  decreased 178 basis points.  The increased cost of deposits  attendant to
the growth of  balances  was  approximately  $2.2  million,  while the  decrease
associated with a change in interest rates was approximately  $5.6 million.  The
cost associated with interest-bearing deposits decreased from 4.96% for the year
ended  September 30, 2001 to 3.18% for the same period ended September 30, 2002.
The cost  associated  with borrowed funds  decreased to 5.72% for fiscal 2002 as
compared  to 5.99% for  fiscal  2001.  A  decrease  of  $290,000  in the cost of
borrowed  funds was the result of decreases in rates,  while  decreased  volumes
reduced interest expense by $1.0 million. Details are contained in the tables at
pages 5 and 6.

Net Interest Income
Net interest income increased $4.5 million during the 2002 fiscal year.  Changes
in  interest  rates  caused an  increase  in net income of $2.1  million,  while
volumes accounted for an increase in net interest income of $2.4 million.

Provision For Loan Losses
The allowance for losses on loans is maintained at a level that is considered by
management to be adequate to absorb  inherent  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  decreased  from $1.1 million for the year ended
September 30, 2001 to $811,000 for the year ended  September 30, 2002.  Included
in the Bank's loan loss  provision for September 30, 2001 was a $716,000  charge
in regard to an agricultural loan. The Bank's allowance for loan losses was $1.7
million at September 30, 2002. The allowance for loan losses represents 0.41% of
net loans outstanding and 33.8% of total nonperforming assets.

A loan is impaired when, based on current  information and events, the Bank will
be unable to collect all amounts contractually due under a loan agreement.  When
a loan is determined to be impaired,  a valuation allowance is established based
upon the  difference  between  investment  in the loan and the fair value of the
collateral  securing the loan.  While the Bank  maintains its allowance for loan
losses at a level that 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.

Noninterest Income
Total noninterest  income increased by $2.4 million to $9.0 million for the year
ended  September  30, 2002 from $6.6  million for the year ended  September  30,
2001.  Gains on loans sold  increased  from $2.5 million for fiscal year 2001 to
$4.3 million for fiscal year 2002, and other service  charges and fees increased
from $979,000 for the year ended September 20, 2001 to $1.4 million for the year
ended September 30, 2002,  primarily due to declining interest rates that helped
boost the purchase and refinance  markets.  Service charges on deposit  accounts
increased $216,000 due to a combination of an increase in the number of accounts
and an increase in fees.

Noninterest Expense
Total  noninterest  expense  increased  from  $12.8  million  for the year ended
September  30, 2001 to $16.1  million  for the year ended  September  30,  2002.
Compensation and benefits increased $1.8 million, as a result of the acquisition
of the St. Cloud office and higher indirect  administrative costs related to the
higher levels of construction lending activities and merit increases.  Occupancy
and  equipment  expense  decreased  $8,000,  while  deposit  insurance  premiums
increased $4,000. Professional fees increased from $401,000 for fiscal year 2001
to $524,000  for fiscal  year 2002.  The  increase  is due to expenses  incurred
relating to evaluations  required with the St. Cloud  acquisition;  an increased
reliance  on  consultants,   where  appropriate;  and  general  increases.  Data
processing  increased  $147,000 to $901,000 for the period ended  September  30,
2002,  partially  due to the St.  Cloud  acquisition  and  partially  due to the
delivery of additional  data  processing-related  services to our customer base.
Other  operating

                                       10
<PAGE>

expenses  increased  as a  result  of  goodwill  and  core  deposit  intangibles
associated with the ING acquisition,  increased indirect expenses related to the
higher levels of construction  lending  activities,  and communication and other
costs associated with the integration of an additional branch location.

Income Tax Expense
Income tax expense  increased $1.5 million for the year ended September 30, 2002
to $3.9  million.  This increase was primarily due to a gain in pretax income of
$3.8 million.

LIQUIDITY AND CAPITAL RESOURCES

The  liquidity of a  corporation  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  Corporation'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 $21.0  million  during  the year  ended
September  30,  2003.  Operating  activities  used cash of $8.9 million and $3.1
million  during the years ended  September 30, 2002 and 2001,  respectively.  In
fiscal 2003, the cash flow in operating  activities was influenced  primarily by
the change in loans held-for-sale and other assets and liabilities.

Investing  activities provided $43.0 million during the year ended September 30,
2003 and provided $9.4 million and $6.9 million during the years ended September
30,  2002  and  2001.  The  primary  activity  of the  Bank is  originating  and
purchasing loans and purchasing investment and mortgage-backed  securities.  The
primary  activity  of HMC is  originating  and  selling  loans in the  secondary
mortgage market.  During the years ended September 30, 2003, 2002, and 2001, the
Corporation  originated  loans in the amount of $572.3 million,  $481.0 million,
and $348.0 million.  The net loan  originations and principal  payments on loans
provided $24.8 million in 2003, $4.6 million in 2002, and $25.9 million in 2001.
The purchase of loans used $4.0  million,  $19.3  million,  and $27.3 million in
fiscal 2003,  2002, and 2001 and was largely  comprised of land  development and
commercial  business loans that represented  participation  interests with other
financial institutions. The Bank also sold a participation in a development loan
in fiscal year 2001 for $1.6 million.  Maturities,  principal  payments,  or the
exercise  of  call  provisions  by the  issuers  of  mortgage-backed  securities
held-to-maturity  provided $2.2 million,  $5.1 million, and $7.3 million for the
years ended September 30, 2003,  2002, and 2001,  respectively.  The purchase of
investment  securities  available-for-sale  used $9.0 million, $3.0 million, and
$13.9  million,  and maturities or the exercise of call provision by the issuers
of such securities provided $28.0 million,  $4.8 million,  and $13.3 million for
the  years  ended  September  30,  2003,  2002,  and 2001,  respectively.  Other
investment   activities   included  the  purchase  of  equipment   and  property
improvements and proceeds from the sale of REO property.

For the year ended  September  30, 2003,  $9.2 million in cash was provided as a
result of an increase in deposits  and net cash of $5.0 million was paid on FHLB
advances. The purchase of treasury stock and dividends on common stock used $1.0
million and $2.7 million,  respectively.  During the fiscal year ended September
30,  2002,  $19.9  million in cash was  provided  as a result of an  increase in
deposits and net cash of $15.5 million was paid on FHLB  advances.  The purchase
of treasury  stock used $1.5  million and  dividends  on common  stock used $2.2
million  during the 2002 fiscal year.  Basic and diluted  earnings per share for
the year ended September 30, 2003 were $2.70 and $2.55, respectively.  A portion
of the earnings per share was a result of the purchase of treasury  stock during
the fiscal year.  Financing  activities  provided  $2.0 million  during the year
ended  September  30, 2003 and provided $1.5 million and $327,000 in cash during
the years ended September 30, 2002 and 2001, respectively.

The  Bank's  liquidity  is a  measure  of its  ability  to  fund  loans  and pay
withdrawals  of  deposits  and other  cash  outflows  in an  efficient  and cost
effective  manner.  The Bank's  primary  sources of funds are  deposits  and the
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, 2003,  such  borrowed  funds  totaled  $93.0  million.  While loan
repayments  and  maturing

                                       11
<PAGE>

investments and mortgage-backed securities are relatively predictable sources of
funds,  deposit  flows and loan and  mortgage-backed  security  prepayments  are
greatly  influenced  by  general  interest  rates,   economic  conditions,   and
competition.

The amount of  certificate  accounts  that are  scheduled  to mature  during the
twelve months ending September 30, 2004 is approximately  $167.4 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,  and FHLB  advances  or  outside  borrowings.  It has been the Bank's
experience  that  substantial  portions of such maturing  deposits remain at the
Bank.

At  September  30,  2003,  the Bank had  commitments  to extend  credit of $42.2
million,  including  unused  lines  of  credit.  Funds  required  to fill  these
commitments  are  derived   primarily  from  FHLB  borrowings,   current  excess
liquidity, deposit inflows, loan sales, and loan and security repayments.

OTS regulations  require the Bank to maintain core capital of 4.0% 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 8.0% 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 6.0%, 6.2%,
3.0%, and 2.7%, respectively.

The Bank's risk-based capital increased from $40.5 million to $44 million during
the year ended  September  30, 2003.  This was  primarily  due to the Bank's net
earnings less the amount of a dividend paid by the Bank to the Corporation.

Management  believes that under current  regulations,  the Bank will continue to
meets 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.

IMPACT OF INFLATION AND CHANGING PRICES

The financial  statements and related data have been prepared in accordance with
accounting principles generally accepted in the United States of America.  These
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 on 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.

NEW ACCOUNTING PRONOUNCEMENTS

The  Financial  Accounting  Standards  Board  ("FASB")  recently  issued two new
accounting  standards,  Standard 149,  "Amendment of Statement 133 on Derivative
Instruments and Hedging  Activities" and Statement 150,  "Accounting for Certain
Financial  Instruments with  Characteristics  of Both Liabilities and Equities",
both of which generally become effective in the quarter  beginning July 1, 2002.
Because  the  Company  does  not have  these  instruments  or is only  nominally
involved in these instruments, management determined that, upon adopting the new
standards, the new accounting standards will not materially affect the Company's
operating results or financial condition.

