EXHIBIT 13

<PAGE>
                               FSF FINANCIAL CORP.
                               1997 ANNUAL REPORT

  

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


Corporate Profile and Stock Market Information..............................1


Selected Financial and Other Data...........................................3


Letter to Stockholders......................................................4

Management's Discussion and Analysis of
  Financial Condition and Results of Operations.............................5


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


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


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


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


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


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


Selected Quarterly Financial Data..........................................38


Office Locations...........................................................39


Corporate Information......................................................40

<PAGE>

                               FSF FINANCIAL CORP.

Corporate Profile and Related Information

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

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

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

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

Stock Market Information

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


The number of  stockholders  of record of common  stock as of the record date of
December 1, 1997,  was  approximately  533.  This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage  firms.  At December 1, 1997,  there were 3,009,715  shares issued and
outstanding.

                                       1
<PAGE>



The following  table sets forth the  Corporation's  net income and the dividends
declared on the common stock:
                                                    Net               Dividends
                                                  Income               Declared
                                           ----------------      ---------------
                                                    (Dollars in thousands,
                                                   except per share amounts)
Quarter ended December 31, 1994
     Total                                         $ 1,069
     Per common share outstanding                     0.26                 None
Quarter ended March 31, 1995
     Total                                             565
     Per common share outstanding                     0.14                0.125
Quarter ended June 30, 1995
     Total                                             531
     Per common share outstanding                     0.14                0.125
Quarter ended September 30, 1995
     Total                                             460
     Per common share outstanding                     0.12                0.125
Quarter ended December 31, 1995
     Total                                             421
     Per common share outstanding                     0.11                0.125
Quarter ended March 31, 1996
     Total                                             460
     Per common share outstanding                     0.13                0.125
Quarter ended June 30, 1996
     Total                                             684
     Per common share outstanding                     0.21                0.125
Quarter ended September 30, 1996
     Total                                             103
     Per common share outstanding                     0.03                0.125
Quarter ended December 31, 1996
     Total                                             722
     Per common share outstanding                     0.24                0.125
Quarter ended March 31, 1997
     Total                                             725
     Per common share outstanding                     0.25                0.125
Quarter ended June 30, 1997
     Total                                             823
     Per common share outstanding                     0.29                0.125
Quarter ended September 30, 1997
     Total                                             854
     Per common share outstanding                     0.30                0.125



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

                                       2

<PAGE>


FSF FINANCIAL CORP.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA  (1)
Financial Condition (Dollars in Thousands)
------------------------------------------------------------------------------------------------------------------------------------
September 30,                                            1997             1996             1995             1994             1993
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>              <C>              <C>              <C>              <C>
Total assets                                         $  388,135       $  354,636       $  304,605       $  281,467       $  217,672
Loans held for sale                                         204              443              230              729           21,576
Loans receivable, net                                   260,390          216,727          170,921          116,591           99,370
Mortgage-backed securities                               38,539           38,557           37,110           33,267           30,702
Mortgage-backed securities available for sale            16,699           16,336           16,141           16,338           16,979
Debt securities                                          37,876           44,349           41,914           22,897           28,175
Debt securities available for sale                        1,000                -                -                -                -
Equity securities available for sale                     19,311           18,231           16,165           14,172                -
Cash and cash equivalents (2)                             6,135           11,756           14,855           69,991           14,666
Savings deposits                                        208,246          189,074          171,516          156,479          164,827
Other borrowings                                        133,817          114,693           73,807           37,688           30,472
Stockholders' equity                                     43,362           47,649           57,351           20,508           19,873

Summary of Operations (Dollars in Thousands)  (3)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                 1997             1996             1995             1994             1993
------------------------------------------------------------------------------------------------------------------------------------

Interest income                                     $    27,315      $    23,244      $    19,079      $    15,320      $    14,728
Interest expense                                         16,346           13,609            9,472            7,544            7,282
Net interest income                                      10,969            9,635            9,607            7,776            7,446
Provision for loan losses                                   120               42               24               33               47
Non-interest income                                       1,510            1,354            1,127              184            1,684
Non-interest expense (4)                                  7,130            8,178            6,966            5,964            5,339
Income before cummulative effect
     of change in accounting principle                    3,124            1,668            2,243            1,135            2,464
Net income                                                3,124            1,668            2,625            1,135            2,464

Other Selected Data
------------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                 1997             1996             1995             1994             1993
------------------------------------------------------------------------------------------------------------------------------------

Return on average assets before cum. eff.                  0.84%            0.69%            0.82%            0.50%            1.27%
Return on average assets after cum. eff.                   0.84%            0.69%            0.95%            0.50%            1.27%
Return on average equity before cum. eff.                  6.87%            4.25%            3.83%            5.58%           14.78%
Return on average equity after cum. eff.                   6.87%            4.25%            4.48%            5.58%           14.78%
Average equity to average assets                          12.25%           15.93%           21.31%            8.96%            8.57%
Net interest rate spread (5)                               2.54%            2.36%            2.78%            3.41%            3.73%
Non-performing assets to total assets                      0.14%            0.06%            0.12%            0.20%            0.38%
Allowance for loan losses to total loans                   0.30%            0.33%            0.41%            0.61%            0.57%
Earnings per share before cum. eff.                  $     1.06       $     0.48       $     0.57              N/A              N/A
Earnings per share after cum. eff.                   $     1.06       $     0.48       $     0.67              N/A              N/A
Cash dividends declared per share                    $     0.50       $     0.50       $    0.375              N/A              N/A
</TABLE>

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

                                       3
<PAGE>








To Our Stockholders:

The year ended September 30, 1997, provided many challenges, which were met, and
many opportunities,  which were capitalized on. For our stockholders,  this year
also marked a significant  achievement for FSF Financial Corp.  stock. Our stock
price has approximately doubled since our conversion three years ago.

Earnings  per share were $1.06 for the fiscal year  compared  with $0.48 for the
1996  fiscal  year.  Stockholders'  equity,  as a  percentage  of total  assets,
decreased to 11.2% at September 30, 1997, from 13.4% at September 30, 1996. This
was  accomplished  by a  combination  of internal  growth and stock  repurchases
completed  during the year that totaled 473,884 shares.  These  repurchases have
the effect of  decreasing  stockholders'  equity while  increasing  earnings per
share for you, our stockholders.

Fiscal year 1997 saw mortgage  originations  and purchases exceed $70.7 million,
land and commercial real estate  originations  and purchases were $25.4 million,
and consumer  originations and purchases  totaled more than $31.6 million.  This
activity led to an increase in our loan portfolio of more than $50.4 million and
an increase in total assets of more than 9.4%.  Lending  will  continue to be an
important   part  of  our  asset   generation,   with  a  greater   emphasis  on
adjustable-rate  and  "prime-based"  products,  while not  compromising our risk
standards.  Our private banking department will continue to grow and we recently
hired a veteran agricultural lender.

Our  emphasis   continues  to  be  customer   service  and  increased   customer
relationships.  The  success of our  "Master  Money"  check card and  "Telephone
Banking" has provided  customers  with  increased  access to funds,  while still
continuing to provide excellent face-to-face customer service at no charge.

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

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

Sincerely,





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


                                       4
<PAGE>


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

General

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

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

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

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

Asset/Liability Management

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

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

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

Management  attempts  to  reduce  the  Bank's  interest  rate risk by the way it
structures its assets and  liabilities.  The Bank sells all fixed rate mortgages
with  contractual  terms of greater than 20 years and has primarily  focused its
residential  lending programs on loans with either adjustable  interest rates or
balloon  provisions.  These loans  provide the Bank with a repricing  time frame
which is substantially shorter than the contractual term. During the 1997 fiscal
year, the Bank  originated  $24.9 million of single family  mortgage loans which
have initial fixed rates for terms of one to ten years and then adjust  annually
off a treasury  index  thereafter.  The Bank also  originated  $14.3  million of
single family  mortgage loans that have a balloon  payment due in three to seven
years.  Originations of construction and land development loans, which generally
have a  contractual  maturity of two years or less,  totaled $22.0  million.  At
September 30, 1997, $147.3 million of real estate mortgages were adjustable rate
mortgages,  balloon  mortgages,  or  construction  and land  development  loans,
representing 63% of total mortgages and 38% of total assets.

                                       5
<PAGE>
Interest  rate  sensitivity  is the result of  differences  in the  amounts  and
repricing dates of rate-sensitive assets and rate-sensitive  liabilities.  These
differences,  or interest  rate  repricing  "GAP,"  provide an indication of the
extent to which the Bank's net interest  income is affected by future changes in
interest  rates.  A GAP is considered  positive when the amount of interest rate
sensitive  assets exceeds the amount of interest rate sensitive  liabilities.  A
GAP  is  considered   negative  when  the  amount  of  interest  rate  sensitive
liabilities  exceeds interest rate sensitive assets.  During a period of falling
interest  rates,  a  negative  GAP would  tend to result in an  increase  in net
interest  income,  while a positive GAP would tend to affect net interest income
adversely.  Conversely, during a period of rising interest rates, a negative GAP
would tend to result in a decrease in net interest income,  while a positive GAP
would tend to result in an increase in net interest income.

The table that  follows  sets forth the amounts of  interest-earning  assets and
interest-bearing  liabilities  at  September  30,  1997,  which are  expected to
reprice or mature in each of the future time periods shown.

                                                Analysis of Repricing Mechanisms
<TABLE>
<CAPTION>

                                                                    Over One             Over Five
                                                      Within        to Five               to Ten          Over Ten
                                                      One Year       Years                 Years           Years          Total
                                                ----------------  ------------     ------------------ --------------   ------------
                                                                           (Dollars in Thousands)
<S>                                               <C>              <C>                <C>              <C>              <C>
Interest-earning assets:
   Mortgage loans                                 $      64,896    $   86,305         $       51,950   $      8,767     $  211,918
   Other loans                                           37,287         9,892                  2,349              -         49,528
   Investment securities                                 76,058        12,071                 13,095         15,846        117,070
                                                ----------------  ------------     ------------------ --------------   ------------
Total interest-earning assets                           178,241       108,268                 67,394         24,613        378,516
                                                ----------------  ------------     ------------------ --------------   ------------
Interest-bearing liabilities:
   Noninterest bearing deposits                               -             -                      -              -              -
   NOW and Super now accounts                            25,351             -                      -              -         25,351
   Savings accounts                                      47,847             -                      -              -         47,847
   Money market deposit accounts                          2,708             -                      -              -          2,708
   Certificates                                          75,639        55,601                  1,100              -        132,340
   Other borrowed money                                  98,400        35,417                      -              -        133,817
                                                ----------------  ------------     ------------------ --------------   ------------
Total interest-bearing liabilities                      249,945        91,018                  1,100              -        342,063
                                                ----------------  ------------     ------------------ --------------   ------------

Interest sensitivity gap                          $     (71,704)    $   17,250         $       66,294    $    24,613    $    36,453
                                                ================  ============     ================== ==============   ============

Cumulative interest sensitivity gap               $     (71,704)   $  (54,454)         $       11,840    $    36,453
                                                ================  ============     ================== ==============
Cumulative ratio of interest-earning assets
   to interest-bearing liabilities                         0.71%         0.84%                  1.03%          1.11%
                                                ================  ============     ================== ==============
Cumulative ratio of cumulative interest
   sensitivity gap to total assets.                      -18.47%       -14.03%                  3.05%          9.39%
                                                ================  ============     ================== ==============
</TABLE>

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

Certain  shortcomings  are  inherent in the method of analysis  presented in the
previous table.  For example,  although  certain assets and liabilities may have
similar maturities or periods of repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance

                                       6

<PAGE>

of changes in market interest rates, while interest rates on other types may lag
behind  changes  in  market  rates.   Additionally,   certain  assets,  such  as
adjustable-rate mortgage loans, have features which restrict changes in interest
rates on a short-term basis over the life of the assets.  Further,  in the event
of a change in interest rate, prepayment levels and decay rates on core deposits
may deviate significantly from those assumed in calculating the table.

