EXHIBIT 13

<PAGE>


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


Corporate Profile

FSF Financial Corp. (the "Corporation") is the holding company for First Federal
fsb  ("First  Federal")  and  Insurance  Planners.   Insurance  Planners  is  an
independent  property  and  casualty  insurance  agency  located in  Hutchinson,
Minnesota.   Additionally,  on  November  17,  1998,  the  Corporation  acquired
Homeowners Mortgage  Corporation  ("HMC"), a mortgage banking company located in
Vadnais  Heights,  Minnesota.  As of June  1,  2000,  HMC  became  an  operating
subsidiary of First Federal (the "Bank") following regulatory approval.

First  Federal's  business  consists  primarily of attracting  deposits from the
general  public and using such  deposits,  together  with  borrowings  and other
funds,  to make a variety of loans.  Deposits  with First Federal are insured by
the Federal Deposit Insurance Corporation to applicable limits. At September 30,
2000, First Federal operated 11 retail-banking offices in Minnesota.

Stock Market Information

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

The number of  stockholders  of record of common  stock as of the record date of
November 30, 2000,  was  approximately  444. This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage  firms. At November 30, 2000,  there were 2,393,955  shares issued and
outstanding.

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

                                       1
<PAGE>
<TABLE>
<CAPTION>

SELECTED FINANCIAL AND OTHER DATA FOR FSF FINANCIAL CORPORATION
-------------------------------------------------------------------------------------------------------------------


Financial Condition  (dollars in thousands)

----------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                   2000         1999         1998         1997         1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>          <C>          <C>           <C>
Total assets                                           $ 466,515    $ 418,094    $ 416,232    $ 388,135     $ 354,636
Loans held for sale                                        3,191        5,334        2,672          204           443
Loans receivable, net                                    341,813      278,290      280,603      260,390       216,727
Mortgage-backed securities                                26,986       27,587       36,418       38,539        38,557
Mortgage-backed securities available for sale             15,369       15,979       16,574       16,699        16,336
Debt securities                                           18,393       19,937       24,412       37,876        44,349
Debt securities available for sale                        12,728       12,794        3,010        1,000             -
Equity securities available for sale                      18,246       19,284       19,459       19,311        18,231
Cash and cash equivalents (1)                              8,482       19,265       22,597        6,135        11,756
Savings deposits                                         294,823      231,651      226,542      208,246       189,074
Other borrowings                                         127,500      140,967      144,177      133,817       114,693
Stockholders' equity                                      39,765       42,325       42,518       43,362        47,649

Summary of Operations  (dollars in thousands)

---------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                   2000         1999         1998         1997         1996
---------------------------------------------------------------------------------------------------------------------

Interest income                                         $ 32,877     $ 29,420     $ 29,981     $ 27,315     $ 23,244
Interest expense                                          19,753       18,198       18,499       16,346       13,609
Net interest income                                       13,124       11,222       11,482       10,969        9,635
Provision for loan losses                                    216          456          302          120           42
Non-interest income                                        4,825        5,259        2,269        1,510        1,354
Non-interest expense (2)                                  11,979       11,826        8,395        7,130        8,178
Net income (2)                                             3,504        2,505        3,030        3,124        1,668

Other Selected Data

----------------------------------------------------------------------------------------------------------------------
Year Ended September 30,                                   2000         1999         1998         1997         1996
----------------------------------------------------------------------------------------------------------------------

Return on average assets                                    0.81%        0.59%        0.74%        0.84%         0.69%
Return on average equity                                    8.54%        5.74%        6.94%        6.87%         4.25%
Average equity to average assets                            9.49%       10.26%       10.70%       12.25%        15.93%
Net interest rate spread (3)                                2.93%        2.39%        2.44%        2.54%         2.36%
Non-performing assets to total assets                       0.28%        0.13%        0.19%        0.15%         0.06%
Allowance for loan losses to total loans                    0.44%        0.48%        0.36%        0.33%         0.36%
Basic earnings per share                                 $  1.46      $  0.94      $  1.14      $  1.13       $  0.49
Diluted earnings per share                               $  1.43      $  0.90      $  1.05      $  1.04       $  0.47
Cash dividends declared per share                        $  0.50      $  0.50      $  0.50      $  0.50       $  0.50
Dividend payout ratio                                      34.40%       53.10%       44.80%       45.20%       105.40%
</TABLE>

(1)  Consists  of  cash  due from  banks,  interest-bearing  deposits and  other
     investments with original maturities of less than three months.
(2)  Includes a one time special  assessment of $1,030,000 to  recapitalize  the
     SAIF for the year ended September 30, 1996.
(3)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.