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  of
Variable   Interest   Entities,   an   Interpretation   of  ARB  No.  51".  This
Interpretation  provides new guidance for the consolidation of variable interest
entities ("VIEs") and requires such entities to be consolidated by their primary
beneficiaries  if the entities do not  effectively  disperse  risk among parties
involved.  The  Interpretation  also adds disclosure  requirements for investors
that are involved with unconsolidated VIEs. The consolidation requirements apply
immediately  to VIEs created  after  January 31, 2003 and are  effective for the
first  fiscal  year or interim  period  beginning  after June 15,  2003 for VIEs
acquired  before  February 1, 2003. The adoption of

                                       12
<PAGE>

this  interpretation is not expected have a significant  impact on the Company's
financial condition of results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 that 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 ensure
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 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 asset 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  retains  for its  portfolio  residential  mortgages  with either
adjustable  interest rates or balloon  provisions.  These loans provide the Bank
with a repricing time frame that is  substantially  shorter than the contractual
term.  Originations of construction and land development  loans, which generally
have a contractual  maturity of two years or less,  totaled $242.1  million.  At
September  30, 2003,  the Bank had  outstanding,  $219.3  million of real estate
mortgages  that  were  adjustable  rate,   balloon,  or  construction  and  land
development loans, representing 58.4% of net loans and 40.6% of total assets.

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 2003 have changed when compared to fiscal 2002.
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.

                                       13
<PAGE>

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, 2003,  as calculated by the NPV Model.  The table shows the NPV of
the Bank under  rate shock  scenarios  of -200 to +300  basis  points  ("bp") in
increments  of 100. As market  rates  increase,  the market  value of the Bank's
large  portfolio of mortgage loans and securities  increases and prepayments are
slow.  As rates  decrease,  the market  value of mortgage  loans and  securities
decreases  due to  prepayment  risk,  periodic  rates 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                       Net Portfolio Change                       NPV as % of Assets
      Rates in Basis              ---------------------------------------------    --------------------------------
    Points (Rate Shock)            $ Amount        $ Change         Change %        NPV Ratio          Change
                                  ------------    ------------    -------------    ------------    ----------------
                                             (Dollars in thousands)

          <S>                         <C>              <C>                <C>             <C>              <C>
          +300 bp                     $48,544          $  138             0.29%           9.15%            13 bp
          +200 bp                      48,502              96             0.20            9.11              9 bp
          +100 bp                      48,456              50             0.10            9.07              5 bp
           0 bp                        48,406               -                -            9.02              -
          -100 bp                      48,354            (52)           (0.11)            8.98             (4)bp
          -200 bp                      48,304           (102)           (0.21)            8.94             (8)bp
</TABLE>

This table shows that the Bank's  economic  value of equity would  increase with
rising interest rates while decreasing with declining  interest rates.  However,
computations of prospective  effects of  hypothetical  interest rate changes are
based on numerous  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 because  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.

                                       14
<PAGE>

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


We have audited the accompanying  consolidated statements of financial condition
of FSF Financial Corp. and Subsidiaries as of September 30, 2003 and the related
consolidated   statements   of   income,   comprehensive   income,   changes  in
stockholders'  equity,  and cash flows for the year then ended.  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 audit. The accompanying consolidated financial statements of the Corporation
as of September  30, 2002 and for the two years then ended were audited by other
auditors whose report dated October 26, 2002 expressed an unqualified opinion on
those statements.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the 2003 consolidated  financial  statements  referred to above
present  fairly,  in  all  material  respects,  the  financial  position  of FSF
Financial  Corp.  and  Subsidiaries  as of September 30, 2003 and the results of
their  operations  and their cash flows for the year then ended,  in  conformity
with accounting principles generally accepted in the United States of America.



                                            /s/ Crowe Chizek and Company LLC

                                            Crowe Chizek and Company LLC

Oak Brook, Illinois
October 31, 2003

                                       15
<PAGE>

FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               September 30,
                                                                                          -----------------------------
                                                                                             2003               2002
                                                                                          -----------------------------
                                                                                                 (In thousands)
<S>                                                                                       <C>             <C>
                                       ASSETS
                                       ------
Cash and cash equivalents:
     Cash                                                                                 $     3,556     $      3,597
     Interest-bearing deposits                                                                 77,045           11,018
                                                                                          -----------------------------
          Total cash and cash equivalents                                                      80,601           14,615
Securities available-for-sale, at fair value:
     Equity securities                                                                         12,009           12,046
     Mortgage-backed and related securities                                                    29,923           29,196
     Debt securities                                                                           12,178                -
Securities held-to-maturity, at amortized cost:
     Debt securities (fair value of $13,150)                                                        -           12,447
     Mortgage-backed and related securities (fair value of $20,724)                                 -           20,679
Restricted stock                                                                                4,797            5,925
Loans held-for-sale                                                                            17,122           29,242
Loans receivable, net                                                                         358,708          382,690
Foreclosed real estate                                                                          1,152              122
Accrued interest receivable                                                                     3,960            4,436
Premises and equipment                                                                          6,331            6,005
Goodwill                                                                                        3,883            3,883
Identifiable intangibles                                                                        1,014            1,184
Investment in life insurance                                                                    8,388            7,982
Other assets                                                                                    1,086            1,708
                                                                                          -----------------------------
          Total assets                                                                    $   541,152     $    532,160
                                                                                          =============================
                                LIABILITIES AND STOCKHOLDERS' EQUITY
                                ------------------------------------
Liabilities:
     Demand deposits                                                                     $    69,684     $     62,687
     Savings accounts                                                                         86,666           89,037
     Certificates of deposit                                                                 234,665          230,200
                                                                                          -----------------------------
          Total deposits                                                                     391,015          381,924
     FHLB borrowings                                                                          93,000           98,000
     Advances from borrowers for taxes and insurance                                             233              352
     Other liabilities                                                                         5,717            6,003
                                                                                          -----------------------------
          Total liabilities                                                                  489,965          486,279

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                                                               43,925           43,101
     Retained earnings, substantially restricted                                              38,643           35,214
     Treasury stock at cost (2,156,540 and 2,197,763 shares)                                 (31,444)         (31,621)
     Unearned ESOP shares at cost (7,643 and 54,891 shares)                                      (76)            (549)
     Unearned MSP stock grants at cost (41,764 and 42,164 shares)                               (484)            (448)
     Accumulated other comprehensive (loss)                                                      173             (266)
                                                                                          -----------------------------
          Total stockholders' equity                                                          51,187           45,881
                                                                                          -----------------------------
          Total liabilities and stockholders' equity                                     $   541,152     $    532,160
                                                                                         ==============================
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       16
<PAGE>

FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                   Years Ended September 30,
                                                                         ----------------------------------------------
                                                                              2003           2002            2001
                                                                         ----------------------------------------------
                                                                                        (In thousands)
<S>                                                                          <C>             <C>            <C>
Interest income:
     Loans receivable                                                        $   30,425      $   31,389     $   30,636
     Mortgage-backed and related securities                                       1,651           2,430          2,395
     Investment securities                                                        1,442           1,355          2,279
                                                                         ----------------------------------------------
          Total interest income                                                  33,518          35,174         35,310
                                                                         ----------------------------------------------
Interest expense:
     Deposits                                                                     9,600          11,478         14,826
     Borrowed funds                                                               5,086           5,770          7,074
                                                                         ----------------------------------------------
          Total interest expense                                                 14,686          17,248         21,900
                                                                         ----------------------------------------------
          Net interest income                                                    18,832          17,926         13,410
     Provision for loan losses                                                    1,228             811          1,077
                                                                         ----------------------------------------------
          Net interest income after provision for loan losses                    17,604          17,115         12,333
                                                                         ----------------------------------------------
Noninterest income:
     Gain (loss) on sale of loans - net                                           5,044           4,273          2,499
     Other service charges and fees                                               1,657           1,384            979
     Service charges on deposit accounts                                          2,496           1,767          1,551
     Commission income                                                            1,243           1,126          1,145
     Other                                                                          359             425            425
                                                                         ----------------------------------------------
          Total noninterest income                                               10,799           8,975          6,599
                                                                         ----------------------------------------------
Noninterest expense:
     Compensation and benefits                                                   11,655           9,533          7,705
     Occupancy and equipment                                                      1,769           1,507          1,515
     Data processing                                                              1,002             901            754
     Professional fees                                                              627             524            401
     Other                                                                        3,574           3,666          2,440
                                                                         ----------------------------------------------
          Total noninterest expense                                              18,627          16,131         12,815
                                                                         ----------------------------------------------
          Income before provision for income taxes                                9,776           9,959          6,117
Income tax expense                                                                3,687           3,927          2,384
                                                                         ----------------------------------------------
          Net income                                                         $    6,089      $    6,032     $    3,733
                                                                         ==============================================

Basic earnings per share                                                     $     2.70      $     2.77     $     1.68
Diluted earnings per share                                                   $     2.55      $     2.63     $     1.61


FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
------------------------------------------------------------------------------------------------------------------------

Net income                                                                  $    6,089      $    6,032      $    3,733
Other comprehensive income
     Unrealized holding gains on securities transferred from held to
maturity,
          net of taxes                                                             561               -               -
     Unrealized holding gains (losses) arising during period                      (180)            444           1,966
     Tax benefit (expense)                                                          58            (170)           (735)
                                                                         -----------------------------------------------
     Other comprehensive income (loss) after tax                                   439             274           1,231
                                                                         -----------------------------------------------
Comprehensive income                                                        $    6,528      $    6,306      $    4,964
                                                                         ===============================================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       17
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY  (in thousands, except per share amounts)
---------------------------------------------------------------------------------------------------------------------------------