Market Risk Management

Market risk is the risk of loss arising from  adverse  changes in market  prices
and rates.  The Bank's market risk is comprised  primarily of interest rate risk
resulting  from its core  banking  activities  of lending  and  deposit  taking.
Interest  rate risk is the risk that  changes  in market  interest  rates  might
adversely  affect the Bank's net interest  income or the  economic  value of its
portfolio of assets,  liabilities and off-balance  sheet  contracts.  Management
continually  develops and applies  strategies to mitigate this risk.  Management
does not believe that the Bank's  primary  market risk  exposures  and how those
exposures  are managed in Fiscal 1997 have changed when compared to Fiscal 1996.
Market risk limits have been  established by the Board of Directors based on the
Bank's tolerance for risk.

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

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

The  following  table  sets forth the  present  value  estimates  of the Bank at
September 30, 1997,  as calculated by its NPV Model.  The table shows the NPV of
the Bank under rate shock scenarios of -400 basis points to +400 basis points in
increments of 100 basis points.  As market rates  increase,  the market value of
the  Bank's  large   portfolio  of  mortgage  loans  and   securities   declines
significantly  and prepayments are slow. As rates decrease,  the market value of
mortgage  loans and  securities  increase only modestly due to prepayment  risk,
periodic rate caps, and other embedded  options.  Actual changes in market value
will differ from estimated  changes set forth in this table due to various risks
and uncertainties. <TABLE> <CAPTION>
    Changes in Interest
       Rates in Basis                     Net Portfolio Change                                          NPV as % of Assets
                         -------------------------------------------------------------    ---------------------------------------
    Points (Rate Shock)     $ Amount               $ Change               Change %               NPV Ratio          Change
                         ---------------    ------------------    --------------------    ------------------    -----------------
                                                (Dollars in thousands)

<S>      <C>           <C>                         <C>                      <C>                      <C>           <C>
          +400 bp        $       30,276              (13,518)                 (30.87) %                8.42          (280) bp
          +300 bp                33,191              (10,603)                 (24.21)                  9.06          (217) bp
          +200 bp                36,390               (7,404)                 (16.91)                  9.73          (149) bp
          +100 bp                39,911               (3,883)                  (8.87)                 10.45           (77) bp
             0 bp                43,794                    -                       -                  11.22             -
          -100 bp                48,091                4,297                    9.81                  12.05            82  bp
          -200 bp                52,858                9,064                   20.70                  12.93           171  bp
          -300 bp                58,163               14,369                   32.81                  13.87           265  bp
          -400 bp                64,087               20,293                   46.34                  14.89           366  bp

</TABLE>
                                       7

<PAGE>


Average Balances

The following table sets forth information relating to the Corporation's average
yield on assets and average cost of liabilities for the periods  indicated.  The
yields and costs are  computed  by  dividing  income or  expense by the  average
balance   of   interest-earning   assets   and   interest-bearing   liabilities,
respectively,  for the periods  indicated.  Average  balances  are derived  from
month-end  balances.  Management  does not  believe  that  the use of  month-end
balances has caused any material difference in the information presented.
<TABLE>
<CAPTION>
                                                                                Years Ended September 30,
                                         -------------------------------------------------------------------------------------------
                                                           1997                           1996                        1995
                                         -------------------------------------------------------------------------------------------
                                                                  Average                        Average                     Average
                                              Average     Income/  Yield/     Average    Income/ Yield/    Average    Income/ Yield/
                                              Balance     Expense   Cost      Balance    Expense  Cost     Balance    Expense  Cost
                                         -------------------------------------------------------------------------------------------
                                                      (in thousands)                 (in thousands)              (In thousands)
<S>                                          <C>        <C>        <C>     <C>         <C>       <C>    <C>        <C>        <C>
Interest-Earning Assets
   Loans receivable (1)                       $237,475   $20,066    8.45%   $ 193,202   $16,077   8.32%  $ 142,711  $  11,221  7.86%
   Mortgage-backed securities                   55,062     3,384    6.15%      54,208     3,270   6.03%     51,984      3,504  6.74%
   Investment securities (2)                    66,734     3,865    5.79%      69,676     3,897   5.59%     70,762      4,354  6.15%
                                         ------------------------         ----------------------        ----------------------
      Total interest-earning assets           $359,271    27,315    7.60%   $ 317,086    23,244   7.33%  $ 265,457     19,079  7.19%
                                         ------------------------         ----------------------        ----------------------
Interest-Bearing Liabilities
   NOW and money market accounts              $ 27,463       389    1.42%   $  25,697       443   2.41%  $  27,923        673  2.41%
   Passbook savings                             48,381     1,524    3.15%      49,120     1,576   3.52%     47,519      1,669  3.51%
   Certificates of deposit                     127,211     7,426    5.84%     108,665     6,243   5.75%     86,518      4,411  5.10%
                                         ------------------------         ----------------------        ----------------------
      Total deposits                           203,055     9,339    4.60%     183,482     8,262   4.50%    161,960      6,753  4.17%
   FHLB advances                               120,093     7,007    5.83%      90,408     5,347   5.91%     52,688      2,719  5.16%
                                         ------------------------         ----------------------        ----------------------
      Total interest-bearing liabilities       323,148    16,346    5.06%     273,890    13,609   4.97%    214,648      9,472  4.41%
                                         ------------------------         ----------------------        ----------------------
Net Interest Income                                      $10,969                        $ 9,635                     $   9,607
                                                       ==========                     ==========                   ===========
Net Interest Rate Spread  (3)                                       2.54%                         2.36%                        2.78%
Net Interest Rate Margin  (4)                                       3.05%                         3.04%                        3.62%
Ratio of average interest-earning assets
  to average interest-bearing liabilities         1.11x                          1.16x                        1.24x
                                         ==============                   ============                      ===========
</TABLE>

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

                                       8

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



Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                                      Increase (Decrease) Due To
                                             -------------------------------------------------------------------------------
                                                 Rate                 Volume             Rate/Volume             Total
                                             ---------------      ---------------     ------------------     ---------------
Year Ended September 30, 1997 vs 1996:                                      (In Thousands)
<S>                                          <C>                    <C>                  <C>                   <C>
Interest income:
   Loans Receivable                          $          247         $      3,684         $           58        $      3,989
   Mortgage-backed securities                            55                   51                      8                 114
   Investment securities                                117                 (164)                    15                 (32)
                                             ---------------      ---------------     ------------------     ---------------
      Total change in interest income                   419                3,571                     81               4,071

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

Year Ended September 30, 1996 vs 1995:
Interest income:
   Loans Receivable                          $          656         $      3,968         $          232        $      4,856
   Mortgage-backed securities                          (369)                 150                    (15)               (234)
   Investment securities                               (396)                 (67)                     5                (458)
                                             ---------------      ---------------     ------------------     ---------------
      Total change in interest income                  (109)               4,051                    222               4,164

Interest expense:
   Savings accounts                                     534                  897                     78               1,509
   Other liabilities                                    395                1,947                    286               2,628
                                             ---------------      ---------------     ------------------     ---------------
      Total change in interest expense                  929                2,844                    364               4,137
                                             ---------------      ---------------     ------------------     ---------------
Net change in net interest income            $       (1,038)        $      1,207         $         (142)       $         27
                                             ===============      ===============     ==================     ===============

</TABLE>


                                       9

<PAGE>
Changes in Financial Condition

               General.  Total assets increased from $354.6 million at September
30, 1996, to $388.1  million at September 30, 1997, an increase of $33.5 million
or 9.4%. The Bank continues to experience good demand for loans and supplemented
the internal loan  originations  ($119.2  million) with purchases of other loans
($8.5  million)  that meet the  interest  rate  risk and  credit  risk  criteria
established by management.

               Securities  Available for Sale. Equity  securities  available for
sale  increased by $1.1  million  during the 1997 fiscal year as a result of the
purchase  of  additional  stock in the  Federal  Home  Loan  Bank of Des  Moines
("FHLB").  The  additional  stock  purchase  was  required  as  FHLB  borrowings
increased.  The net unrealized losses on securities available for sale decreased
from $1.1 million at September  30, 1996 to $0.6 million at September  30, 1997.
This  decrease  was  primarily  due to the market  rate of  interest  decreasing
compared to the contractual rate.

               Securities  Held to Maturity.  Debt  securities  held to maturity
decreased from $44.3 million to $37.9 million due to maturities and the exercise
of  call  options  by  issuers.  Mortgage-backed  securities  held  to  maturity
decreased  from $38.6  million to $38.5  million  during  fiscal  1997.  The net
unrealized losses on securities held to maturity  decreased from $4.3 million at
September 30, 1996 to $1.8 million at September 30, 1997.  These  decreases were
primarily  due to  the  market  rate  of  interest  decreasing  compared  to the
contractual rate.

               Loans Held for Sale.  Loans held for sale decreased from $443,000
at September 30, 1996,  to $204,000 at September 30, 1997.  The Bank had no firm
commitments to sell loans held for sale that were closed at September, 1997.

               Loans Receivable.  Loans receivable increased from $216.7 million
at September 30, 1996,  to $260.4  million at September 30, 1997, an increase of
$43.7  million or 20.2%.  The increase was  primarily  comprised of increases in
adjustable  rate  mortgages  (ARMs),   balloon   mortgages,   loans  with  short
contractual maturities (i.e., consumer, construction and land development loans)
and Home Equity Lines of Credit (HELOCs) that have an interest rate that adjusts
to the prime rate as published in the Wall Street Journal.

               Deposits.  Total deposits  increased by $19.2  million,  or 10.2%
during  the  1997  fiscal  year.  The  increase  in  deposits  can be  primarily
attributed  to an increase in  certificates  of deposit.  The  increase in total
deposits was  accompanied  by an increase in the weighted  average cost of funds
from  4.50%  to  4.60%  for  the  years  ended  September  30,  1996  and  1997,
respectively.  The increase in cost is primarily  attributable  to the change in
the composition of deposits.

               Borrowings.  In  addition to the growth in  deposits,  additional
borrowings  of $19.1  million were needed in order to fund the growth in assets.
Management  utilizes a least cost, at the margin,  approach to fund assets. As a
result,  borrowings  will be utilized as a funding  source when it provides  the
least cost, at the margin. FHLB advances are used to fund lending and investment
activities,  withdrawals  from  deposit  accounts  and other  ordinary  business
activity.

               Stockholders'  Equity.  Stockholders' equity decreased from $47.6
million at  September  30,  1996,  to $43.4  million at  September  30,  1996, a
decrease of $4.2 million.  The  Corporation  repurchased  473,884  shares of its
common stock  during the year at an average  price of $15.29,  thereby  reducing
stockholders'  equity. The repurchase of shares also reduced the total number of
shareholders. Despite the decrease in stockholders' equity, book value per share
increased from $15.50 at September 30, 1996, to $16.24 at September 30, 1997.

Comparison of Years Ended September 30, 1997 and 1996

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

               Interest Income.  Total interest income increased $4.1 million to
$27.3 million for the year ended  September 30, 1997, from $23.2 million for the
year ended  September  30,  1996.  Interest  income on loans  increased  by $4.0
million  from $16.1  million for the year ended  September  30,  1996,  to $20.1
million for the year ended  September  30, 1997,  as a result of a $44.3 million
increase  in the average  balance of loans  receivable  from  $193.2  million at
September 30, 1996, to $237.5  million at September 30, 1997.  Furthermore,  the
average yield  increased from 8.32% at September 30, 1996, to 8.45% at September
30, 1997.  Interest  income on  mortgage-backed  securities  increased from $3.3
million for the year ended  September  30,  1996,  to $3.4  million for the year
ended September 30, 1997. The increase was primarily the result

                                       10
<PAGE>

of an increase in average  rate from 6.03% for the 1996 fiscal year to 6.15% for
the 1997 fiscal year. The average balance of investment  securities decreased by
$3.0 million during the fiscal year and the yield increased from 5.59% to 5.79%.
The  increase  in yield for  investment  securities  was  primarily  impacted by
maturities  and  the  exercise  of  call  options  by  issuers.   The  yield  on
interest-earning  assets  increased from 7.33% for the year ended  September 30,
1996, to 7.60% for the year ended September 30, 1997.  Interest income increased
by $3.6  million  as a result of  increased  volume  during  the year  while the
changes  in rates  caused  interest  income  to  increase  by  $419,000  and the
rate/volume change increased interest income by $81,000.