                                        2

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

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

General

The  Corporation  does not engage in any active  business.  The  earnings of the
Corporation  depend primarily on the Bank's net interest income, and to a lesser
extent,  income from its recently acquired wholly owned subsidiaries:  Insurance
Planners  (June 1998) and  Homeowners  Mortgage  (November  1998).  Net interest
income is affected by the interest  rates that the Bank  receives from its loans
and investments and by the interest rates that the Bank must pay for its sources
of funds. The difference  between average rates of interest earned on assets and
the  average  rate paid on  liabilities  is the  "interest  rate  spread".  When
interest-earning  assets  equal  or  exceed  interest-bearing  liabilities,  any
positive interest rate spread will produce net interest income.

In addition,  the Bank receives income from service charges on deposit accounts,
other service  charges and fees,  commission  income and income from the sale of
loans to the secondary market.  The Bank incurs expenses in addition to interest
expense  in the form of  salaries  and  benefits,  deposit  insurance,  property
operations and maintenance, advertising and other related business expenses.

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

Asset/Liability Management

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

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

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

Management  attempts  to  reduce  the  Bank's  interest  rate risk by the way it
structures its assets and liabilities. The Bank sells all fixed rate residential
mortgages  and  retains for its  portfolio,  residential  mortgages  with either
adjustable  interest rates or balloon  provisions.  These loans provide the Bank
with a repricing time frame that is  substantially  shorter than the contractual
term.  During the 2000 fiscal year,
                                       4
<PAGE>

the Bank originated  $2.2 million of single family  mortgage  loans,  which have
initial fixed rates for terms of one to ten years and then adjust annually off a
treasury  index  thereafter.  The Bank also  originated  $3.0  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 $102.1 million. At September
30, 2000, $138.7 million of real estate mortgages were adjustable rate,  balloon
or construction and land development  loans,  representing  40.2% of total loans
and 29.7% of total assets.

Interest  rate  sensitivity  is the result of  differences  in the  amounts  and
repricing dates of rate sensitive assets and rate sensitive  liabilities.  These
differences,  or interest  rate  repricing  "GAP,"  provide an indication of the
extent to which  the net  interest  income is  affected  by  future  changes  in
interest  rates.  A GAP is considered  positive when the amount of interest rate
sensitive assets exceed the amount of interest rate sensitive liabilities. A GAP
is considered  negative when the amount of interest rate  sensitive  liabilities
exceed  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,  2000,  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                                   $ 86,933     $ 89,234      $ 33,483      $ 29,500     $239,150
   Other loans                                        65,337       68,726         8,214         2,687      144,964
   Investment securities                              31,745       21,351         2,016        45,092      100,204
                                                ------------- ------------ ------------- ------------- ------------
Total interest-earning assets                        184,015      179,311        43,713        77,279      484,318
                                                ------------- ------------ ------------- ------------- ------------

Interest-bearing liabilities:
   Non-interest bearing deposits                      17,294            -             -             -       17,294
   NOW and Super now accounts                         14,744        3,459             -             -       18,203
   Savings accounts                                   71,277        8,810             -             -       80,087
   Money market deposit accounts                       1,306          161             -             -        1,467
   Certificates                                      133,762       41,607         2,403             -      177,772
   Other borrowed money                               35,000       25,500        67,000             -      127,500
                                                ------------- ------------ ------------- ------------- ------------
Total interest-bearing liabilities                   273,383       79,537        69,403             -      422,323
                                                ------------- ------------ ------------- ------------- ------------

Interest sensitivity gap                          $  (89,368)    $ 99,774    $  (25,690)     $ 77,279     $ 61,995
                                                ============= ============ ============= ============= ============

Cumulative interest sensitivity gap               $  (89,368)    $ 10,406    $  (15,284)     $ 61,995
                                                ============= ============ ============= =============

Cumulative ratio of interest-earning assets
   to interest-bearing liabilities                      0.67%        1.03%         0.96%         1.15%
                                                ============= ============ ============= =============