                                                                                                   Unallocated
                                                                                     Retained        Common         Unearned
                                                                    Additional       Earnings         Stock          Stock
                                                       Common         Paid-in     Substantially      Held by      Acquired by
                                                       Stock          Capital       Restricted        ESOP            MSP
                                                   ------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>            <C>             <C>
Balance, September 30, 2000                             $     450      $   43,391     $   28,925     $    (1,268)    $     (458)
  Net earnings                                                  -               -          3,733               -              -
  Treasury stock acquired                                       -               -              -               -              -
  Stock issued for options and compensation                     -            (330)             -               -              -
    Amortization of MSP shares                                  -               5              -               -              5
    Common stock dividends
    ($0.60 per share)                                           -               -         (1,303)              -              -
    Allocated ESOP shares                                       -             118              -             359              -
    Other comprehensive loss                                    -               -              -               -              -
                                                   ------------------------------------------------------------------------------
Balance September 30, 2001                                    450          43,184         31,355            (909)          (453)
  Net earnings                                                  -               -          6,032               -              -
  Treasury stock acquired                                       -               -              -               -              -
  Stock issued for options and compensation                     -            (246)             -               -              -
    Amortization of MSP shares                                  -               -              -               -              5
    Common stock dividends
    ($1.00 per share)                                           -               -         (2,173)              -              -
    Allocated ESOP shares                                       -             163              -             360              -
    Other comprehensive income                                  -               -              -               -              -
                                                   ------------------------------------------------------------------------------
Balance September 30, 2002                                    450          43,101         35,214            (549)          (448)
  Net earnings                                                  -               -          6,089               -              -
  Treasury stock acquired                                       -               -              -               -              -
  Stock issued for options and compensation                     -             282              -               -            (41)
  Amortization of MSP shares                                    -               -              -               -              5
  Common stock dividends
     ($1.20 per share)                                          -               -         (2,660)              -              -
  Allocated ESOP shares                                         -             542              -             473              -
  Other comprehensive income                                    -               -              -               -              -
                                                   ------------------------------------------------------------------------------
Balance September 30, 2003                              $     450      $   43,925     $   38,643      $      (76)    $     (484)
                                                   ==============================================================================
<CAPTION>
                                                                   Accumulated
                                                                      Other
                                                                  Comprehensive
                                                    Treasury         Income
                                                      Stock          (Loss)          Total
                                                   ---------------------------------------------
<S>                                                  <C>             <C>             <C>
Balance, September 30, 2000                          $   (29,504)    $    (1,771)    $   39,765
  Net earnings                                                 -               -          3,733
  Treasury stock acquired                                 (2,488)              -         (2,488)
  Stock issued for options and compensation                  846               -            516
    Amortization of MSP shares                                 -               -             10
    Common stock dividends
    ($0.60 per share)                                          -               -         (1,303)
    Allocated ESOP shares                                      -               -            477
    Other comprehensive loss                                   -           1,231          1,231
                                                   ---------------------------------------------
Balance September 30, 2001                               (31,146)           (540)        41,941
  Net earnings                                                 -               -          6,032
  Treasury stock acquired                                 (1,496)              -         (1,496)
  Stock issued for options and compensation                1,021               -            775
    Amortization of MSP shares                                 -               -              5
    Common stock dividends
    ($1.00 per share)                                          -               -         (2,173)
    Allocated ESOP shares                                      -               -            523
    Other comprehensive income                                 -             274            274
                                                   ---------------------------------------------
Balance September 30, 2002                               (31,621)           (266)        45,881
  Net earnings                                                 -               -          6,089
  Treasury stock acquired                                 (1,016)              -         (1,016)
  Stock issued for options and compensation                1,193               -          1,434
  Amortization of MSP shares                                   -               -              5
  Common stock dividends
     ($1.20 per share)                                         -               -         (2,660)
  Allocated ESOP shares                                        -               -          1,015
  Other comprehensive income                                   -             439            439
                                                   ---------------------------------------------
Balance September 30, 2003                           $   (31,444)      $     173     $   51,187
                                                   =============================================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       18
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  Years Ended September 30,
                                                                        -----------------------------------------------
                                                                             2003            2002           2001
                                                                        -----------------------------------------------
<S>                                                                           <C>            <C>             <C>
Cash flows from operating activities:
     Net income                                                               $   6,089      $   6,032       $   3,733
     Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
     Depreciation                                                                   927            730             658
     Net amortization of discounts and premiums                                    (120)          (186)            (39)
     Provision for loan losses                                                    1,228            811           1,077
     Net market value adjustment on ESOP shares                                     542            163             117
     Amortization of ESOP and MSP stock compensation                                246            211             325
     Amortization of intangibles                                                    170            444             118
     Net gain on sale of assets                                                       -              -             (30)
     Net loan fees deferred and amortized                                          (323)            91              64
     Loans originated for sale                                                 (342,977)      (225,532)       (138,136)
     Loans sold                                                                 355,097        208,371         129,245
     (Increase) decrease in: Accrued interest receivable                            476            434            (345)
          Life insurance                                                           (406)          (411)           (372)
          Other assets                                                              542           (267)           (277)
          Deferred taxes                                                           (244)          (276)           (678)
          Other liabilities                                                        (286)           518           1,402
                                                                        -----------------------------------------------
Net cash provided by (used in) operating activities                              20,961         (8,867)         (3,138)
                                                                        -----------------------------------------------

Cash flows from investing activities:
     Loan originations and principal payments on loans, net                      24,759          4,599          25,925
     Purchase of loans                                                           (4,000)       (19,298)        (27,337)
     Loan participations sold                                                         -              -           1,600
     Principal payments on mortgage-related securities held-to-maturity           2,178          5,085           1,260
     Purchase of securities available-for-sale                                   (9,030)        (2,992)        (13,938)
     Proceeds from FHLB stock redeemed                                            1,128              -             450
     Principal repayments and proceeds from maturities of securities
       available-for-sale                                                        28,003          4,753          13,321
     Proceeds from maturities of securities held-to-maturity                          -              -           6,000
     Investment in foreclosed real estate                                          (163)           (21)             (6)
     Proceeds from sale of REO                                                    1,357            175             231
     Purchase of ING Branch, net of deposits assumed                                  -         17,589               -
     Purchase of equipment and property improvements                             (1,253)          (530)           (583)
                                                                        -----------------------------------------------
Net cash provided by investing activities                                     $  42,979      $   9,360       $   6,923
                                                                        -----------------------------------------------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       19
<PAGE>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                   Years Ended September 30,
                                                                         ----------------------------------------------
                                                                              2003           2002            2001
                                                                         ----------------------------------------------
<S>                                                                           <C>             <C>            <C>
Cash flows from financing activities:
     Net increase in deposits                                                 $   9,175       $  19,912      $  17,718
     FHLB Advances                                                                5,000          10,000         26,000
     Payments on FHLB Advances                                                  (10,000)        (25,500)       (40,000)
     Allocated dividends used to retire debt on ESOP                                232             249            120
     Net decrease in mortgage escrow funds                                         (119)           (146)          (160)
     Treasury stock purchased                                                    (1,016)         (1,496)        (2,488)
     Dividends on common stock                                                   (2,660)         (2,173)        (1,303)
     Proceeds from exercise of stock options                                      1,434             682            440
                                                                         ----------------------------------------------
Net cash provided by financing activities                                         2,046           1,528            327
                                                                         ----------------------------------------------

Net increase in cash and cash equivalents                                        65,986           2,021          4,112

Cash and cash equivalents:
     Beginning of year                                                           14,615          12,594          8,482
                                                                         ----------------------------------------------

     End of year                                                              $  80,601       $  14,615      $  12,594
                                                                         ==============================================

Supplemental disclosures of cash flow information:
    Cash payments for:
        Interest on advances and other borrowed money                         $   5,086       $   5,770      $   7,074
        Interest on deposits                                                     10,287          12,145         14,044
        Income taxes                                                              3,825           3,939          2,830

Supplemental schedule of non-cash investing and financing activities:
Foreclosed real estate                                                        $   2,224        $    149       $    339
Transfer of securities from held-to-maturity to available-for-sale               30,462               -              -
Unrealized gain on securities available-for-sale transferred,
    net of tax                                                                      561               -              -
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       20
<PAGE>

FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003, 2002, AND 2001
--------------------------------------------------------------------------------

(1)      DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  include the accounts of FSF  Financial
Corp. ("the Corporation") and its wholly owned subsidiaries,  Insurance Planners
of Hutchinson,  Inc. ("the Agency") and First Federal fsb ("the Bank"). Firstate
Services  and  Homeowners   Mortgage   Corporation   ("HMC")  are  wholly  owned
subsidiaries   of  the  Bank.  All   significant   inter-company   accounts  and
transactions  have been  eliminated in the  consolidated  financial  statements,
which have been  prepared in conformity  with  accounting  principles  generally
accepted in the United States of America.

Nature of Business
The  Corporation  is  a  holding  company  whose  affiliated  companies  provide
financial  services.  The Agency is a property and casualty  insurance  company.
Firstate  Services is an investment  services  company.  The Bank is a community
financial institution attracting deposits from the general public and using such
deposits,   together  with   borrowings  and  other  funds,  to  make  mortgage,
construction,  consumer,  commercial,  and agricultural  loans.  HMC, a mortgage
banking entity, has become an integral part of the Bank's lending.  At September
30, 2003, the Bank operated 13 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  therefore,  undergoes
periodic examinations by those regulatory authorities.

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

Cash and Cash Equivalents (in thousands)
For  purposes of the  consolidated  statements  of cash flows,  the  Corporation
considers all highly liquid debt  instruments  and  investment  certificates  of
deposit with original  maturities of three months or less and money market funds
to be  cash  equivalents.  At  September  30,  2003,  interest-bearing  deposits
consisted of $19.8 million in overnight funds in other  financial  institutions,
$44.5   million  at  the  FHLB  of  Des  Moines  and  $12.7   million  in  other
interest-bearing  accounts.  At September  30, 2002,  interest-bearing  deposits
consisted of $9.8 million at the FHLB and $1.2 million in other interest-bearing
accounts.

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  are  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 during
      the three fiscal years ended September 30, 2003.