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

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

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

The  Bank's  loan loss  provision  increased  from  $42,000  for the year  ended
September  30, 1996, to $120,000 for the year ended  September 30, 1997,  due to
the change in composition of the loan portfolio.  The Bank's  allowance for loan
losses was  $852,000  at  September  30,  1997.  The  allowance  for loan losses
represents  .30% of total  loans  outstanding  and 149% of total  non-performing
assets.  While the Bank maintains its allowance for loan losses at a level which
it considers to be adequate,  there can be no assurance  that further  additions
will not be made to the loss  allowances or that such losses will not exceed the
estimated amounts.

               Non-interest  Income.  Total  non-interest  income  increased  by
$156,000  to $1.5  million  for the year ended  September  30,  1997,  from $1.4
million for the year ended  September  30, 1996.  Gains on loans sold  increased
from  $38,000 in the 1996 fiscal year to $48,000 in the 1997  fiscal  year.  The
gains are a result of long-term  fixed-rate  mortgages  (with an amortization of
greater than 20 years) that were sold in the  secondary  market  because they do
not fit the interest rate risk profile of the Bank.  Other  service  charges and
fees decreased  from $430,000 for the year ended  September 30, 1996 to $422,000
for the year ended  September  30,  1997.  Service  charges on deposit  accounts
increased $177,000 during the periods compared as a result of an increase in the
number of accounts  affected  and to a lesser  degree by an increase in the fees
associated with deposit accounts.

               Non-interest  Expense.  Total  non-interest  expense decreased to
$7.1 million for the year ended  September  30, 1997,  from $8.2 million for the
year ended  September 30, 1996, or 13.4%.  Compensation  and benefits  increased
from $4.4 million to $4.5  million or 1.9%,  primarily  due to merit  increases.
Occupancy and equipment expense remained  unchanged.  Deposit insurance premiums
decreased  58.9%,  as a result  of the  reduction  in the SAIF  premium  and the
absence of a one-time  $1.0 million  charge to  recapitalize  the SAIF in fiscal
1996. Professional fees decreased from $249,000 for fiscal year 1996 to $235,000
for fiscal year 1997.

Historically,  date fields in computer  software  programs were programmed using
two digit characters to represent the year. Due to this practice, these software
applications,  if not corrected  prior to the year 2000, will interpret the year
as 1900 and not 2000.  As a result,  many  calculations  which  rely on the date
field  information,  such as interest,  payment or due dates and other operating
functions, will generate results which will be significantly misstated.

To  prepare  for this  event  and to  minimize  its  potential  adverse  impact,
management  has begun a process to identify  areas that will be affected by this
issue,  assess their potential impact on the operations of the Bank, monitor the
progress of third

                                       11
<PAGE>

party software  vendors in addressing this matter,  testing changes  provided by
these vendors,  and developing  contingency plans for any critical systems which
are not effectively reprogrammed.

The Bank's  material data  processing  functions are  performed  using  software
provided by a third  party  vendor.  This  company has advised its users that it
expects to resolve any potential  problems  prior to the year 2000. In addition,
this company will provide ongoing  communication  to its users to assist them in
implementing  tests of the  vendor's  software.  If this  company  is  unable to
correct  potential  problems  in time,  or if tests  should  prove the  proposed
corrections  to be  insufficient,  it is likely  that the Bank would  experience
significant data processing delays,  errors or failures.  Such delays, errors or
failures could have a significant  adverse impact on the financial condition and
results of operations of the Bank. In addition, monitoring and managing the year
2000 project will result in  additional  direct and indirect  costs to the Bank.
Direct  costs  include  potential  charges by third party  software  vendors for
product enhancements,  costs involved in testing software products for year 2000
compliance,  and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally  consist  of the time  devoted by  existing  employees  in  managing
software vendor progress,  testing enhanced  software  products and implementing
any  necessary  contingency  plans.  While  such  direct  costs  cannot  yet  be
reasonably estimated, these expenditures will be charged to expense as incurred.

               Income Tax Expense.  Income tax expense increased to $2.1 million
for the year ended  September  30,  1997,  from $1.1  million for the year ended
September  30, 1996.  The increase was  primarily  due to an increase in pre-tax
income of $2.5 million.

Comparison of Years Ended September 30, 1996 and 1995

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

               Interest Income.  Total interest income increased $4.1 million to
$23.2 million for the year ended  September 30, 1996, from $19.1 million for the
year ended  September  30,  1995.  Interest  income on loans  increased  by $4.9
million  from $11.2  million for the year ended  September  30,  1995,  to $16.1
million for the year ended  September  30, 1996,  as a result of a $50.5 million
increase  in the average  balance of loans  receivable  from  $142.7  million at
September 30, 1995, to $193.2  million at September 30, 1996.  Furthermore,  the
average yield  increased from 7.86% at September 30, 1995, to 8.32% at September
30, 1996.  Interest  income on  mortgage-backed  securities  decreased from $3.5
million for the year ended  September  30,  1995,  to $3.3  million for the year
ended  September 30, 1996.  The income  decrease was the result of a decrease in
average  rate from 6.74% for the 1995  fiscal  year to 6.03% for the 1996 fiscal
year.  The average  balance of investment  securities  decreased by $1.1 million
during the fiscal year and the yield decreased from 6.15% to 5.59%.  The decline
in yields for both mortgage  backed  securities  and  investment  securities was
primarily  impacted by the relatively low interest rate environment and the flat
yield curve that  existed  during the first six months of the fiscal  year.  The
yield on  interest-earning  assets  increased  from  7.19%  for the  year  ended
September  30, 1995, to 7.33% for the year ended  September  30, 1996.  Interest
income increased by $4.1 million as a result of increased volume during the year
while the changes in rates  caused  interest  income to decrease by $109,000 and
the rate/volume change increased interest income by $222,000.

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

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

                                       12
<PAGE>

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

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

               Non-interest  Income.  Total  non-interest  income  increased  by
$227,000  to $1.4  million  for the year ended  September  30,  1996,  from $1.1
million for the year ended  September  30, 1995.  Gains on loans sold  increased
from  $6,000 in the 1995 fiscal  year to $38,000 in the 1996  fiscal  year.  The
gains are a result of long-term  fixed-rate  mortgages  (with an amortization of
greater than 20 years) that are sold in the secondary market because they do not
fit the interest rate risk profile of the Bank.  Other service  charges and fees
increased  from  $329,000 for the year ended  September 30, 1995 to $430,000 for
the year ended September 30, 1996. Service charges on deposit accounts increased
$95,000 during the periods  compared as a result of an increase in the number of
accounts  affected and to a lesser degree by an increase in the fees  associated
with deposit accounts.

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

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

Liquidity and Capital Resources

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

Operating  activities  provided  cash of $3.8  million,  $3.0  million  and $3.6
million during the years ended September 30, 1997, 1996, and 1995, respectively.
In fiscal 1997 and 1996,  the cash flow in operating  activities  was  primarily
influenced by the changes in accrued liabilities  associated with the accrual of
the SAIF special assessment in fiscal 1996, which was paid out in fiscal 1997.

Investing activities used $39.5 million, $52.2 million, and $79.5 million during
the years ended September 30, 1997, 1996, and 1995, respectively.  During fiscal
1997 and fiscal 1996, the cash used in investing activities was primarily due to
the origination and purchase of loans and to a less extent was the result of the
purchase of securities held to maturity and  mortgage-backed  securities held to
maturity.  During  fiscal 1995,  the cash used in investing  activities  was the
result of the  purchase  of  securities  held to  maturity  and  mortgage-backed
securities  held to maturity.  The use of cash in all periods was offset in part
by maturities or the exercise of call options by the issuer of investments.

The primary  activity  of the Bank is  originating  and  purchasing  loans,  and
purchasing  investment and  mortgage-backed  securities.  During the years ended
September 30, 1997, 1996, and 1995, the Bank originated loans in the amounts of

                                       13
<PAGE>
$119.2  million,  $97.6 million and $94.7 million,  respectively.  The Bank also
purchases loans,  investment and mortgage-backed  securities to manage liquidity
and interest  rate risk,  to  supplement  local loan demand and to diversify its
loan portfolio.  Funding of loans purchased was $2.4 million,  $17.4 million and
$21.0 million for the 1997, 1996 and 1995 fiscal years, respectively.  Purchases
of  investment  and  mortgage-backed  securities  held to maturity  totaled $3.0
million,  $21.0 million,  and $26.0 million,  and securities  available for sale
totaled  $2.0  million,  $2.0  million and $1.9  million  during the years ended
September 30, 1997, 1996, and 1995,  respectively.  Other investment  activities
included  investments in U. S.  Government and federal agency  obligations,  and
FHLB of Des Moines stock.

Changes in cash  flows from  financing  activities  covered by the  Consolidated
Statements  of Cash Flows in fiscal 1995 were  primarily the result of increases
in short-term  borrowings of $36.1 million.  In addition,  increases in deposits
provided $15.0 million in cash during fiscal 1995. For the year ended  September
30,  1996,  $17.6  million in cash was  provided  as a result of an  increase in
deposits  and $40.9  million in cash was  provided as a result of an increase in
borrowings.  The purchase of treasury stock,  and dividends on common stock used
$10.6  million,  and $1.8  million,  respectively.  During the fiscal year ended
September  30,  1997,  $19.2  million  in cash was  provided  as a result  of an
increase in deposits  and $19.1  million was provided as a result of an increase
in borrowings. The purchase of treasury stock used $7.2 million and dividends on
common stock used $1.4 million  during the 1997 fiscal year.  Earnings per share
for the year ended September 30, 1997, were $1.06. A portion of the earnings per
share was a result of the  purchase of treasury  stock  during the fiscal  year.
Earnings  per share on a pro forma  basis for the  fiscal  year  would have been
$0.95,  if the funds used to  purchase  treasury  stock  would have been used to
reduce  borrowed  funds.  Financing  activities  provided $30.0  million,  $46.2
million,  and $20.7  million in cash during the years ended  September 30, 1997,
1996 and 1995, respectively.  Financing activities in the foreseeable future are
expected to primarily  include changes in deposits and advances from FHLB of Des
Moines.  See  Consolidated  Statements of Cash Flow for FSF Financial  Corp. and
Subsidiary.

The Bank's  liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits, and other cash outflows in an efficient, cost effective manner. The
Bank's  primary  source of funds are deposits  and  scheduled  amortization  and
prepayments  of loan and  mortgage-backed  security  principal.  During the past
several  years,  the Bank has used such funds  primarily to fund  maturing  time
deposits,  pay savings  withdrawals,  fund  lending  commitments,  purchase  new
investments,  and increase liquidity.  The Bank funds its operations  internally
and as needed with borrowed funds from the FHLB. As of September 30, 1997,  such
borrowed  funds  totaled  $133.8  million.  While loan  repayments  and maturing
investments and mortgage-backed securities are relatively predictable sources of
funds,  deposit  flows and loan and  mortgage-backed  security  prepayments  are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.