Cumulative ratio of cumulative interest
   sensitivity gap to total assets.                   -19.16%        2.23%        -3.28%        13.29%
                                                ============= ============ ============= =============

</TABLE>
                                       5
<PAGE>

The  table  on  the  preceding   page   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 6.0%,  mortgages held for sale are all set to
reprice in three years or less, while remaining  mortgages have prepayment rates
ranging  from 4.0% to  10.0%.  Consumer  loans  have a  prepayment  rate that is
constant  over time at 19.0%,  NOW  checking,  core  savings  deposits and money
market deposits have an increasing decay ranging from 6.0% to 30.0%.  Management
utilizes  its own  assumptions  and  feels  that  these  assumptions  provide  a
reasonable estimate of actual experience.

Certain  shortcomings  are  inherent in the method of analysis  presented in the
previous table.  For example,  although  certain assets and liabilities may have
similar maturities or periods of repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Additionally,  certain  assets,  such as adjustable rate mortgage loans,
have features that 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 2000 have changed when compared to fiscal 1999.
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 ("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.

                                       6
<PAGE>

The  following  table  sets forth the  present  value  estimates  of the Bank at
September 30, 2000,  as calculated by its NPV Model.  The table shows the NPV of
the Bank under rate shock  scenarios of -300 to +300 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                       Net Portfolio Change                       NPV as % of Assets
     Rates in Basis               ---------------------------------------------    -------------------------------
    Points (Rate Shock)            $ Amount        $ Change         Change %        NPV Ratio          Change
                                  ------------    ------------    -------------    ------------    ---------------
                                             (Dollars in thousands)

<S>     <C>                     <C>             <C>               <C>                <C>            <C>
          +300 bp                  $ 30,721        $(6,268)          (16.47) %          6.72 %         (120)bp
          +200 bp                    32,697         (4,292)          (11.28)            7.11            (81)bp
          +100 bp                    34,782         (2,207)           (5.80)            7.50            (42)bp
             0 bp                    36,989              -                -             7.92              -
          -100 bp                    39,336           2,347             6.17            8.36             44 bp
          -200 bp                    41,841           4,852            12.75            8.82             90 bp
          -300 bp                    44,528           7,539            19.81            9.31            139 bp
</TABLE>

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

                                       7

<PAGE>

Rate/Volume Analysis

The table below sets forth  certain  information  regarding  changes in interest
income and interest  expense of the Corporation 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) and (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
                                        ---------   -------- ----------- --------
                                                     (In Thousands)
<S>                                    <C>        <C>        <C>        <C>
Year Ended September 30, 2000 vs 1999:
Interest income:
   Loans Receivable                      $ 1,228    $ 2,824    $   184    $ 4,236
   Mortgage-backed securities                545       (161)       (34)       350
   Investment securities                     519     (1,469)      (179)    (1,129)
                                         -------    -------    -------    -------
      Total change in interest income      2,292      1,194        (29)     3,457

Interest expense:
   Savings accounts                          622        691         62      1,375
   FHLB Borrowings                           616       (405)       (31)       180
                                         -------    -------    -------    -------
      Total change in interest expense     1,238        286         31      1,555
                                         -------    -------    -------    -------
Net change in net interest income        $ 1,054    $   908    $   (60)   $ 1,902
                                         =======    =======    =======    =======

Year Ended September 30, 1999 vs 1998:
Interest income:
   Loans Receivable                      $  (488)   $  (165)   $     2    $  (651)
   Mortgage-backed securities               (279)      (454)        45       (688)
   Investment securities                    (319)     1,210       (113)       778
                                         -------    -------    -------    -------
      Total change in interest income     (1,086)       591        (66)      (561)

Interest expense:
   Savings accounts                         (611)       796        (34)       151
   FHLB Borrowings                          (460)        18        (10)      (452)
                                         -------    -------    -------    -------
      Total change in interest expense    (1,071)       814        (44)      (301)
                                         -------    -------    -------    -------
Net change in net interest income        $   (15)   $  (223)   $   (22)   $  (260)
                                         =======    =======    =======    =======
</TABLE>