                                       21
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

     Securities Available-for-Sale
     Securities   available-for-sale  consist  of  equity  securities  and  debt
     securities   not   classified  as  trading   securities  or  as  securities
     held-to-maturity.  Unrealized holding gains and losses, net of income taxes
     on  securities  available-for-sale,  are  reported  as a  net  amount  in a
     separate component of stockholders' equity until realized. Gains and losses
     on the sale of  securities  available-for-sale  are  determined  using  the
     specific   identification   method.   Any   decision  to  sell   securities
     available-for-sale  would be based on various factors,  including movements
     in interest rates,  changes in the maturity mix of the Corporation's assets
     and liabilities,  liquidity demands,  regulatory capital considerations and
     other similar  factors.  Premiums and discounts are  recognized in interest
     income  using the interest  method over the period to maturity.  Unrealized
     losses on  securities  available-for-sale  reflecting  a  decline  in value
     judged to be other than temporary are charged to income.

Restricted Stock
The Bank, as a member of the FHLB System,  is required to maintain an investment
in capital stock of the 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.

Interest income is reported on the interest method and includes  amortization of
net deferred loan fees and costs over the loan term. Interest income on mortgage
and commercial  loans is generally  discontinued at the time the loan is 90 days
delinquent  unless the  credit is well  secured  and in  process of  collection.
Consumer loans are typically charged off no later than 180 days past due. In all
cases,  loans are  placed on  nonaccrual  or charged  off at an earlier  date if
collection of principal or interest is considered doubtful.

All  interest  accrued,  but not  received,  for loans placed on  nonaccrual  is
reversed against interest income.  Interest  received on such loans is accounted
for on the  cash-basis or  cost-recovery  method until  qualifying for return to
accrual.  Loans are  returned  to  accrual  status  when all the  principal  and
interest amounts  contractually  due are brought current and future payments are
reasonably assured.

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

                                       22
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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.

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  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.

Servicing Assets
Servicing assets represent  purchased rights and the allocated value of retained
servicing rights on loans sold.  Servicing assets are expensed in proportion to,
and  over the  period  of,  estimated  net  servicing  revenues.  Impairment  is
evaluated  based  on the  fair  value  of the  assets,  using  groupings  of the
underlying  loans as to interest rates and then,  secondarily,  as to geographic
and  prepayment  characteristics.  Fair  value is  determined  using  prices for
similar  assets with  similar  characteristics,  when  available,  or based upon
discounted  cash flows  using  market-based  assumptions.  Any  impairment  of a
grouping is reported as a valuation allowance.

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

Life Insurance
The Corporation has purchased life insurance policies on certain key executives.
Company-owned  life  insurance  is recorded at its cash  surrender  value or the
amount that can be realized.

Goodwill and Other Intangible Assets
Goodwill  results from prior business  acquisitions and represents the excess of
the  purchase  price  over  the fair  value  of  acquired  tangible  assets  and
liabilities and  identifiable  intangible  assets.  Upon adopting new accounting
guidance  on  October 1,  2002,  the  Corporation  ceased  amortizing  goodwill.
Goodwill is assessed, at least annually, for impairment, and any such impairment
will be recognized in the period identified. The effect on net income of ceasing
goodwill amortization in fiscal 2003 was $267,000.

Other  intangible   assets  consist  of  core  deposit  and  acquired   customer
relationship intangible assets arising from a branch acquisition and acquiring a
property and casualty  insurance  company.  They are initially  measured at fair
value and then are  amortized  on a  straight-line  method over their  estimated
useful lives, which is 15 and 25 years, respectively.

Income Taxes
Income tax expense is the total of the current year income tax due or refundable
and the change in deferred tax assets and  liabilities.  Deferred tax assets and
liabilities  are the expected  future tax amounts for the temporary  differences
between carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.

                                       23
<PAGE>

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

Earnings Per Share
Basic  earnings per share amounts are computed by dividing the net income by the
weighted average number of common shares  outstanding.  Diluted income per share
amounts are 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.

Derivatives
The Company  enters into  commitments to make loans whereby the interest rate on
the loan is set prior to funding (rate lock commitments).  Rate lock commitments
on mortgage loans that are intended to be sold are considered  derivatives.  All
derivative  instruments  are recorded at their fair values.  Changes in the fair
value of the rate lock  commitments are recorded in gain on sale of loans in the
Statement of Income.

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  proceed   differences   reflected  as  paid-in   capital
adjustments. Treasury stock is available for general corporate purposes.

Stock Compensation
The Corporation has adopted Statement of Financial Accounting Standards ("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 the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related  interpretations,  which measure  compensation
cost using the intrinsic value method.

The exercise  price of the employee stock options equals the market price of the
underlying stock on the date of grant, and therefore, no compensation expense is
recognized. Pro forma information regarding net income and earnings per share is
required  by SFAS No.  123 and has been  determined  as if the  Corporation  had
accounted  for its  employee  stock  option  under the fair value method of that
statement. Pro forma net income and earnings per share follows:
<TABLE>
<CAPTION>
                                                                      Years Ended September 30,
                                                       ----------------------------------------------------------
                                                           2003                   2002                   2001
                                                       ------------           ------------           ------------
<S>                                                    <C>                    <C>                    <C>
Net income
           As reported                                 $     6,089            $     6,032            $     3,733
           Pro forma                                         6,012                  6,008                  3,636
Earnings per common share
           As reported
                  Basic                                $      2.70            $      2.77            $      1.68
                  Diluted                                     2.55                   2.63                   1.61
           Pro forma
                  Basic                                $      2.67            $      2.76            $      1.64
                  Diluted                                     2.51                   2.62                   1.57
</TABLE>

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 grants:
<TABLE>
<CAPTION>
                                                                                Years Ended September 30,
                                                                      -----------------------------------------------
                                                                          2003              2002              2001
                                                                      -----------------------------------------------
<S>                                                                        <C>               <C>               <C>
Risk free interest rate                                                    4.05%             4.63%             4.85%
Expected life                                                           10 years          10 years          10 years
Expected volatility                                                       27.00%            44.00%            27.00%
Expected dividends                                                         5.22%             8.00%             7.00%
Weighted average fair value per share of the option granted             $   4.43         $    7.20         $    7.16
</TABLE>

                                       24
<PAGE>

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

Fair Value of Financial Instruments
Fair  values of  financial  instruments  are  estimated  using  relevant  market
information and other  assumptions,  as more fully disclosed in a separate note.
Fair value estimates involve  uncertainties and matters of significant  judgment
regarding  interest  rates,  credit  risk,   prepayments,   and  other  factors,
especially  in the absence of broad  markets for  particular  items.  Changes in
assumptions or in market conditions could significantly affect the estimates.

Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting
stockholders'  equity that, under generally accepted accounting  principles,  is
excluded from net income. For the Corporation,  such items consist of unrealized
gains and losses on securities available-for-sale.

Newly Effective Accounting Standards
New  accounting  standards  on  asset  retirement   obligations,   restructuring
activities and exit costs,  operating leases, and early  extinguishment of debt,
and financial  instruments with  characteristics  of both liabilities and equity
were issued in fiscal 2003.  Because the Company did not have these  instruments
or is only nominally involved in these instruments, the new accounting standards
did  not  materially  affect  the  Company's   operating  results  or  financial
condition.

Reclassifications
Certain amounts in the prior periods presented have been reclassified to conform
to  the  current  presentation.   These  reclassifications  have  no  effect  on
previously reported net income.

(2) SECURITIES (in thousands)

Securities have been classified in the consolidated  balance sheets according to
management's  intent.  During the current fiscal year, the Bank  transferred all
securities  held-to-maturity  to  available-for-sale.  The  carrying  amount  of
securities  and their  approximate  fair values at September 30 are presented as
follows:

SEPTEMBER 30, 2003
<TABLE>
<CAPTION>
                                                                      Gross            Gross
                                                  Amortized         Unrealized       Unrealized           Fair
                                                     Cost             Gains            Losses            Value
                                                ---------------   ---------------  ---------------   ---------------
<S>                                                 <C>                 <C>              <C>             <C>
Securities available-for-sale:
     Equity securities:
           Fund Investments                         $   12,522          $      -         $    513        $   12,009
                                                ===============   ===============  ===============   ===============
     Debt securities:
           U.S. Government and Agency               $   11,362          $    816         $      -        $   12,178
                                                ===============   ===============  ===============   ===============
     Mortgage-backed securities:
           REMICs                                   $   20,294          $    121          $     4        $   20,411
           FNMA certificates                             5,738               118                -             5,856
           Other certificates                            3,554               141               39             3,656
                                                ---------------   ---------------  ---------------   ---------------
                      Total                         $   29,586          $    380         $     43        $   29,923
                                                ===============   ===============  ===============   ===============
</TABLE>

                                       25
<PAGE>

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

SEPTEMBER 30, 2002
<TABLE>
<CAPTION>
                                                                      Gross            Gross
                                                  Amortized         Unrealized       Unrealized           Fair
                                                     Cost             Gains            Losses            Value
                                                ---------------   ---------------  ---------------   ---------------
<S>                                                 <C>                 <C>              <C>             <C>
Securities available-for-sale:
     Equity securities
           Fund Investments                         $   12,522          $      -         $    476        $   12,046
                                                ===============   ===============  ===============   ===============
     Mortgage-backed securities:
           FNMA certificates                             6,797               236                -             7,033
           FHLMC certificates                           22,046               212               95            22,163
                                                ---------------   ---------------  ---------------   ---------------
                  Total                             $   28,843          $    448         $     95        $   29,196
                                                ===============   ===============  ===============   ===============
Securities held-to-maturity:
     Debt securities:
           U.S. Government and Agency               $   12,447          $    763         $     60        $   13,150
                                                ===============   ===============  ===============   ===============
     Mortgage-backed securities:
           REMICs                                   $   20,154          $    136         $     92        $   20,198
           FNMA certificates                               511                 1                -               512
           Other certificates                               14                 -                -                14
                                                ---------------   ---------------  ---------------   ---------------
                      Total                         $   20,679          $    137         $     92        $   20,724
                                                ===============   ===============  ===============   ===============
</TABLE>

There were no sales of securities during the past three years as presented.

The fair  values of debt  securities  at  September  30,  2003,  by  contractual
maturity,  were as  follows.  Securities  not  due at a  single  maturity  date,
primarily mortgage-backed securities, are shown separately.