The Bank is required  under federal  regulations to maintain  certain  specified
levels of "liquid  investments,"  which include certain United States government
obligations and other approved investments. Current regulations require the Bank
to maintain liquid assets of not less than 5% of its net  withdrawable  accounts
plus short term  borrowings.  Short term liquid  assets must consist of not less
than 1% of such accounts and  borrowings,  which amount is also included  within
the 5% requirement.  These levels may change from time to time by the regulators
to reflect the current economic conditions.  The Bank's regulatory liquidity was
5.12%, 6.08% and 11.05% at September 30, 1997, 1996, and 1995,  respectively and
its  short-term   liquidity  was  5.12%,  6.08%,  and  11.05%,  at  such  dates,
respectively.

The amount of  certificate  accounts  which are  scheduled to mature  during the
twelve months ending September 30, 1998, is approximately  $75.6 million. To the
extent  that these  deposits do not remain at the Bank upon  maturity,  the Bank
believes  that  it  can  replace  these  funds  with  deposits,  current  excess
liquidity,  FHLB  advances  or  outside  borrowings.  It  has  been  the  Bank's
experience  that a substantial  portion of such maturing  deposits remain at the
Bank.

At  September  30,  1997,  the Bank had  commitments  to extend  credit of $18.3
million and forward commitments to purchase mortgages of $80,000. Funds required
to fill these  commitments are derived  primarily from FHLB borrowings,  current
excess liquidity, deposit inflows, or loan and security repayments.

OTS  regulations  require the Bank to maintain core capital of 3% of assets,  of
which  1.5%  must be  tangible  capital,  excluding  goodwill.  The Bank is also
required to maintain  risk-based capital equal to 8% of total risk-based assets.
The OTS has proposed  amending its  regulations  in a manner that would increase
the core capital  requirements  for most thrifts from 3% to 4% or 5%,  depending
upon the institution's financial condition and other factors. Although the final
form of the  regulation  cannot be foreseen,  if adopted as  proposed,  the Bank
would expect its core capital requirement to remain at 3%. The Bank's regulatory
capital  exceeded its tangible,  core and  risk-based  capital  requirements  by
8.56%, 7.06% and 11.20%, respectively.

                                       14
<PAGE>
Management  believes that under current  regulations,  the Bank will continue to
meet its minimum capital  requirements in the foreseeable future.  Events beyond
the control of the Bank,  such as increased  interest rates or a downturn in the
economy  in areas in which the Bank  operates,  could  adversely  affect  future
earnings  and as a result,  the  ability of the Bank to meet its future  minimum
capital requirements.

Impact of Inflation and Changing Prices

The financial  statements and related data have been prepared in accordance with
generally  accepted  accounting  principles  which  require the  measurement  of
financial position and operating results in terms of historical dollars, without
consideration  for changes in the relative  purchasing  power of money over time
caused by inflation.

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

                                       15
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



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

We have audited the accompanying  consolidated statements of financial condition
of FSF Financial  Corp. and  Subsidiary  (the  Corporation)  as of September 30,
1997, and 1996, and the related  consolidated  statements of income,  changes in
stockholders'  equity,  and cash flows for each of the three fiscal years in the
period  ended   September  30,  1997.   These   financial   statements  are  the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

 In our opinion the financial  statements  referred to above present fairly,  in
all material  respects,  the  consolidated  financial  position of FSF Financial
Corp. and  Subsidiary as of September 30, 1997,  and 1996, and the  consolidated
results of their  operations  and their cash flows for each of the three  fiscal
years in the period ended  September  30, 1997,  in  conformity  with  generally
accepted accounting principles.

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






Bertram Cooper & Co., LLP
Waseca, Minnesota
October 24, 1997

                                       16
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                                         September 30,
                                                                                --------------------------------------
                                                                                        1997                  1996
                                                                                --------------------------------------
                                                                                        (In thousands)
                                             ASSETS
                                             ------
<S>                                                                             <C>                     <C>
Cash and cash equivalents                                                       $          6,135        $      11,756
Securities available for sale, at fair value:
   Equity securities                                                                      19,311               18,231
   Mortgage-backed and related securities                                                 16,699               16,336
   Debt securities                                                                         1,000                    -
Securities held to maturity, at amortized cost:
   Debt securities (Fair value of $37,065 and $41,626)                                    37,876               44,349
   Mortgage-backed and related securities (Fair value of $37,535 and $36,915)             38,539               38,557
Loans held for sale                                                                          204                  443
Loan receivable, net                                                                     260,390              216,727
Accrued interest receivable                                                                2,436                2,325
Premises and equipment                                                                     3,772                3,728
Other assets                                                                               1,773                2,184
                                                                                --------------------------------------

          Total Assets                                                          $        388,135        $     354,636
                                                                               ======================================

                              LIABILITIES AND STOCKHOLDERS' EQUITY
                              ------------------------------------
Liabilities:
     Demand deposits                                                            $         28,059        $      27,601
     Savings accounts                                                                     47,847               48,334
     Certificates of deposit                                                             132,340              113,139
                                                                                --------------------------------------
          Total deposits                                                                 208,246              189,074
     Federal Home Loan Bank borrowings                                                   133,817              114,693
     Other liabilities                                                                     2,710                3,220
                                                                                --------------------------------------
          Total liabilities                                                              344,773              306,987
                                                                                --------------------------------------

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                                                           43,334               43,150
     Retained earnings, substantially restricted                                          23,779               22,068
     Treasury stock at cost (1,491,562 and 1,023,083 shares)                             (20,267)             (13,095)
     Unearned ESOP shares at cost (234,745 and 271,850 shares)                            (2,347)              (2,719)
     Unearned MSP stock grants at cost (104,604 and 131,946 shares)
                                                                                          (1,108)              (1,398)
     Unrealized (loss) on securities available for sale                                     (479)                (807)
                                                                                --------------------------------------
          Total stockholders' equity                                                      43,362               47,649
                                                                                --------------------------------------

          Total Liabilities and Stockholders' Equity                            $        388,135        $     354,636
                                                                                ======================================
</TABLE>
        The accompanying notes are an integral part of these statements.

                                       17
<PAGE>

                       FSF FINANCIAL CORP. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                                     Years Ended September 30,
                                                                                ----------------------------------------
                                                                                 1997          1996           1995
                                                                                ----------------------------------------
                                                                                           (In thousands)
<S>                                                                             <C>          <C>             <C>
Interest income:
     Loans receivable                                                           $  20,066    $    16,077     $   11,221
     Mortgage-backed and related securities                                         3,384          3,270          3,504
     Investment securities                                                          3,865          3,897          4,354
                                                                                ----------------------------------------
          Total interest income                                                    27,315         23,244         19,079
                                                                                ----------------------------------------
 Interest expense:
     Deposits                                                                       9,339          8,262          6,753
     Borrowed funds                                                                 7,007          5,347          2,719
                                                                                ----------------------------------------
          Total interest expense                                                   16,346         13,609          9,472
                                                                                ----------------------------------------
          Net interest income                                                      10,969          9,635          9,607
     Provision for loan losses                                                        120             42             24
                                                                                ----------------------------------------
          Net interest income after provision for loan losses                      10,849          9,593          9,583
                                                                                ----------------------------------------
Non-interest income:
     Gain (loss) on loans - net                                                        48             38              6
     Other service charges and fees                                                   422            430            329
     Service charges on deposit accounts                                              717            540            445
     Commission income                                                                227            231            161
     Other                                                                             96            115            186
                                                                                ----------------------------------------
          Total non-interest income                                                 1,510          1,354          1,127
                                                                                ----------------------------------------
Non-interest expense:
     Compensation and benefits                                                      4,487          4,404          4,212
     Occupancy and equipment                                                          800            797            716
     Deposit insurance premiums                                                       167            406            357
     SAIF special assessment                                                            -          1,030              -
     Data processing                                                                  393            379            567
     Professional fees                                                                235            249            242
     Other                                                                          1,048            913            872
                                                                                ----------------------------------------
          Total non-interest expense                                                7,130          8,178          6,966
                                                                                ----------------------------------------
          Income before provision for income taxes and  cumulative effect
              of change in accounting principle                                     5,229          2,769          3,744
Income tax expense                                                                  2,105          1,101          1,501
                                                                                ----------------------------------------
          Income before cumulative effect of change in accounting principle         3,124          1,668          2,243
Cumulative effect of change in accounting for securities
          available for sale                                                            -              -            382
                                                                                ----------------------------------------
Net income                                                                      $   3,124   $      1,668   $      2,625
                                                                                ========================================
Earnings per common and common equivalent shares:
          Income before cumulative effect of change in accounting principle         $1.06          $0.48          $0.57
          Cumulative effect of change in accounting principle                           -              -          $0.10
          Net income                                                                $1.06          $0.48          $0.67
                                                                                ========================================

Weighted average common shares outstanding (000's)                                  2,945          3,470          3,931
                                                                                ========================================
</TABLE>

        The accompanying notes are an integral part of these statements.
                                       18

<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                      Unallocated                         Unrealized
                                                           Retained     Common      Unearned              (Loss) on
                                              Additional   Earnings      Stock       Stock                Securities
                                    Common      Paid-in  Substantially  Held by   Acquired by  Treasury    Available
                                     Stock      Capital   Restricted     ESOP         MSP        Stock      For Sale     Total
                                  ------------------------------------------------------------------------------------------------
<S>                                <C>         <C>         <C>         <C>       <C>         <C>           <C>        <C>

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

  Net earnings                          --         --         2,625        --          --          --          --         2,625

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

  Treasury stock acquired               --         --          --          --          --        (2,589)       --        (2,589)

  Common stock dividends
  ($0.375 per share)                    --         --        (1,513)       --          --          --          --        (1,513)

  Allocated ESOP & MSP Shares           --           17        --           494         217        --          --           728

  Common stock issued for options
  exercised                             --           32        --          --          --          --          --            32

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

  Adjust valuation allowance for
  securities available for sale         --         --          --          --          --          --           (26)        (26)
                                    ------------------------------------------------------------------------------------------------

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

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

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

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

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

  Allocated ESOP & MSP Shares           --           75        --           384         290        --          --           749

  Common stock issued for options
  exercised                             --           13        --          --          --          --          --            13

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

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

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

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

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

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

  Allocated ESOP & MSP Shares           --          196        --           372         290        --          --           858

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

Balance September 30, 1997          $    450   $ 43,334    $ 23,779    $ (2,347)   $ (1,108)   $(20,267)   $   (479)   $ 43,362
                                    ================================================================================================
</TABLE>


        The accompanying notes are an integral part of these statements.

<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                        Years Ended September 30,
                                                                                  ------------------------------------
                                                                                       1997       1996       1995
                                                                                  ------------------------------------
                                                                                            (In thousands)
<S>                                                                                <C>         <C>         <C>
Cash flows from operating activities:
     Net income                                                                    $  3,124    $  1,668    $  2,625
     Adjustments  to  reconcile  net income to net cash  provided  by  operating
        activities:
     Depreciation                                                                       329         340         330
     Net amortization of discounts and premiums on
        securities held to maturity                                                     (31)        (36)        (55)
     Provision for loan losses                                                          120          42          24
     Net market value adjustment on ESOP shares                                         208          89          18
     Amortization of ESOP and MRP stock compensation                                    612         674         712
     Net gain on sale of fixed assets                                                  --            (2)        (12)
     Net gain on real estate sold                                                      --            (3)        (44)
     Federal Home Loan Bank stock dividends                                            --           (81)       --
     Change in accounting for securities available for sale                            --          --          (382)
     Net loan fees deferred and amortized                                               214         283         225
     (Increase) decrease in:
        Loans held for sale                                                            (160)       (213)        499
        Accrued interest receivable                                                    (111)       (228)       (741)
        Other assets                                                                    132         (72)        547
     Increase (decrease) in:
        Net deferred taxes                                                              234        (676)       (237)
        Accrued interest payable                                                        182         (16)        (87)
        Accrued income tax                                                              (78)        (26)        411
        Accrued liabilities                                                          (1,043)      1,111        (416)
        Deferred compensation payable                                                   116         106         203
                                                                                   --------------------------------
Net cash provided by operating activities                                             3,848       2,960       3,620
                                                                                   --------------------------------

Cash flows from investing activities:
     Loan originations and principal payments on loans, net                         (41,245)    (28,770)    (33,767)
     Purchase of loans                                                               (2,445)    (17,447)    (20,993)
     Principal payments on securities held to maturity                                   19          49          84
     Purchase of mortgage-related securities held to maturity                          --        (1,494)     (3,924)
     Purchase of securities available for sale                                       (1,956)     (1,963)     (1,900)
     Purchase of  securities held to maturity                                        (3,000)    (19,552)    (22,063)
     Proceeds from maturities of securities held to maturity                          9,500      17,150       3,100
     Investment in foreclosed real estate                                                (2)        (21)        (35)
     Proceeds from sale of foreclosed real estate                                        22         112         502
     Proceeds from sale of fixed assets                                                --             2          16
     Purchase of equipment and property improvements                                   (373)       (311)       (481)
                                                                                    -------------------------------
Net cash (used in) investing activities                                            $(39,480)   $(52,245)   $(79,461)
                                                                                    -------------------------------
</TABLE>
        The accompanying notes are an integral part of these statements.