                                                           Securities
                                                           Available
                                                            for Sale
                                                      ---------------------
                                                           Fair Value
                                                      ---------------------
  Due in one year or less                                $     2,011
  Due from one to five years
                                                               8,707
  Due from five to ten years
                                                                   -
  Due after ten years
                                                               1,460
  Mortgage-backed
                                                              29,923
                                                      ---------------------
            Total                                        $    42,101
                                                      =====================

Debt and mortgage-backed  securities with carrying values of approximately $15.7
million at  September  30,  2003 and $14.6  million at  September  30, 2002 were
pledged to secure public  deposits and for other purposes  required or permitted
by law.

                                       26
<PAGE>

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

(3) LOANS RECEIVABLE (in thousands)

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                                      September 30,
                                                                        ------------------------------------------
                                                                               2003                   2002
                                                                        -------------------    -------------------
<S>                                                                           <C>                    <C>
First mortgage loans:
     Secured by 1-4 family residences                                         $     24,293           $     42,383
     Secured by other properties                                                    27,586                 52,043
     Land and land development loans                                                20,948                 19,394
     Residential construction loans                                                263,227                239,155
                                                                        -------------------    -------------------
                                                                                   336,054                352,975
     Less:
          Undisbursed portion of construction
            and land development loans                                            (110,657)              (101,854)
          Net deferred loan origination fees                                          (751)                  (991)
                                                                        -------------------    -------------------
                    Subtotal first mortgage loans                                  224,646                250,130
Consumer and other loans:
     Consumer loans                                                                 32,822                 29,929
     Home equity and second mortgages                                               22,482                 27,543
     Commercial                                                                     22,961                 20,484
     Agricultural loans                                                             57,259                 56,129
                                                                        -------------------    -------------------
                                                                                   135,524                134,085
     Add:
          Net deferred loan origination costs                                          239                    156
                                                                        -------------------    -------------------
                    Subtotal consumer and other loans                              135,763                134,241
                                                                        -------------------    -------------------
                              Subtotal all loans                                   360,409                384,371
     Less:
          Allowance for loan losses                                                 (1,701)                (1,681)
                                                                        -------------------    -------------------
                                        Total                                 $    358,708           $    382,690
                                                                        ===================    ===================
</TABLE>

There were no impaired loans at September 30, 2003 and 2002. Loans receivable on
nonaccrual  status for which interest income has not been recognized were $6,039
and $4,873 at September 30, 2003 and 2002, respectively. The interest income not
recognized on these loans was $394 and $264, respectively.

A summary of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
                                                                          Years Ended September 30,
                                                          -----------------------------------------------------------
                                                                2003                 2002                2001
                                                          ------------------   -----------------   ------------------
<S>                                                          <C>                  <C>                 <C>
Balance, beginning of year                                   $      1,681         $      1,541        $      1,534
ING Branch acquisition                                                  -                  274                   -
Provision for losses                                                1,228                  811               1,077
Charge-offs                                                        (1,293)                (988)             (1,127)
Recoveries                                                             85                   43                  57
                                                          ------------------   -----------------   ------------------
Balance, end of year                                         $      1,701         $      1,681        $      1,541
                                                          ==================   =================   ==================
</TABLE>

Loans,  having  carrying  values of $2.2  million and $149 were  transferred  to
foreclosed real estate in 2003 and 2002, respectively.

The  aggregate  amount  of loans to  executive  officers  and  directors  of the
Corporation  was $313 and $240 at  September  30,  2003 and 2002,  respectively.
During 2003, repayments on loans to executive officers and directors amounted to
$175, while $248 was advanced.

                                       27
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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 were  $30,118,  $46,093,  and $52,968 at September 30, 2003,
2002, and 2001, respectively. Custodial escrow balances maintained in connection
with the foregoing loan servicing and included in demand  deposits were $101 and
$260 at September  30, 2003 and 2002,  respectively.  At September  30, 2003 and
2002,  the  remaining  balance of mortgage  servicing  assets was $128 and $137,
respectively.

(4) PREMISES AND EQUIPMENT (in thousands)

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
                                                                                      September 30,
                                                                        -------------------------------------------
                                                                               2003                    2002
                                                                        -------------------     -------------------
<S>                                                                             <C>                    <C>
Land                                                                            $      979             $     1,044
Buildings, improvements, and leasehold improvements
                                                                                     5,345                   5,186
Furniture, equipment, and automobiles
                                                                                     5,714                   4,680
                                                                        -------------------     -------------------
     Total costs
                                                                                    12,038                  10,910
Less accumulated depreciation
                                                                                     5,707                   4,905
                                                                        -------------------     -------------------
     Total                                                                     $     6,331             $     6,005
                                                                        ===================     ===================
</TABLE>

Depreciation  expense was $927, $730, and $658 for the years ended September 30,
2003, 2002, and 2001, respectively.

At September  30, 2003,  the  Corporation  was  obligated  under  non-cancelable
operating  leases for office  space and  equipment.  Net  rental  expense  under
operating  leases,  included in occupancy and equipment was $370, $318, and $398
for the years ended  September  30, 2003,  2002,  and 2001,  respectively.  Rent
commitments  under  non-cancelable  operating  leases  were as  follows,  before
considering renewal options that generally are present:

                 Years Ending September 30,
                 --------------------------

    2004                                           $    364
    2005                                                362
    2006                                                334
    2007                                                 84
    2008                                                 30
                                               -------------
                                                  $   1,174
                                               =============

                                       28
<PAGE>

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

(5) GOODWILL AND INTANGIBLE ASSETS (in thousands except per share data)

On November 9, 2001, the Bank acquired the St. Cloud,  Minnesota branch facility
and related  business of ING Bank,  fsb.  The primary  reason for the ING branch
acquisition was to increase the Bank's business and market  potential in the St.
Cloud,  Minnesota area. The purchase method transaction  involved the assumption
of deposits and acquisitions of assets as follows:

 Deposits assumed (at fair value)                                   $ 50,083
                                                              ===============

 Assets acquired:
      Cash                                                          $ 17,589
      Loans receivable                                                28,806
      Premises and equipment                                             765
      Other assets                                                        14
      Core deposit and other intangibles                                 794
                                                              ---------------
           Sub-total (at fair value)                                $ 47,968
                                                              ---------------

      Cost of unidentifiable intangible asset resulting
        from the excess of fair value of deposit liabilities
        assumed over the fair value of acquired
        identifiable asset                                          $  2,115
                                                              ===============

Goodwill consists of $1,919 related to the acquisition of HMC and $1,964 related
to the acquisition of ING Bank, fsb. Goodwill is no longer amortized starting in
fiscal  year  2003.  The  effect  of not  amortizing  goodwill  (net  of tax) is
summarized as follows:
<TABLE>
<CAPTION>
                                                                           Year Ended September 30,
                                                            --------------------------------------------------------
                                                                  2003               2002                2001
                                                            -----------------  -------------------------------------
<S>                                                               <C>                 <C>                <C>
Reported net income                                               $    6,089          $    6,032         $    3,733
Add back:  goodwill amortization
                                                                           -                 141                 54
                                                            -----------------  ------------------  -----------------
Adjusted net income                                               $    6,089          $    6,173         $    3,787
                                                            =================  ==================  =================

Basic earnings per share:
     Reported net income                                          $     2.70          $     2.77         $     1.68
     Goodwill amortization
                                                                           -                0.06               0.02
                                                            -----------------  ------------------  -----------------
     Adjusted basic earnings per share                            $     2.70          $     2.83         $     1.70
                                                            =================  ==================  =================

Diluted earnings per share:
     Reported net income                                          $     2.55          $     2.63         $     1.61
     Goodwill amortization
                                                                           -                0.06               0.02
                                                            -----------------  ------------------  -----------------
     Adjusted diluted earnings per share                          $     2.55          $     2.69         $     1.63
                                                            =================  ==================  =================
</TABLE>

                                       29
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Acquired identifiable intangible assets were as follows as of fiscal year end:
<TABLE>
<CAPTION>
                                                                          September 30,
                                               ---------------------------------------------------------------------
                                                    2003                               2002
                                               ---------------------------------   ---------------------------------
                                                   Gross                               Gross
                                                  Carrying        Accumulated        Carrying        Accumulated
                                                   Amount        Amortization         Amount         Amortization
                                               ---------------  ----------------   --------------  -----------------
<S>                                                  <C>              <C>               <C>               <C>
Amortized intangible assets:
     Core deposit intangibles                        $    794         $     320         $    794          $     178
     Other customer relationship intangibles
                                                          687               147              687                119
                                               ---------------  ----------------   --------------  -----------------
          Total                                      $  1,481         $     467         $  1,481          $     297
                                               ===============  ================   ==============  =================
</TABLE>

Aggregate amortization expense was $170, $207, and $27 for the three years ended
September 2003, 2002, and 2001, respectively.

Estimated amortization expense for each of the next five years:

              Years Ending September 30,
              --------------------------
     2004                                        $    137
     2005                                             111
     2006                                              96
     2007                                              82
     2008                                              69

(6) DEPOSITS (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of one  hundred  thousand  dollars  was  $69,263  and  $62,600 in 2003 and 2002,
respectively.

Interest expense is summarized as follows:
<TABLE>
<CAPTION>
                                                                               September 30,
                                                         -----------------------------------------------------------
                                                               2003                 2002                 2001
                                                         -----------------    -----------------    -----------------
<S>                                                            <C>                  <C>                  <C>
Savings accounts                                               $    1,011           $    1,585           $    3,491
Demand deposits                                                       334                  411                  266
Certificates of deposit                                             8,255                9,482               11,069
                                                         -----------------    -----------------    -----------------
                                                               $    9,600           $   11,478           $   14,826
                                                         =================    =================    =================
</TABLE>

Noninterest-bearing demand deposits amounted to $24,330, $26,387, and $20,797 at
September 30, 2003, 2002, and 2001, respectively.