<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
                                                                             Years Ended September 30,
                                                                        ----------------------------------
                                                                           1997        1996        1995
                                                                        ----------------------------------
                                                                                   (In thousands)
<S>                                                                     <C>         <C>         <C>
Cash flows from financing activities:
     Net increase in deposits,                                          $ 19,171    $ 17,558    $ 15,036
     Net increase in short-term borrowings                                19,124      40,886      36,119
     Net increase in mortgage escrow funds                                   305           6          53
     Expenses related to stock offering                                     --          --        (1,496)
     Treasury stock purchased                                             (7,245)    (10,559)     (2,589)
     Refund of proceeds from stock offering                                 --          --       (23,032)
     Dividends on common stock                                            (1,413)     (1,758)     (1,513)
     Purchase of stock for MSP
                                                                            --          --        (1,905)
     Proceeds from exercise of stock options                                  69          53          32
                                                                        ----------------------------------
Net cash provided by financing activities                                 30,011      46,186      20,705
                                                                        ----------------------------------
Net increase in cash and cash equivalents                                 (5,621)     (3,099)    (55,136)

Cash and cash equivalents:
     Beginning of year                                                    11,756      14,855      69,991
                                                                        ----------------------------------

     End of year                                                        $  6,135    $ 11,756    $ 14,855
                                                                        ========    ========    ========

Supplemental disclosures of cash flow information: Cash payments for:
        Interest on advances and other borrowed money                   $  6,976    $  5,368    $  2,834
        Interest on deposits                                               9,188       8,258       6,725
        Income taxes                                                       1,999       1,656       1,338

Supplemental schedule of noncash investing and financing activities:
Federal Home Loan Bank stock dividends                                  $   --      $     81    $   --
Reinvested amounts of capital gains and dividends
        from mutual fund investments                                          22         163         607
Refinancings of sales of real estate owned                                  --          --           436

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       21


<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        SEPTEMBER 30, 1997, 1996 AND 1995

    (1)    Summary of Significant Accounting Policies

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

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

Nature of Business
The  Corporation is a unitary thrift holding company whose  subsidiary  provides
financial services.  The Bank's business is that of a financial intermediary and
consists primarily of attracting deposits from the general public and using such
deposits,  together with  borrowings  and other funds,  to make  mortgage  loans
secured by residential real estate located primarily in Minnesota.  At September
30, 1997, the Bank operated 11 retail banking offices in Minnesota.  The Bank is
subject to significant  competition  from other financial  institutions,  and is
also subject to regulation by certain  federal  agencies and undergoes  periodic
examinations by those regulatory authorities.

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

Cash and Cash Equivalents (In thousands)
For  purposes of the  consolidated  statements  of cash flows,  the  Corporation
considers all highly liquid debt instruments  with original  maturities of three
months  or less and money  market  funds to be cash  equivalents.  Cash and cash
equivalents  include interest bearing deposits of $3,645 and $9,392 at September
30, 1997, and 1996, respectively.

Debt and Equity Securities
The    Corporation  classifies  its  investments,  including  marketable  equity
       securities,  mortgage-backed securities, and mortgage-related securities,
       in one of three categories:  Trading Account  Securities  Securities held
       principally  for  resale in the near  term,  are  classified  as  trading
       account  securities and recorded at their fair values.  Unrealized  gains
       and losses on trading  account  securities  are included in other income.
       The Corporation did not hold any trading securities at September 30, 1997
       or 1996.

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

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

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


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

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

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

Loans Receivable
Loans  receivable  that  management  has the intent and  ability to hold for the
forseeable future or until maturity or pay-off are reported at their outstanding
principal  adjusted for 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 residential real estate
loans are  amortized  to income  using the  interest  method over the  remaining
period to contractual maturity, adjusted for anticipated prepayments.  Discounts
and premiums on purchased  consumer loans are recognized over the expected lives
of the loans using the level yield method.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs  (net  of  recoveries).  Management's  periodic  evaluation  of  the
adequacy  of the  allowance  is based on the Bank's  past loan loss  experience,
known and inherent risks in the portfolio,  adverse  situations  that may affect
the borrower's ability to repay,  estimated value of any underlying  collateral,
and current economic conditions. Loans are considered impaired if full principal
or interest payments are not anticipated in accordance with the contractual loan
terms.  Impaired loans are carried at the present value of expected  future cash
flows discounted at the loan's  effective  interest rate or at the fair value of
the collateral if the loan is collateral  dependent.  A portion of the allowance
for loan losses is  allocated  to  impaired  loans if the value of such loans is
deemed  to be less  than the  unpaid  balance.  If these  allocations  cause the
allowance for loan losses to require an increase, such increase is reported as a
component of the provision for loan losses.

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

Loan origination fees and certain direct  origination costs are capitalized with
the net fee or cost  recognized as an  adjustment  to interest  income using the
interest method.

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

Income Taxes
Deferred tax assets and  liabilities  are reflected at currently  enacted income
tax  rates  applicable  to the  period  in which  the  deferred  tax  assets  or
liabilities  are  expected to be realized or settled.  As changes in tax laws or
rates are enacted,  deferred tax assets and liabilities are adjusted through the
provision for income taxes.

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.

                                       23
<PAGE>

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

Mortgage Loan-Servicing Assets
The Bank  adopted  SFAS No. 125,  "Accounting  for  Transfers  and  Servicing of
Financial Assets and  Extinguishments  of Liabilities" for transactions  entered
into after December 31, 1996. SFAS No. 125 established  accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities  based on the  consistent  application  of the  financial-components
approach.  This  approach  requires  the  recognition  of  financial  assets and
servicing  assets  that  are  controlled  by  the  reporting  entity,   and  the
derecognition  of financial assets and liabilities when control is extinguished.
Liabilities and  derivatives  incurred or obtained by transferors in conjunction
with  the  transfer  of  financial   assets  are  measured  at  fair  value,  if
practicable.  Servicing assets and other retained interest in transferred assets
are measured by allocating  the carrying  amount between the assets sold and the
interest retained,  based on their relative fair value. The adoption of SFAS No.
125 did not have a material  effect on the Bank's  operations for the year ended
September 30, 1997.

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

For  servicing  contracts  in  existence  before  January  1,  1997,  previously
recognized  servicing  rights and "excess  servicing"  receivables not exceeding
contractually  specified  servicing  fees were  combined,  net of any previously
recognized servicing obligations, as a servicing asset.

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

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

Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based  Compensation," establishes a new fair
value-based  accounting method for stock-based  compensation plans. As permitted
by SFAS No. 123, management has elected to continue measuring compensation costs
based on the  intrinsic  value  method as  prescribed  by APB  Opinion  No.  25,
"Accounting  for Stock Issued to  Employees,"  by providing pro forma net income
and pro forma  earnings per share  disclosures  for stock options  granted after
October 1, 1995.

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

       Cash  and  cash  equivalents  - The  carrying  value  of  cash  and  cash
       equivalents  approximate  fair value.  Debt and equity  securities - Fair
       values of debt and equity  securities  have been  estimated  using quoted
       market prices.  Loans receivable - For  variable-rate  loans,  loans with
       balloon
             maturities,  loans with relatively  near-term  maturities  (such as
             consumer   installment  loans)  carrying  values  approximate  fair
             values.  The fair  value of  long-term  fixed  rate  loans has been
             estimated  using  present  value cash flows,  discounted  at a rate
             approximating  current  market  rates and giving  consideration  to
             estimated  prepayment  risk and credit loss factors.  The estimated
             fair value of loans held for sale is based on quoted  market prices
             of similar instruments trading in the secondary market.
       Originated mortgage servicing rights - The carrying amounts of originated
       mortgage servicing rights approximate fair values. Accrued interest - The
       carrying amounts of accrued interest  receivable  approximate  their fair
       values Deposit liabilities - The fair values of demand deposits are, by
             definition,  equal to the amount payable on demand at the reporting
             date (that is, their  carrying  amounts).  The carrying  amounts of
             variable-rate, fixed-term money market accounts and certificates of
             deposits  approximate their fair values at the reporting date. Fair
             values for fixed-rate certificates of deposit are estimated using a
             discounted  cash  flow  calculation  that  applies  interest  rates
             currently being offered on certificates to a schedule of aggregated
             expected monthly maturities on time deposits.

                                       24
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

       Short-term borrowings - The carrying amounts of advances from the Federal
Home Loan Bank (FHLB) of Des Moines  maturing within 90 days  approximate  their
fair values.
       Long-term  borrowings  - The  carrying  amounts of  amounts of  long-term
             borrowings are estimated using  discounted cash flow analyses based
             on the Bank's current incremental borrowing rates for similar types
             of borrowing arrangements.
       Off-balance-sheet  items  -  Fair  value  for  off-balance-sheet  lending
             commitments  are  based on fees  currently  charged  to enter  into
             similar agreements,  taking into account the remaining terms of the
             agreements and the counterparties'  credit standings.  The carrying
             value  and fair  value of  commitments  to  extend  credit  are not
             material.

    (2)    Debt and Equity Securities  (in thousands)

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets according to management's  intent.  The carrying amount of securities and
their approximate fair values at September 30 are presented as follows:
<TABLE>
<CAPTION>
                                                   eptember 30,
                                                      1997
                                                   ------------------------------------------------------------------------
                                                                         Gross              Gross
                                                    Amortized          Unrealized         Unrealized            Fair
                                                      Cost               Gains              Losses             Value
                                                   --------------   -----------------  -----------------  -----------------
<S>                                                <C>               <C>               <C>                  <C>
Available for sale securities:
     Equity securities
           Fund Investments                        $      12,522     $             -   $            325     $       12,197
           Stock in FHLB                                   6,692                   -                  -              6,692
           Preferred Stock                                   399                  23                  -                422
                                                   --------------   -----------------  -----------------  -----------------
                      Total                        $      19,613     $            23   $            325     $       19,311
                                                   ==============   =================  =================  =================
     Mortgage backed securities:
           REMICs                                  $      16,980     $             -   $            281     $       16,699
                                                   ==============   =================  =================  =================

     Debt Securities:                              $       1,000     $             -   $              -     $        1,000
                                                   ==============   =================  =================  =================
Held to maturity securities:
     Debt securities:
           U.S. Government and Agency              $      37,876     $           372   $          1,183     $       37,065
                                                   ==============   =================  =================  =================
     Mortgage backed securities:
           REMICs                                  $      38,469     $            90   $          1,103     $       37,456
           GNMA certificates                                  63                   8                  -                 71
           FHLMC certifiactes                                  7                   1                  -                  8
                                                   --------------   -----------------  -----------------  -----------------
                      Total                        $      38,539     $            99   $          1,103     $       37,535
                                                   ==============   =================  =================  =================
</TABLE>
                                       25
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The amortized cost of debt and mortgage-backed securities at September 30, 1997,
included  unamortized  premiums  of  $241  and  unaccreted  discounts  of  $444,
respectively. <TABLE> <CAPTION>
                                                        September 30,
                                                            1996
                                                       --------------------------------------------------------------------------
                                                                               Gross              Gross
                                                          Amortized          Unrealized         Unrealized            Fair
                                                            Cost               Gains              Losses             Value
                                                       ----------------   -----------------  -----------------  -----------------
<S>                                                      <C>              <C>                <C>                   <C>
Available for sale securities:
     Equity securities
           Fund Investments                              $      12,522    $              -   $            426      $      12,096
           Stock in FHLB                                         5,736                   -                  -              5,736
           Preferred Stock                                         398                   1                  -                399
                                                       ----------------   -----------------  -----------------  -----------------
                      Total                              $      18,656    $              1   $            426      $      18,231
                                                       ================   =================  =================  =================
     Mortgage backed securities:
           REMICs                                        $      16,980    $              -   $            644      $      16,336
                                                       ================   =================  =================  =================
Held to maturity securities:
     Debt securities:
           U.S. Government and Agency                    $      44,349    $             30   $          2,753      $      41,626
                                                       ================   =================  =================  =================
     Mortgage backed securities:
           REMICs                                        $      38,468    $             46   $          1,693      $      36,821
           GNMA certificates                                        80                   4                  -                 84
           FHLMC certifiactes                                        9                   1                  -                 10
                                                       ----------------   -----------------  -----------------  -----------------
                      Total                              $      38,557    $             51   $          1,693      $      36,915
                                                       ================   =================  =================  =================
</TABLE>

The amortized cost of debt and mortgage backed securities at September 30, 1996,
includes  unamortized  premiums  of  $255  and  unaccreted  discounts  of  $462,
respectively.

There were no sales of  securities  during the three years ended  September  30,
1997.

The scheduled  maturities of securities  held-to-maturity  and securities (other
than equity  securities)  available-for-sale  at  September  30,  1997,  were as
follows: <TABLE> <CAPTION>
                                                             Held-to-Maturity                     Available-for-Sale
                                                                Securities                            Securities
                                                    ------------------------------------  ------------------------------------
                                                       Amortized             Fair            Amortized             Fair
                                                         Cost               Value               Cost              Value
                                                    ----------------   -----------------  -----------------  -----------------
<S>                                                 <C>                   <C>              <C>               <C>
Due in one year or less                             $         2,500       $        2,510   $             -   $              -
Due from one to five years                                   11,070              11,012              1,000              1,000
Due from five to ten years                                   13,132              12,537                  -                  -
Due after ten years                                          49,713              48,541             16,980             16,699
                                                    ----------------   -----------------  -----------------  -----------------
                                     Total            $      76,415       $      74,600      $      17,980      $      17,699
                                                    ================   =================  =================  =================
</TABLE>

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

Debt and  mortgage-backed  securities carried at approximately  $27.5 million at
September  30, 1997 and $26.9  million at September  30,  1996,  were pledged to
secure public deposits and for other purposes required or permitted by law.


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

    (3)    Loans Receivable  (in thousands)

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                                                     September 30,
                                                                                         --------------------------------------
                                                                                              1997                 1996
                                                                                         ----------------   -------------------
<S>                                                                                         <C>               <C>
First mortgage loans:
     Secured by one-to-four family residences                                               $    170,218      $        149,659
     Secured by other properties                                                                  28,364                14,996
     Construction and land development loans                                                      34,384                27,070
                                                                                         ----------------   -------------------
                                                                                                 232,966               191,725
     Less:
           Undisbursed portion of construction and land development loans                       (20,364)              (13,401)
           Unearned discounts                                                                       (22)                  (23)
           Net deferred loan origination fees                                                      (866)                 (889)
                                                                                         ----------------   -------------------
                       Sub-total first mortgage loans                                            211,714               177,412
Consumer and other loans:
     Consumer loans                                                                               19,440                17,709
     Home equity and second mortgages                                                             20,812                15,430
     Commercial                                                                                    8,114                 6,234
     Secured by savings                                                                              977                   563
                                                                                         ----------------   -------------------
                                                                                                  49,343                39,936
     Add:  net deferred loan origination costs                                                       185                   155
                                                                                         ----------------   -------------------
                       Sub-total consumer and other loans                                         49,528                40,091
                                                                                         ----------------   -------------------
                                  Sub-total all loans                                            261,242               217,503
     Less: allowance for loan losses                                                               (852)                 (776)
                                                                                         ----------------   -------------------
                                             Total                                          $    260,390      $        216,727
                                                                                         ================   ===================
</TABLE>


A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
                                                                                Years Ended September 30,
                                                             -------------------------------------------------------------
                                                                    1997                 1996                 1995
                                                             -------------------    ----------------   -------------------
<S>                                                          <C>                    <C>                <C>
Balance, beginning of period                                 $              776     $           764    $              748
Provision for losses                                                        120                  42                    24
Charge-offs                                                                 (50)                (34)                  (20)
Recoveries                                                                    6                   4                    12
                                                             -------------------    ----------------   -------------------
Balance, end of period                                        $             852     $           776    $              764
                                                             ===================    ================   ===================
</TABLE>

Recorded investments in impaired loans were $82 at September 30, 1997, and $145,
at September 30, 1996. The average recorded  investment in impaired loans during
1997 and 1996 was $137 and  $111,  respectively.  The total  allowance  for loan
losses  related to these loans was $3 and $2, on September  30, 1997,  and 1996,
respectively.  No interest  income on these loans was  recognized or received in
1997 and 1996.

Loans having carrying values of $20 and $74 were  transferred to foreclosed real
estate in 1997 and 1996, respectively.

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

The  aggregate  amount  of loans to  executive  officers  and  directors  of the
Corporation  were $639, and $648 at September 30, 1997, and 1996,  respectively.
During 1997 repayments on loans to executive  officers and directors  aggregated
$56 and loans originated aggregated $106.

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

    (4)    Loan Servicing (in thousands)

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans  serviced for others was $42,734 and $41,133 at  September  30, 1997
and 1996, respectively.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing, and included in demand deposits, were approximately, $237 and $235 at
September 30, 1997 and 1996, respectively.

Capitalized mortgage servicing assets are summarized as follows:
<TABLE>
<CAPTION>
                                                                                 Years Ended Spetember 30,
                                                                 -------------------------------------------------------------
                                                                        1997                 1996                 1995
                                                                 -------------------    ----------------   -------------------
<S>                                                              <C>                    <C>                <C>
Beginning balance,net of accumulated amortization                $              157     $           155    $              163
Amounts capitalized                                                              20                  23                     3
Amortization                                                                    (30)                (18)                   (9)
Valuation adjustments                                                             1                  (3)                   (2)
                                                                 -------------------    ----------------   -------------------
Balance, end of period                                           $              148     $           157    $              155  
                                                                 ===================    ================   ===================
</TABLE>


    (5)    Foreclosed Real Estate (in thousands)

Gain on foreclosed real estate, including net revenues from operations,  was not
material for the three years ended  September 30, 1996. The Bank held foreclosed
real estate at September 30, 1997  amounting to $72,  which is included in other
assets.

    (6)    Premises and Equipment (in thousands)

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
                                  September 30,
                                                                                     --------------------------------------
                                                                                          1997                 1996
                                                                                     ----------------   -------------------
<S>                                                                                  <C>                <C>
Land                                                                                 $           490    $              490
Buildings and improvements                                                                     3,693                 3,552
Furniture, equipment and automobiles                                                           2,685                 2,740
Leasehold improvements                                                                            40                    40
                                                                                     ----------------   -------------------
Total costs                                                                                    6,908                 6,822
Less accumulated depreciation                                                                  3,136                 3,094
                                                                                     ----------------   -------------------
Total                                                                                $         3,772    $            3,728
                                                                                     ================   ===================
</TABLE>


At September 30, 1997,  the Bank was  obligated  under  noncancelable  operating
leases for office space. Net rental expense under operating leases,  included in
occupancy and equipment, was $58, $59, and $69 for the years ended September 30,
1997, 1996, and 1995, respectively.

The  projected  minimum  rental  commitments  under the  terms of the  leases at
September 30, 1997, are as follows:
<TABLE>
<CAPTION>
                                                                             Rental Income                Rental Expense
Fiscal                                                                       as Lessor                      as Lessee
                                                                         -------------------            -------------------
<S>                                                                      <C>                            <C>
1998                                                                     $               23             $               31
1999                                                                                     19                             31
2000                                                                                      5                              -
                                                                         -------------------            -------------------
                                                                         $               47             $               62
                                                                         ===================            ===================
</TABLE>

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



    (7)    Deposits  (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of  $100,000,   was   approximately   $30,938  and  $16,008  in  1997  and  1996
respectively.

Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
                                                                                  September 30,
                                                            -------------------------------------------------------------
                                                                   1997                 1996                 1995
                                                            -------------------    ----------------   -------------------
<S>                                                         <C>                    <C>                <C>
Savings accounts                                            $            1,548     $         1,576    $            1,669
Demand deposits                                                            389                 443                   673
Certificates of deposit                                                  7,402               6,243                 4,411
                                                            -------------------    ----------------   -------------------
                                                            $            9,339     $         8,262    $            6,753
                                                            ===================    ================   ===================
</TABLE>


At September 30, 1997, the scheduled  maturities of  certificates of deposit are
as follows:
<TABLE>
<CAPTION>


<S>                                                              <C>
      Years Ending September 30,
               1998                                               $     75,639
               1999                                                     38,693
               2000                                                     16,408
               2001                                                        578
               2002 and thereafter                                       1,022
                                                               ----------------
                                                                  $    132,340
                                                               ================
</TABLE>


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

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

                                                                            September 30,
                                           --------------------------------------------------------------------------------
                                                  1997                                      1996
                                           ---------------------------------------   --------------------------------------

Fiscal Year of Maturity - Advances                                   Weighted                                 Weighted
----------------------------------
                                                 Amount                Rate                Amount               Rate
                                           -------------------    ----------------   -------------------   ----------------
<S>                                        <C>                    <C>                <C>                   <C>
     1997                                  $                -                   - %  $           22,100               5.74 %
     1998                                              90,400                5.75                56,900               5.80
     1999                                              13,000                6.03                 3,000               6.55
     2000                                               7,417                6.11                 7,693               6.11
     2001                                              15,000                6.00                15,000               6.00
                                           -------------------                       -------------------
         Total                                        125,817                                   104,693
Line of Credit from FHLB                                8,000        variable                    10,000       variable
                                           -------------------    ----------------   -------------------   ----------------
                                           $          133,817                5.83    $          114,693               5.88
                                           ===================    ================   ===================   ================
</TABLE>

At September 30, 1997,  borrowed funds are  collateralized by stock in the FHLB,
first   mortgage   loans  with   carrying   value  of  $169,321   and  debt  and
mortgage-backed  securities  with carrying  values of $50,869 under a collateral
agreement.  The line of credit has a variable  rate of interest that is adjusted
daily based on the FHLB's short-term investment return. The interest rate on the
line  of  credit  was  5.75%  and  6.18%  at  September  30,  1997,   and  1996,
respectively.  The total amount  available to the Bank on its line of credit was
$17,000 and $15,000 at September 30, 1997 and 1996, respectively.

    (9) 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
$142, $134, and $141 for the three years ended September 30, 1997, respectively.

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

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

The Corporation presents these financial statements in accordance with the AICPA
Statement of Position (SOP) No. 93-6,  "Employers' Accounting for Employee Stock
Ownership  Plans." The price of the shares issued and  unreleased are charged to
unearned compensation, a contra-equity account, and shares released are reported
as compensation  expense equal to the current market value price of the released
shares.  Dividends paid on allocated shares are charged to retained earnings and
those on unallocated shares are charged to expense.  The total amount charged to
expense in the fiscal year ended  September  30,  1997,  1996 and 1995 was $549,
$449 and $525, respectively.