At September 30, 2003, the scheduled  maturities of  certificates of deposit are
as follows:

            Years Ending September 30,
            --------------------------

     2004                                    $  167,445
     2005                                        47,040
     2006                                        12,471
     2007                                         3,980
     2008 and thereafter                          3,729
                                          --------------
                                             $  234,665
                                          ==============

                                       30
<PAGE>

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

The Bank held deposits of  approximately  $2,300 and $548 for related parties at
September 30, 2003 and 2002.

(7) FEDERAL HOME LOAN BANK BORROWINGS (in thousands)

Borrowings by the Bank from the FHLB of Des Moines are summarized as follows:
<TABLE>
<CAPTION>
                                                                         September 30,
                                                -----------------------------------------------------------------
                                                    2003                              2002
                                                -------------------------------   -------------------------------
Fiscal Year of Maturity - Advances                                 Weighted                          Weighted
----------------------------------                 Amount            Rate            Amount            Rate
                                                --------------   --------------   --------------  ---------------
<S>                                                   <C>                <C>          <C>                   <C>
2003                                                  $     -                - %      $  10,000             6.53%
2004                                                   21,000             5.30           21,000             5.30
2006                                                   10,000             3.88            5,000             4.93
2008 and thereafter                                    62,000             5.55           62,000             5.55
                                                --------------   --------------   --------------  ---------------
     Total                                          $  93,000             5.31%      $  98,000              5.56%
                                                ==============   ==============   ==============  ===============
</TABLE>

Prepayment  penalties  will be incurred if the  advances are paid prior to their
maturity date. At September 30, 2003, $62 million are callable by the FHLB.

At September 30, 2003,  borrowed funds are  collateralized by stock in the FHLB,
loans with carrying value of $62,990,  debt and mortgage-backed  securities with
carrying  values of  $27,476,  and FHLB term  certificates  of  deposit of $22.0
million under a collateral agreement.

(8) 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
$196, $160, and $135 for the three years ended September 30, 2003, respectively.

Deferred Compensation 401(k) Plans
The  Corporation  provides 401(k) plans that cover  substantially  all employees
meeting age and length of service requirements.  The plan maintained by the Bank
covers  employees of both the Bank and the Agency.  Employees  participating  in
this plan are eligible to contribute up to 15% of their annual compensation. The
plan  maintained  by HMC for the  benefit of its  employees  also  provides  for
employee  contributions  up to 15% of  their  annual  compensation.  Both  plans
provide for discretionary contributions by the employers, which are allocated to
the  participants'  accounts  in  proportion  to  employee  contributions.   The
Corporation  made no  discretionary  contributions  to these plans for the three
years ended September 30, 2003.

Supplemental Life Insurance
In addition to group term  insurance  benefits  provided  to  substantially  all
employees,  the Bank maintains  investments  in insurance  policies that provide
either split dollar or survivor benefits for certain key employees.

Self Insurance
The  Corporation  has a  self-insured  health  plan for all its  employees.  The
Corporation  has purchased  stop loss  insurance to supplement  the health plan,
which will  reimburse the  Corporation  for  individual  claims in excess of $35
annually or aggregate claims exceeding $558.8 annually.


                                       31
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Employee Stock Ownership Plan ("ESOP")
The Corporation  established an ESOP covering all employees who are 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, with the loan being
collateralized by the common stock. Employer contributions, 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 is charged to
unearned compensation,  a contra-equity account. 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.

A summary of the ESOP share allocation is as follows:
<TABLE>
<CAPTION>
                                                                                   September 30,
                                                                ----------------------------------------------------
                                                                     2003              2002              2001
                                                                ----------------  ----------------------------------
<S>                                                                     <C>               <C>               <C>
Shares allocated, beginning of year                                     304,829           268,857           232,885
Shares allocated during year                                             47,248            35,972            35,972
Unreleased shares                                                         7,643            54,891            90,863
                                                                ----------------  ----------------  ----------------
Total ESOP                                                              359,720           359,720           359,720

Fair value of unreleased shares                                        $    227         $   1,087         $   1,481
Amount charged to expense                                              $    817          $    214          $    406
</TABLE>

Management Stock Plan
The Bank established the management stock plan (MSP) for key officers during the
year ended  September  30, 1995.  Following  shareholder  approval of the MSP 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, 2003,  2002,
and 2001, the amount included in compensation expense related to the MSP was $5,
$5, and $5, respectively.

The  following  summarizes  the  activity  in the MSP for the three  years ended
September 30, 2003:
<TABLE>
<CAPTION>
                                                                      Un-awarded                 Awarded
                                                                        Shares                    Shares
                                                                   -----------------         -----------------
<S>                                                                          <C>                        <C>
           At September 30, 2000                                             40,964                     2,000
                     Vested                                                       -                      (400)
                                                                   -------------------------------------------
           At September 30, 2001                                             40,964                     1,600
                     Vested                                                       -                      (400)
                                                                   -----------------         -----------------
           At September 30, 2002                                             40,964                     1,200
                    Granted                                                  (2,000)                    2,000
                     Vested                                                       -                      (400)
                                                                   -----------------         -----------------
           At September 30, 2003                                             38,964                     2,800
                                                                   =================         =================
</TABLE>

                                       32
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Directors' Stock Compensation Plan
In  January  1998,  the  stockholders  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 vest 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 per share) on the date that the plan
was  approved by the  stockholders.  During the year ended  September  30, 2002,
1,200 shares of the total grant were vested to the plan  recipients  to complete
the plan.  Compensation costs included in the accompanying  financial statements
for the  fiscal  years  ended  September  30,  2002  and  2001  were $6 and $23,
respectively.

Stock Option Plans
The  Corporation   maintains  the  1994  stock  option  plan,  approved  by  the
Corporation's  stockholders  on January 17,  1995 (the 1994 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.  Awards made under
the Plans may be incentive  stock options  ("ISOs") as defined by Section 422 of
the Internal Revenue Code or options that do not qualify.  Those options granted
that qualify as ISOs 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 to 5 years. The following  summarizes
the activity in the two plans for the three years ended September 30, 2003:
<TABLE>
<CAPTION>
                                                   Shares Available         Options Shares        Weighted Average
                                                       for Grant             Outstanding           Exercise Price
                                                  --------------------   ---------------------  ---------------------
<S>                                                           <C>                    <C>              <C>
At September 30, 2000                                          50,702                 512,585          $       13.33
      Granted                                                 (21,937)                 21,937                  16.05
      Exercised                                                     -                 (93,087)                 15.42
      Cancelled                                                 1,550                  (1,550)                 17.46
                                                  --------------------   ---------------------  ---------------------
At September 30, 2001                                          30,315                 439,885                  13.59
      Granted                                                  (2,500)                  2,500                  16.05
      Exercised                                                     -                (81,375)                  18.28
      Cancelled                                                 1,944                 (1,944)                  17.40
                                                  --------------------   ---------------------  ---------------------
At September 30, 2002                                          29,759                 359,066                  14.67
      Granted                                                 (21,937)                 21,937                  23.00
      Exercised                                                     -                 (82,196)                 14.56
      Cancelled                                                   844                   (844)                  15.00
                                                  --------------------   ---------------------  ---------------------
At September 30, 2003                                           8,666                 297,963          $       15.57
                                                  ====================   =====================  =====================
Shares available for future grants
      1994 Plan                                                 7,481
      1998 Plan                                                 1,185
</TABLE>

The following table summarizes the information  about stock options  outstanding
at September 30, 2003:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                         Options Outstanding                                       Options Exercisable
------------------------------------------------------------------------------------------------------------------
                                                   Weighted average
              Exercise               Number      remaining contractual
               Price             Outstanding         life in years                       Price       Number
-----------------------------------------------------------------------  -----------------------------------------
          <S>                           <C>               <C>                     <C>                      <C>
          $       9.68                  55,848            1.3                     $       9.68             55,848
                19.125                  98,530            4.3                           19.125             98,530
                16.050                   2,500            8.1                           16.050              2,500
                19.250                  20,000            4.7                           19.250             20,000
                15.000                  25,000            5.2                           15.000             25,000
                14.750                  17,737            6.2                           14.750             17,737
                12.375                  14,774            5.2                           12.375             14,774
                12.375                  17,000            4.0                           12.375             17,000
                12.125                   6,000            5.0                           12.125              6,000
                16.050                  20,137            5.0                           16.050             20,137
                23.000                  20,437            9.0                           23.000             20,437
                         ----------------------                                                -------------------
                                       297,963                                                            297,963
                         ======================                                                ===================
</TABLE>

                                       33
<PAGE>


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

(9) 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
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,
                                                          -----------------------------------------------------------
                                                                2003                 2002                 2001
                                                          ------------------   -----------------    -----------------
<S>                                                              <C>                 <C>                  <C>
Current
      Federal                                                    $    3,199          $    3,176           $    2,313
      State                                                             732               1,027                  749
                                                          ------------------   -----------------    -----------------
             Subtotal                                                 3,931               4,203                3,062
Deferred
      Federal                                                          (164)               (207)                (509)
      State                                                             (80)                (69)                (169)
                                                          ------------------   -----------------    -----------------
             Subtotal                                                  (244)               (276)                (678)
                                                          ------------------   -----------------    -----------------
                    Total income tax provision                   $    3,687          $    3,927           $    2,384
                                                          ==================   =================    =================
</TABLE>

The State of Minnesota  follows the Internal Revenue Code for the  determination
of taxable  income,  in connection  with temporary  differences.  The portion of
deferred  tax  assets  and  liabilities  attributed  to  state  income  taxes 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,
                                                                          ------------------------------------------
                                                                                2003                    2002
                                                                          ------------------     -------------------
<S>                                                                              <C>                     <C>
         Deferred tax assets:
               Deferred compensation                                             $      785              $      686
               Deferred net loan fees                                                    56                     166
               Intangible assets                                                        (12)                      4
               Section 475 "For Sale Assets"                                            370                     143
               Allowance for loan losses                                                689                     681
                                                                          ------------------     -------------------
                    Total                                                             1,888                   1,680
         Deferred tax liabilities:
               FHLB stock                                                               156                     193
               Tax bad debt reserve                                                      43                      85
               Premises and equipment                                                   635                     571
               Installment obligation sale of former building                             -                      26
               Mortgage-servicing rights and other                                       47                      42
               Securities unrealized gain                                               467                     152
                                                                          ------------------     -------------------
                    Total                                                             1,348                   1,069
                                                                          ------------------     -------------------
         Net deferred tax asset                                                  $      540              $      611
                                                                          ==================     ===================
</TABLE>

A valuation  allowance was  established to reduce the deferred tax asset related
to the  unrealized  loss on equity  securities  because  management is uncertain
whether 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.  Therefore,  no  additional  valuation  allowance  was  required at
September 30, 2003 and 2002.