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

                                                                                     September 30,
                                                               ----------------------------------------------------------
                                                                       1997                 1996                 1995
                                                               -------------------   -------------------   --------------
<S>                                                            <C>                   <C>                   <C>
Shares allocated beginning of year                                         87,870             49,461                   -
Shares allocated during year                                               37,105             38,409              49,461
Unreleased shares                                                         234,745            271,850             310,259
                                                               -------------------   ----------------      --------------
Total ESOP                                                                359,720            359,720             359,720
                                                               ===================   ================      ==============
Fair value of unreleased shares                                $            4,607    $         3,466       $       4,074
                                                               ===================   ================      ==============
</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 on
January 17, 1995, the Bank purchased 179,860 shares of the Corporation's  common
stock in the open  market  at $10.59  per share to be  awarded  to  officers  in
accordance  with the provisions of the MSP. The cost of the shares awarded under
these plans are recorded as unearned compensation,  a contra equity account, and
are recognized as an expense in accordance with the vesting  requirements  under
the plan.  For the fiscal year ended  September  30,  1997,  1996 and 1995,  the
amount included in compensation expense was $290, $290 and $218, respectively.
<TABLE>
<CAPTION>
                                                                             Unawarded              Awarded
                                                                               Shares               Shares
                                                                         -------------------    ----------------
<S>                                                                                 <C>            <C>
Purchased by Plan                                                                   179,890                   -
Granted                                                                            (136,896)            136,896
Vested                                                                                    -                   -
                                                                         -------------------    ----------------
At September 30, 1995                                                                42,964             136,896
Granted                                                                                   -                   -
Vested                                                                                    -              27,379
                                                                         -------------------    ----------------
At September 30, 1996                                                                42,964             109,517
                                                                         -------------------    ----------------
Granted                                                                                   -                   -
Vested                                                                                    -              27,379
                                                                         -------------------    ----------------
At September 30, 1997                                                                42,964              82,138
                                                                         ===================    ================
</TABLE>
Stock Option Plan
The  Corporation  established  a stock option plan for  directors,  officers and
employees.  The stock  option plan was approved by  shareholders  on January 17,
1995,  and in  accordance  with the terms of the plan,  the  exercise  price was
established at $9.50 per share, the fair market price on the date of shareholder
approval.  Awards made under the plan may be incentive  stock options as defined
by Section  422 of the  Internal  Revenue  Code of 1986 or  options  that do not
qualify. All options expire on January 16, 2005.

                                       30
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The following table summarizes the stock option transactions:
<TABLE>
<CAPTION>
                                                                             Available              Options
                                                                             for Grant            Outstanding
                                                                         -------------------    ----------------
<S>                                                                       <C>                    <C>
At inception                                                                        449,650                   -
Granted                                                                            (442,163)            442,163
Exercised                                                                                 -              (3,405)
                                                                         -------------------    ----------------
At September 30, 1995                                                                 7,487             438,758
Granted                                                                                   -                   -
Exercised                                                                                 -              (6,000)
                                                                         -------------------    ----------------
At September 30, 1996                                                                 7,487             432,758
                                                                         -------------------    ----------------
Granted                                                                                   -                   -
Exercised                                                                                 -              (5,405)
Cancelled                                                                                 -              (1,500)
                                                                         -------------------    ----------------
At September 30, 1997                                                                 7,487             425,853
                                                                         ===================    ================
</TABLE>


   (10)    Income Taxes  (in thousands)

The Corporation and its Subsidiary file consolidated income tax returns.  Income
tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
                                                                                        September 30,
                                                                 -------------------------------------------------------------
                                                                        1997                 1996                 1995
                                                                 -------------------    ----------------   -------------------
<S>                                                              <C>                    <C>                <C>
Current
      Federal                                                    $            1,533     $         1,263    $            1,274
      State                                                                     498                 403                   424
                                                                 -------------------    ----------------   -------------------
             Subtotal                                                         2,031               1,666                 1,698
                                                                 -------------------    ----------------   -------------------
Deferred
      Federal                                                                    55                (423)                 (148)
      State                                                                      19                (142)                  (49)
                                                                 -------------------    ----------------   -------------------
             Subtotal                                                            74                (565)                 (197)
                                                                 -------------------    ----------------   -------------------
                         Total income tax provision              $            2,105     $         1,101    $            1,501
                                                                 ===================    ================   ===================
</TABLE>


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

The Bank was allowed a bad debt  deduction,  in  determining  income tax for tax
purposes,  based on specific  formulas or a percentage of taxable  income before
such  deduction.  On August  21,  1996  legislation  was  signed  into law which
repealed the percentage of taxable income method for the tax bad debt deduction.
The repeal is effective for the Bank's taxable year  beginning  October 1, 1996.
In addition,  the legislation requires the Bank to include in taxable income its
bad debt reserves in excess of its base year reserves (pre-1988 reserves) over a
six, seven,  or eight year period  depending upon the attainment of certain loan
origination  levels.  Since the  percentage of taxable income method for the bad
debt tax deduction and the corresponding increase in the tax bad debt reserve in
excess of base year have been recorded as temporary differences,  this change in
the tax law will not effect the Corporation's consolidated statement of income.


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


Temporary  differences  between the financial statement carrying amounts and the
tax basis of assets  and  liabilities  that can create  deferred  tax assets and
liabilities are as follows: <TABLE> <CAPTION>
                                                                                         September 30,
                                                                             --------------------------------------
                                                                                  1997                 1996
                                                                             ----------------   -------------------
<S>                                                                           <C>               <C>
Deferred tax assets:
      Deferred compensation                                                   $          530    $              396
      Deferred net loan fees                                                             336                   297
      Deferred SAIF premium                                                                -                   417
      Securities unrealized loss                                                         227                   423
      Allowance for loan losses                                                          344                   314
                                                                             ----------------   -------------------
           Subtotal                                                                    1,437                 1,847
      Less:  Valuation allowance                                                         131                   172
                                                                             ----------------   -------------------
                        Total                                                          1,306                 1,675
                                                                             ----------------   -------------------
Deferred tax liabilities:
      FHLB Stock                                                                         241                   241
      Tax bad debt reserve                                                               256                   252
      Premises and equipment                                                             302                   273
      Installment obligation sale of former building                                      29                    30
      Mortgage servcing rights                                                            14                     8
      Discount on loans                                                                   11                    21
      Section 475 "For Sale Assets"                                                      105                   273
                                                                             ----------------   -------------------
                        Total                                                            958                 1,098
                                                                             ----------------   -------------------
Net deferred tax asset                                                       $           348    $              577
                                                                             ================   ===================
</TABLE>

The valuation allowance was established to reduce the deferred tax asset related
to the unrealized loss on equity securities because management is uncertain that
more likely than not it will be realized.  The Bank has paid sufficient taxes in
prior  carryback  years  which will  enable it to recover the balance of the net
deferred tax assets,  and  therefore,  no  additional  valuation  allowance  was
required at September 30, 1997 and 1996.

     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,
                                                                 ---------------------------------------------------------
                                                                      1997                 1996                1995
                                                                 ----------------   -------------------   ----------------
<S>                                                              <C>                <C>                   <C>
Computed "expected" tax expense                                  $         1,778    $              941    $         1,273
Exempt dividends                                                             (8)                  (20)                (5)
State income taxes, net of federal tax benefit                               341                   173                247
Other, net                                                                   (6)                     7               (14)
                                                                 ----------------   -------------------   ----------------
Total income tax provision                                       $         2,105    $            1,101    $         1,501
                                                                 ================   ===================   ================

</TABLE>

Retained  earnings at September 30, 1997,  includes $6,492 for which no deferred
federal  income tax liability  has been  recognized.  This amount  represents an
allocation of income to bad-debt  deductions for tax purposes only that arose in
tax years beginning before September 30, 1988, (that is, the base-year  amount).
Reduction of the amount so allocated for purposes other than tax bad-debt losses
or adjustments  arising from this carryback of net operating losses would create
income  for tax  purposes  only,  which  would be  subject  to the  then-current
corporate  income-tax rate. The unrecorded deferred income-tax  liability on the
above amount was approximately $2,600 at September 30, 1997.

   (11)    Contingencies  (in thousands)

Loans Sold
During 1982, the Bank sold loans subject to recourse provisions.  The balance of
these loans at September 30, 1997, and 1996 was $302 and $413, respectively. The
loans had interest  rates ranging from 9.50% to 9.875% with an original  balance
of $3,400 and were sold to FHLMC.

                                       32
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
             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 (the  Conversion) via the issuance of common stock.  The Bank
received $64.4 million in subscriptions  for common stock in the Corporation and
an order for 359,720  shares of common stock from the Employee  Stock  Ownership
Plan (the ESOP).  In  conjunction  with the  Conversion,  the  Corporation  sold
4,496,500 shares of common stock which, after giving effect to offering expenses
of $1.5 million,  resulted in net proceeds of $44.0 million and refunds of $23.0
million of the stock subscription  proceeds held at September 30, 1994. Pursuant
to the Conversion, the Bank transferred all of its outstanding shares to a newly
organized  holding company,  FSF Financial Corp., in exchange for 50% of the net
proceeds.

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

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below)  of  total  and  Tier  1  capital  (as  defined  in the  regulations)  to
risk-weighted  assets  (as  defined),  and of  tangible  and Tier 1 capital  (as
defined) to adjusted  total  assets (as  defined).  Management  believes,  as of
September 30, 1997,  that the Bank meets all capital  adequacy  requirements  to
which it is subject.

As of September 30, 1997,  and 1996, the most recent  notification  from the OTS
categorized the Bank as "well  capitalized"  under the regulatory  framework for
prompt  corrective  action.  To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below.  There are no  conditions  or events since that
notification that management believes have changed the institution's category.

The  Bank's  actual  regulatory  capital  amounts,  with  reconciliation  to the
Corporation's  investment in the Bank  determined in accordance  with  Generally
Accepted  Accounting  Principles  (GAAP),  and ratios, are also presented in the
tables below. <TABLE> <CAPTION>
                                                                                                                To Be Well
                                                                                                             Capitalized Under
                                                                                    For Capital              Prompt Corrective
                                                       Actual                    Adequacy Purposes           Action Provisions
                                                 ------------------------   ---------------------------- ------------------------
<S>                                              <C>               <C>         <C>               <C>     <C>             <C>
GAAP captial, September 30, 1997                 $  38,440
Add:  Unrealized losses on debt
        securities held for sale                       168
                                                 ----------
Tangible capital and ratio to
        adjusted total assets                    $  38,608         10.1%      $     5,754          1.5%
                                                 ------------------------   ----------------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                    $  38,608         10.1%      $    11,509          3.0%  $  19,181          5.0%
                                                 ------------------------   ---------------------------- ------------------------
Tier 1 capital and ratio to
        risk-weighted assets                     $  38,608         18.8%      $     8,221          4.0%  $  12,331          6.0%
                                                           --------------   ---------------------------- ------------------------
Tier 2 capital, allowance for loan losses              852
                                                 ----------
Total risk-based capital and ratio to
        risk-weighted assets, September 30, 1997 $  39,460         19.2%      $    16,523          8.0%  $  20,654         10.0%
                                                 ========================   ============================ ========================
</TABLE>

                                       33
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
                                                                                                                To Be Well
                                                                                                             Capitalized Under
                                                                                       For Capital           Prompt Corrective
                                                          Actual                    Adequacy Purposes        Action Provisions
                                                    ------------------------   ----------------------------  -----------------------
<S>                                                 <C>               <C>          <C>               <C>     <C>              <C>
GAAP captial, September 30, 1996                    $  38,856
Add:  Unrealized losses on debt
        securities held for sale                          383
                                                    ----------
Tangible capital and ratio to
        adjusted total assets                       $  39,239         11.3%      $     5,218          1.5%
                                                    ------------------------   ----------------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                       $  39,239         11.3%      $    10,436          3.0%   $  17,393          5.0%
                                                    ------------------------   ----------------------------  -----------------------
Tier 1 capital and ratio to
        risk-weighted assets                        $  39,239         22.3%      $     7,023          4.0%   $  10,534          6.0%
                                                              --------------   ----------------------------  -----------------------
Tier 2 capital, allowance for loan losses                 776
                                                    ----------
Total risk-based capital and ratio to
        risk-weighted assets, September 30, 1996    $  40,015         22.8%      $    14,046          8.0%   $  17,557         10.0%
                                                    ========================   ============================  =======================
</TABLE>


The Bank may not declare or pay cash dividends to the  Corporation if the effect
would be to reduce GAAP capital below applicable regulatory capital requirements
or  if  such  declaration  and  payment  would  otherwise   violate   regulatory
requirements.