                                       34
<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,
                                                              -----------------------------------------------------
                                                                   2003               2002               2001
                                                              ---------------     --------------     --------------
<S>                                                                 <C>                <C>                <C>
Computed "expected" tax expense                                     $  3,324           $  3,386           $  2,080
State income taxes, net of federal tax benefit                           652                633                383
Increase in cash surrender value of life insurance                      (131)              (156)              (147)
Other, net                                                              (158)                64                 68
                                                              ---------------     --------------     --------------
Total income tax provision                                          $  3,687           $  3,927           $  2,384
                                                              ===============     ==============     ==============
</TABLE>

Retained  earnings at  September  30, 2003  include  $6,492 of 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.  This 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, 2003.

(10)     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,
                                                              ------------------------------------------------------
                                                                    2003              2002              2001
                                                              ------------------------------------------------------
<S>                                                                <C>               <C>               <C>
Numerator:
   Net income - Numerator for basic earnings
      per share and diluted earnings per share--
      income available to common stockholders                      $  6,089,000      $  6,032,000      $  3,733,000
                                                              ======================================================

Denominator:
   Denominator for basic earnings per share--
      weighted-average shares
                                                                      2,252,271         2,179,824         2,220,067

   Effect of dilutive securities:
      Stock-based compensation plans                                    140,166           117,431            96,546
                                                              ------------------------------------------------------

      Denominator for diluted earnings per share--
         adjusted weighted-average shares and
         assumed conversions                                          2,392,437         2,297,255         2,316,613
                                                              ======================================================
Basic earnings per share                                             $     2.70        $     2.77        $     1.68
Diluted earnings per share                                           $     2.55        $     2.63        $     1.61
</TABLE>

(11)     COMMITMENTS AND CONTINGENCIES

In the ordinary  course of business,  the  Corporation  has various  outstanding
commitments   and  contingent   liabilities   that  are  not  reflected  in  the
accompanying consolidated financial statements.

                                       35
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(12) 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  (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  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 Office of Thrift  Supervision  ("OTS") subject to various regulatory capital
requirements  administers the Bank. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional  discretionary actions by
regulators.  If  undertaken,  these 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 that, as of September
30, 2003, the Bank meets all of the capital adequacy requirements to which it is
subject.

As of September 30, 2003, 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 and ratios are 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>
Tangible equity capital and ratio to
        adjusted total assets                         $ 42,571    8.0%       $ 8,073     1.5%      $ 10,764    2.0%
                                                  --------------------- ---------------------- ---------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                         $ 42,571    8.0%      $ 21,528     4.0%      $ 26,910    5.0%
                                                  --------------------- ---------------------- ---------------------
Total risk-based capital and ratio to
        risk-weighted assets                          $ 42,571   12.2%      $ 13,939     4.0%      $ 20,909    6.0%
                                                               -------- ---------------------- ---------------------
Tier 2 risk-based capital, net adjustment                1,701
                                                  -------------
Total risk-based capital and ratio to risk-
       weighted assets, September 30 , 2003           $ 44,272   12.7%      $ 27,878     8.0%      $ 34,848   10.0%
                                                  ===================== ====================== =====================
</TABLE>

                                       36
<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>
Tangible equity capital and ratio to
        adjusted total assets                         $ 38,846    7.4%       $ 7,882     1.5%      $ 10,510    2.0%
                                                  --------------------- ---------------------- ---------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                         $ 38,846    7.4%      $ 21,020     4.0%      $ 26,275    5.0%
                                                  --------------------- ---------------------- ---------------------
Total risk-based capital and ratio to
        risk-weighted assets                          $ 38,846   10.8%      $ 14,365     4.0%      $ 21,548    6.0%
                                                               -------- ---------------------- ---------------------
Tier 2 risk-based capital, net adjustment                1,681
                                                  -------------
Total risk-based capital and ratio to risk-
       weighted assets, September 30 , 2002           $ 40,527   11.3%      $ 28,730     8.0%      $ 35,913   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.

(13) CONCENTRATION OF CREDIT RISK (in thousands)

The  Corporation is primarily  engaged in originating  mortgage,  consumer,  and
business  loans in the Minnesota  counties of McLeod,  Dakota,  Meeker,  Wright,
Carver,  Washington,  Benton,  Sherburne,  Stearns,  and Sibley. The Bank offers
fixed and  adjustable  rates of interest  on these loans that have  amortization
terms ranging up to thirty years. In addition, the Bank has expanded residential
construction  lending in recent years and currently  does business in 44 states.
The following table indicates the percentage of construction  loans  outstanding
by state.

          STATE                           % OF TOTAL OUTSTANDING
 -------------------------            -------------------------------

 Minnesota                                        40.1%
 Wisconsin                                        10.4%
 Michigan                                          6.1%
 Colorado                                          5.9%
 40 Other States                                5% or less

The Corporation had cash on deposit in other financial institutions in excess of
Federal deposit insurance limits of approximately $76,745 at September 30, 2003.

(14) FINANCIAL INSTRUMENTS (in thousands)

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

                                       37
<PAGE>

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

Commitments  to extend  credit are unused  lines of credit and loan  commitments
that 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. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral  obtained,  if it
is deemed  necessary,  upon extension of credit is based on management's  credit
evaluation  of the  counter  party.  Collateral  held  varies,  but may  include
accounts  receivable;  inventory;  property,  plant,  and equipment;  and income
producing  commercial  properties.  Standby  letters of credit  are  conditional
commitments  issued by the Bank to guarantee the  performance of a customer to a
third  party.  The  credit  risk  involved  in  issuing  letters  of  credit  is
essentially the same as that involved in extending loan facilities to customers.

Typically,  the Bank issues  letters of credit to  municipalities  and generally
does 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  and 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
and/or HMC 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 Corporation's  financial instruments at
September 30, 2003 and 2002 follows:
<TABLE>
<CAPTION>
                                                                        2003              2002
                                                                  ----------------------------------

<S>                                                                <C>                <C>
                Unused lines of credit                             $   36,945         $      41,832
                Standby letters of credit                                 282                   156
                Development letters of credit                           9,785                 4,716
                Commitments to sell loans                              22,365                51,299
                Commitments to extend credit                            5,243                22,057
                Commitment to purchase securities                       2,000                     -
</TABLE>

Development  letters of credit are issued to municipalities to ensure completion
of  construction  on housing  developments.  These do not  represent  additional
commitments to the extent that the development is completed by the borrower with
the use of the amounts included in "Undisbursed portion of construction and land
development loans."

                                       38
<PAGE>
                      FSF FINANCIAL CORP. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The  carrying  value and fair value of the  Corporation's  financial  assets and
financial liabilities are as follows:
<TABLE>
<CAPTION>
                                                                            September 30,
                                                                2003                              2002
                                                  ------------------------------------------------------------------
                                                    Carrying              Fair        Carrying             Fair
                                                      Value              Value          Value              Value
                                                  ------------------------------------------------------------------
<S>                                                    <C>                <C>            <C>                <C>
Financial Assets:
  Cash and cash equivalents                            $ 80,601           $ 80,601       $ 14,615           $14,615
  Securities                                             28,984             28,984         30,418            31,121
  Mortgage-backed and related securities                 29,923             29,923         49,875            49,920
  Loans held-for-sale                                    17,122             17,286         29,242            29,242
  Loans receivable, net                                 358,708            355,058        382,690           385,138
  Accrued interest receivable                             3,960              3,960          4,436             4,436
Financial Liabilities:
  Deposits                                              391,015            390,095        381,924           385,529
  Borrowings                                             93,000            100,305         98,000           106,683
  Advances from borrowers for taxes and
    insurance                                               233                233            352               352
  Accrual interest payable                                1,458              1,458          2,061             2,061
</TABLE>

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

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 and 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 their
fair values.

Accrued Interest
The  carrying  amounts of accrued  interest  receivable  approximate  their fair
values.

Life Insurance Policies
Cash value of the policies approximates fair value.

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  of 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.

                                       39
<PAGE>

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

Borrowings
The carrying  amounts of advances from the FHLB of Des Moines maturing within 90
days approximate their fair values. The carrying 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.