   (13)    Concentration of Credit Risk (in thousands)

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

The  Corporation  had cash on deposit in a  financial  institution  in excess of
Federal deposit insurance limits of approximately $1,367 at September 30, 1997.

   (14)    Financial Instruments (in thousands)

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

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

Commitments  to extend  credit are unused  lines of credit and loan  commitments
which are  agreements  to lend to a customer as long as there is no violation of
any condition established in the contract.  Since some of the commitments may be
expected to expire without being drawn upon, the total commitment amounts do not
necessarily  represent  future  cash  requirements.   The  Bank  evaluates  each
customer's  creditworthiness  on a case-by-case  basis. The amount of collateral
obtained,  if it is deemed  necessary by the Bank upon  extension of credit,  is
based on management's  credit  evaluation of the  counterparty.  Collateral held
varies but may  include  accounts  receivable,  inventory,  property,  plant and
equipment, and income producing commercial properties. Standby letters of credit
are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit
is  essentially  the same as that  involved  in  extending  loan  facilities  to
customers.  Typically,  the Bank issues letters of credit to municipalities  and
generally does not require collateral for standby letters of credit.

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

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

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

A summary  of the  notional  amounts  of the  Bank's  financial  instruments  at
September 30, 1997 follows:

Commitments to extend credit                                $      18,264
Standby letters of credit
                                                                      118
Forward commitments to purchase loans
                                                                       80


The  carrying  value and fair value of the  Corporation's  financial  assets and
financial liabilities are as follows:
<TABLE>
<CAPTION>
                                                                                  September 30,
                                                 --------------------------------------------------------------------------------
                                                                  1997                                      1996
                                                 ---------------------------------------   --------------------------------------
                                                     Carrying               Fair              Carrying             Fair
                                                      Value                Value                Value              Value
                                                 --------------------------------------------------------------------------------
<S>                                              <C>              <C>                 <C>                   <C>
Financial assets:
Cash & cash equivalents                          $     6,135      $        6,135      $         11,756      $      11,756
Investment securities                                 58,187              57,376                62,580             59,857
Mortgage-backed and related securities                55,238              54,234                54,893             53,251
Loans held for sale                                      204                 220                   443                453
Loans receivable, net                                260,390             259,994               216,727            216,427
Accrued interest receivable                            2,436               2,436                 2,325              2,325

Financial liabilities:
Deposits                                             208,246             208,487               189,074            189,300
Borrowings                                           133,817             134,060               114,693            114,797
                                                                                              
</TABLE>


 (15)      Effects of New Financial Accounting Standards

SFAS No. 128, "Earnings per Share" - issued February 1997, establishes standards
for  computing and  presenting  earnings per share (EPS).  It  simplifies  prior
standards by replacing  primary earnings per share with basic earnings per share
and by altering the  calculation  of diluted EPS,  which  replaces fully diluted
EPS. SFAS No. 128 is effective for financial  statements  issued after  December
15, 1997, including interim periods.

SFAS No. 130, "Reporting  Comprehensive Income" - issued June 1997,  establishes
standards for reporting and displaying  comprehensive  income and its components
in  general-purpose  financial  statements.  Comprehensive  income  includes net
income and several other items that current  accounting  standards require to be
recognized  outside of net income.  This statement  requires entities to display
comprehensive  income  and its  components  in the  financial  statements,  with
presentation of the accumulated  balances of other comprehensive income reported
in stockholders' equity separately from retained earnings and additional paid-in
capital. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997.  Reclassification  of financial  statements  for earlier  periods that are
presented for comparative purposes is required.

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


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

 internally  by the
enterprise's  chief  operating  decision  maker in making  decisions  related to
resource  allocation  and segment  performance.  SFAS No. 131 is  effective  for
financial statements for years beginning after December 15, 1997.

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

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

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

                                     STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                                   September 30,
                                                                         ----------------------------------
 ASSETS                                                                       1997               1996
                                                                         ---------------    ---------------
<S>                                                                      <C>                <C>
      Cash and cash equivalents                                          $        1,412     $        3,772
      Investment securites available for sale                                       423                399
      Investment securities held to maturity                                      3,062              4,560
      Investment in Bank subsidiary                                              38,440             38,856
      Loan to Bank ESOP                                                           2,347              2,719
      Other assets                                                                   66                 76
                                                                         ---------------    ---------------
                                                                         $       45,750     $        50,382
                                                                         ===============    ===============
 LIABILITIES AND STOCKHOLDERS' EQUITY
      Other liabilities                                                  $           41     $           14

      Stockholders' equity:
          Common stock                                                              450                450
          Additional paid-in capital                                             43,334             43,150
          Unrealized gain on securities available for sale                           14                  1
          Treasury stock                                                        (20,267)           (13,095)
          Unearned MSP stock                                                     (1,108)            (1,398)
          Retained earnings                                                      23,286             21,260
                                                                         ---------------    ---------------
                    Total stockholders' equity                                   45,709             50,368
                                                                         ---------------    ---------------
                                                                         $       45,750     $       50,382
                                                                         ===============    ===============
</TABLE>

                               STATEMENT OF INCOME
<TABLE>
<CAPTION>
                                                                                       Years Ended September 30,
                                                                         -----------------------------------------------------
 Income:                                                                      1997               1996              1995
                                                                         ---------------    ---------------   ----------------
<S>                                                                      <C>                <C>               <C>
      Dividends from Bank subsidiary                                     $       4,202      $       3,500     $        1,686
      Interest from
          Bank's ESOP loan                                                          222                254                306
          Investments                                                               343                641              1,072
                                                                         ---------------    ---------------   ----------------
                                                                                  4,767              4,395              3,064

 Expense:
      Non-interest expense                                                          566                474                430
                                                                         ---------------    ---------------   ----------------
 Income before income taxes and equity in undistributed
    net income of Bank subsidiary                                                 4,201              3,921              2,634
 Income tax expense                                                                  (1)               154                380
                                                                         ---------------    ---------------   ----------------
                                                                                  4,202              3,767              2,254
 Equity (loss) in undistributed net income of Bank subsidiary                    (1,078)            (2,100)               371
                                                                         ---------------    ---------------   ----------------
 Net income                                                              $        3,124     $        1,667    $         2,625
                                                                         ===============    ===============   ================
</TABLE>
                                       36
<PAGE>
                       FSF FINANCIAL CORP. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


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

                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                       Years Ended September 30,
                                                                         -----------------------------------------------------
                                                                              1997               1996              1995
                                                                         ---------------    ---------------   ----------------
<S>                                                                      <C>                <C>               <C>
 Cash flows from operating activities:
      Net Income                                                         $        3,124     $        1,667    $         2,625
      Adjustments:
          (Equity) loss in undistributed net income of
             Bank subsidiary                                                      1,078              2,100               (371)
          (Increase) decrease in other assets                                        10                 97               (171)
          Increase (decrease)in other liabilities                                    27                 (7)                13
          Others                                                                    115                 85                  -
                                                                         ---------------    ---------------   ----------------
 Net cash provided by operations                                                  4,354              3,942              2,096
                                                                         ---------------    ---------------   ----------------

 Cash flows from investing activities:
      Proceeds from maturities of investments                                     1,500              8,650              1,000
      Purchase of investment securities                                               -             (2,559)           (12,088)
      Loan to ESOP                                                                    -                  -             (3,597)
      Purchase of subsidiary stock
                                                                                      -                  -            (21,735)
                                                                         ---------------    ---------------   ----------------

 Net cash provided by (used in) investing activities                              1,500              6,091            (36,420)
                                                                         ---------------    ---------------   ----------------

 Cash flows from financing activities:
      Net proceeds from sale of stock                                                 -                  -             43,519
      Payments received on ESOP bank loan                                           371                385                494
      Purchases of treasury stock                                                (7,245)           (10,559)            (2,589)
      Proceeds from sale of stock                                                    73                 52                 32
      Payments of cash dividends                                                 (1,413)            (1,758)            (1,513)
                                                                         ---------------    ---------------   ----------------
 Net cash provided by (used in) financing activities                             (8,214)           (11,880)            39,943
                                                                         ---------------    ---------------   ----------------

 Increase (decrease) in cash and cash equivalents                                (2,360)            (1,847)             5,619
 Cash and cash equivalents:
      Beginning of year                                                           3,772              5,619                  -
                                                                         ---------------    ---------------   ----------------
      End of year                                                        $        1,412     $        3,772    $         5,619
                                                                         ===============    ===============   ================
</TABLE>
                                       37
<PAGE>
                  Selected Quarterly Financial Data (Unaudited)
                    For Three Years Ended September 30, 1997
<TABLE>
<CAPTION>

                                                               First       Second        Third        Fourth
                                                              Quarter      Quarter      Quarter       Quarter       Year
                                                           ------------------------------------------------------------------
<S>                                                        <C>            <C>          <C>            <C>          <C>      
Fiscal 1997
 Interest income                                           $      6,564   $    6,728   $     6,933    $   7,090    $  27,315
 Interest expense                                                 3,886        4,011         4,104        4,345       16,346
                                                           ------------------------------------------------------------------
 Net Interest Income                                              2,678        2,717         2,829        2,745       10,969
 Provision for loan losses                                           30           30            30           30          120
 Gain on sale of assets                                               5           13            15           15           48
 Net income                                                $        722   $      725   $       823    $     854    $   3,124
 Primary earnings per share of common stock:
      Net income                                                   0.24         0.25          0.29         0.30         1.06
 Cash dividends declared per share                         $      0.125   $    0.125   $     0.125        0.125    $    0.50
 Market range:
      High bid                                             $      15.13   $    18.25   $     18.13    $   21.00    $   21.00
      Low bid                                              $      12.75   $    14.75   $     16.38    $   17.25    $   12.75

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

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


                                       38


<PAGE>
--------------------------------------------------------------------------------

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


                                Corporate Office

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



                               FIRST FEDERAL fsb
                               -----------------
                                Office Locations
<TABLE>
<CAPTION>


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


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


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


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


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

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

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

                                       39

<PAGE>


<TABLE>
<CAPTION>


                   Our Board of Directors and Management Team

                    Board of Directors of FSF Financial Corp.

<S>                                                                       <C>
Donald A. Glas, Co-Chair of the Board                                     George B. Loban, Co-Chair of the Board

Richard H. Burgart                                                        Carl O. Bretzke

James J. Caturia                                                          Jerome R. Dempsey

Sever B. Knutson                                                          Roger R. Stearns


                     Board of Directors of First Federal fsb

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

Richard H. Burgart                                                        Carl O. Bretzke

James J. Caturia                                                          Jerome R. Dempsey

Sever B. Knutson                                                          Roger R. Stearns



                    Executive Officers of FSF Financial Corp.
                              and First Federal fsb

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

Richard H. Burgart
Chief Financial Officer & Corporate Secretary

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

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

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


</TABLE>

                                       40