(15) PARENT-ONLY CONDENSED FINANCIAL INFORMATION (in thousands)

The  information  should  be  read  in  conjunction  with  the  other  Notes  to
Consolidated  Financial  Statements.   Stockholder's  equity  differs  from  the
consolidated statements by the amount of the ESOP loan.
<TABLE>
<CAPTION>
                                        STATEMENTS OF FINANCIAL CONDITION

                                                                                          September 30,
                                                                               ------------------------------------
                                                                                    2003                2002
                                                                               ----------------    ----------------
<S>                                                                                 <C>                 <C>
ASSETS
           Cash and cash equivalents                                                $    2,731          $    1,499
           Investment in subsidiaries                                                   48,444              44,303
           Loan to ESOP                                                                     76                 549
           Other assets                                                                    106                 116
                                                                               ----------------    ----------------
                                    Total assets                                    $   51,357          $   46,467
                                                                               ================    ================

LIABILITIES AND STOCKHOLDERS' EQUITY
           Other liabilities                                                         $      94           $      37
           Stockholders' equity                                                         51,263              46,430
                                                                               ----------------    ----------------
                                    Total liabilities & stockholders' equity        $   51,357          $   46,467
                                                                               ================    ================
</TABLE>
<TABLE>
<CAPTION>
                                              STATEMENTS OF INCOME

                                                                               Years Ended September 30,
                                                                    ------------------------------------------------
                                                                        2003             2002             2001
                                                                    --------------   --------------   --------------
<S>                                                                      <C>              <C>              <C>
Income:
Dividends from Bank Subsidiary                                           $  3,000         $  2,000         $  3,000
Interest from:
         Bank's ESOP Plan                                                      16               37              105
         Investments                                                           14               17               69
                                                                    --------------   --------------   --------------
                                                                            3,030            2,054            3,174
Expense:
       Noninterest expense                                                    995              473              457
                                                                    --------------   --------------   --------------
Income before income taxes and equity in undistributed
   net income of subsidiaries                                               2,035            1,581            2,717
Income tax benefit                                                           (358)            (140)            (114)
                                                                    --------------   --------------   --------------
                                                                            2,393            1,721            2,831
Equity in undistributed net income of subsidiaries                          3,696            4,311              902
                                                                    --------------   --------------   --------------
Net income                                                               $  6,089         $  6,032         $  3,733
                                                                    ==============   ==============   ==============
</TABLE>

                                       40
<PAGE>

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

(16) PARENT-ONLY CONDENSED FINANCIAL INFORMATION- CONTINUED (in thousands)
<TABLE>
<CAPTION>
                                             STATEMENTS OF CASH FLOWS

                                                                                  Years Ended September 30,
                                                                           ----------------------------------------
                                                                              2003          2002          2001
                                                                           ------------  ------------  ------------
<S>                                                                            <C>           <C>           <C>
Cash flows from operating activities:
             Net income                                                        $ 6,089       $ 6,032       $ 3,733
             Adjustments:
                   Equity in undistributed net income of subsidiaries           (3,696)       (4,311)         (902)
                   (Increase) decrease in other assets                              10            35           (69)
                   Increase (decrease) in other liabilities                         57            (5)          (31)
                   Other, including ESOP expense                                   542           187           296
                                                                           ------------  ------------  ------------
Net cash provided by operations                                                  3,002         1,938         3,027
                                                                           ------------  ------------  ------------

Cash flows from investing activities:
             Payments received on ESOP bank loan                                   473           360           360

Cash flows from financing activities:
             Purchases of treasury stock                                        (1,016)       (1,496)       (2,488)
             Proceeds from exercise of stock options                             1,433           682           440
             Payments of cash dividends                                         (2,660)       (2,173)       (1,303)
                                                                           ------------  ------------  ------------
Net cash used in financing activities                                           (2,243)       (2,627)       (2,991)
                                                                           ------------  ------------  ------------

Increase (decrease) in cash and cash equivalents                                 1,232         (689)            36
Cash and cash equivalents:
             Beginning of year                                                   1,499         2,188         2,152
                                                                           ------------  ------------  ------------
             End of year                                                       $ 2,731       $ 1,499       $ 2,188
                                                                           ============  ============  ============
</TABLE>

                                       41
<PAGE>
                  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
                  FOR THE THREE YEARS ENDED SEPTEMBER 30, 2003
                    (IN THOUSANDS, EXCEPT MARKET RANGE DATA)
<TABLE>
<CAPTION>
                                            First          Second         Third          Fourth
                                           Quarter        Quarter        Quarter         Quarter          Year
                                        ----------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>             <C>            <C>
FISCAL 2003
Interest income                              $   8,935      $   8,557      $   8,178       $   7,848      $  33,518
Interest expense                                 4,019          3,735          3,549           3,383         14,686
                                        ----------------------------------------------------------------------------
Net interest income                              4,916          4,822          4,629           4,465         18,832
Provision for loan losses                          288            193            305             442          1,228
Gain on sale of loans                            1,126          1,306          1,269           1,343          5,044
Net income                                   $   1,696      $   1,620      $   1,626       $   1,147      $   6,089
Basic earnings per share                          0.77           0.72           0.72            0.50           2.70
Diluted earnings per share                        0.73           0.68           0.68            0.47           2.55
Cash dividends declared per share            $    0.30      $    0.30      $    0.30       $    0.30      $    1.20
Market range:
     High bid (1)                            $   24.40      $   24.80      $   28.88       $   32.09      $   32.09
     Low bid (1)                             $   19.20      $   22.23      $   24.07       $   29.00      $   19.20
<CAPTION>

                                            First          Second         Third          Fourth
                                           Quarter        Quarter        Quarter         Quarter          Year
                                        ----------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>             <C>            <C>
FISCAL 2002
Interest income                              $   8,825      $   8,712      $   8,677       $   8,960      $  35,174
Interest expense                                 4,873          4,237          4,089           4,049         17,248
                                        ----------------------------------------------------------------------------
Net interest income                              3,952          4,475          4,588           4,911         17,926
Provision for loan losses                          150            275            203             183            811
Gain on sale of loans                            1,348            862            887           1,176          4,273
Net income                                   $   1,530      $   1,375      $   1,426       $   1,701      $   6,032
Basic earnings per share                          0.70           0.64           0.65            0.77           2.77
Diluted earnings per share                        0.67           0.61           0.61            0.74           2.63
Cash dividends declared per share            $    0.25      $    0.25      $    0.25       $    0.25      $    1.00
Market range:
     High bid (1)                            $   18.40      $   19.78      $   23.21       $   22.21      $   23.21
     Low bid (1)                             $   15.77      $   16.86      $   18.94       $   18.65      $   15.77
<CAPTION>

                                            First          Second         Third          Fourth
                                           Quarter        Quarter        Quarter         Quarter          Year
                                        ----------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>             <C>            <C>
FISCAL 2001
Interest income                              $   9,216      $   9,035      $   8,482       $   8,577      $  35,310
Interest expense                                 5,913          5,759          5,186           5,042         21,900
                                        ----------------------------------------------------------------------------
Net interest income                              3,303          3,276          3,296           3,535         13,410
Provision for loan losses                           90            705             90             192          1,077
Gain on sale of loans                              372            575            769             783          2,499
Net income                                   $     857      $     577      $   1,150       $   1,149      $   3,733
Basic earnings per share                          0.38           0.26           0.52            0.52           1.68
Diluted earnings per share                        0.37           0.25           0.50            0.50           1.61
Cash dividends declared per share            $    0.15      $    0.15      $    0.15       $    0.15      $    0.60
Market range:
     High bid (1)                            $   15.63      $   15.38      $   15.70       $   17.25      $   17.25
     Low bid (1)                             $   12.36      $   13.85      $   13.91       $   14.27      $   12.36

<FN>
_____________
(1)  As reported by the Nasdaq Stock Market. Such over the counter quotations do
     not reflect  inter-dealer  prices  without  retail  mark-up,  markdown,  or
     commission and may not necessarily represent actual transactions.
</FN>
</TABLE>

                                       42
<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  55350-2573                       Apple Valley, MN  55124-7498
(320) 234-4563                                   (952) 432-6840

BUFFALO OFFICE                                   GLENCOE OFFICE
305 10th Avenue South                            1002 Greeley Avenue
Buffalo, MN  55313-0338                          Glencoe, MN  55336-2128
(763) 682-3035                                   (320) 864-5541

INVER GROVE HEIGHTS OFFICE                       LITCHFIELD OFFICE
6505 Cahill Avenue East                          501 North Sibley Avenue
Inver Grove Heights, MN  55076-2022              Litchfield, MN  55355-0577
(651) 455-1553                                   (320) 693-2861

WACONIA OFFICE                                   WAITE PARK OFFICE
200 Hwy. 5 East Frontage Road                    113 Waite Avenue South
Waconia, MN  55387-0287                          Waite Park, MN  56387-0641
(952) 442-2141                                   (320) 656-1133

WINTHROP OFFICE                                  SAINT CLOUD OFFICE
122 East Second Street                           1113 West Saint Germain Street
Winthrop, MN  55396-0424                         Saint Cloud, MN  56302
(507) 647-5356                                   (320) 529-8878

--------------------------------------------------------------------------------
                               Insurance Planners

HUTCHINSON OFFICE                                BUFFALO OFFICE
135 3rd Avenue Southeast                         305 10th Avenue South
Hutchinson, MN  55350-2573                       Buffalo, MN  55313-0338
(320) 587-2299                                   (763) 682-3035

--------------------------------------------------------------------------------
                         Homeowners Mortgage Corporation

VADNAIS HEIGHTS OFFICE                           HASTINGS OFFICE
1001 Labore Industrial Court, Suite E            1320 South Frontage Road
Vadnais Heights, MN  55110-5114                  Hastings, MN  55033-2426
(651) 415-1020                                   (651) 437-7791


                                       43
<PAGE>

                     BOARD OF DIRECTORS AND MANAGEMENT TEAM

         BOARD OF DIRECTORS OF FSF FINANCIAL CORP. AND 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 Counsel                         Special Counsel
Mackall, Crounse & Moore                  Malizia, Spidi & Fisch, PC
1400 AT&T Tower                           1100 New York Avenue NW
901 Marquette Avenue                      Suite 340 West
Minneapolis, MN  55402                    Washington, D.C. 20005

Independent Auditors
Crowe Chizek and Company LLC
One Mid America Plaza
P.O. Box 3697 Oak Brook, IL 60522-3697


                                       44