                                       8
<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,
                                           --------------------------------------------------------------------------------------
                                               2000                           1999                         1998
                                           ---------------------------------------------------------------------- ----------------
                                                                Average                         Average                     Average
                                             Average  Income/    Yield/     Average    Income/   Yield/   Average  Income/  Yield/
                                             Balance  Expense     Cost      Balance    Expense    Cost    Balance  Expense   Cost
                                           ---------------------------------------------------------------------- --------- -------
Interest-Earning Assets                      (in thousands)                     (in thousands)               (In thousands)
<S>                                       <C>       <C>         <C>       <C>        <C>         <C>   <C>        <C>      <C>
   Loans receivable (1)                    $ 308,721 $  27,097   8.78%     $ 274,676  $  22,861   8.32% $ 276,730  $23,512   8.50%
   Mortgage-backed securities                 43,224     2,668   6.17%        46,398      2,318   5.00%    54,657    3,006   5.50%
   Investment securities (2)                  57,508     3,112   5.41%        87,987      4,241   4.82%    65,238    3,463   5.31%
                                           --------------------        -------------------------        --------- ---------
      Total interest-earning assets          409,453    32,877   8.03%       409,061     29,420   7.19%   396,625   29,981   7.56%
                                           --------------------        -------------------------        --------- ---------

Interest-Bearing Liabilities
   NOW and money market accounts           $  33,727       259   0.77%     $  31,670        289   0.91% $  28,626      407   1.42%
   Passbook savings                           73,422     3,110   4.24%        58,463      1,896   3.24%    50,699    1,690   3.33%
   Certificates of deposit                   141,686     8,239   5.81%       142,811      8,048   5.64%   136,407    7,985   5.85%
                                           --------------------        -------------------------        --------- ---------
      Total deposits                         248,835    11,608   4.66%       232,944     10,233   4.39%   215,732   10,082   4.67%
   FHLB advances and other borrowed funds    138,213     8,145   5.89%       145,690      7,965   5.47%   145,459    8,417   5.79%
                                           --------------------        -------------------------        --------- ---------
      Total interest-bearing liabilities     387,048    19,753   5.10%       378,634     18,198   4.81%   361,191   18,499   5.12%
                                           --------------------        -------------------------        --------- ---------
Net Interest Income                                  $  13,124                        $  11,222                    $11,482
                                                     ==========                      ===========                   ========
Net Interest Rate Spread  (3)                                    2.93%                            2.39%                      2.44%
Net Interest Rate Margin  (4)                                    3.21%                            2.74%                      2.89%
Ratio of average interest-earning assets
  to average interest-bearing liabilities      1.06x                           1.10x                        1.11x
                                           ==========                  ==============                   ==========
</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.

                                       9
<PAGE>

Changes in Financial Condition

General
Total assets  increased  from $418.1  million at September  30, 1999,  to $466.5
million at September 30, 2000,  an increase of $48.4 million or 11.6%.  The Bank
and HMC  continued  to  experience  good demand for loans and  supplemented  the
internal loan originations ($262.7 million) with purchases of other loans ($32.4
million) that met the interest rate risk and credit risk criteria established by
management.

Securities Available for Sale
Equity  securities  decreased  by $1.0  million  due to the sale of excess  FHLB
stock.  Mortgage-backed  and related securities  available for sale decreased by
$610,000 during the 2000 fiscal year as a result of a reduction in market value.
Debt securities available for sale decreased $66,000, also due to a reduction in
market  value.  The net  unrealized  losses  on  securities  available  for sale
increased  from $1.3 million at September 30, 1999, to $1.8 million at September
30,  2000.  This  increase  was  primarily  due to the market  rate of  interest
increasing compared to the contractual rate of interest.

Securities Held to Maturity
Debt securities  held to maturity  decreased from $19.9 million to $18.4 million
at September 30, 2000, due to  maturities.  Mortgage-backed  securities  held to
maturity  decreased  from $27.6 million to $27.0 million during fiscal 2000, due
to  principal  repayments.  The net  unrealized  losses  on  securities  held to
maturity  increased  from $2.2 million at September 30, 1999, to $3.3 million at
September 30, 2000.  These  increases  were  primarily due to the market rate of
interest increasing compared to the contractual rate.

Loans Held for Sale
Net loans held for sale  decreased  from $5.3 million at September  30, 1999, to
$3.2 million at September  30, 2000.  The Bank and HMC had firm  commitments  to
sell these loans held for sale that were closed by September 30, 2000.

Loans Receivable
Net loans  receivable  increased  from $278.3  million at September 30, 1999, to
$341.8  million  at  September  30,  2000,  primarily  due  to  an  increase  in
originations of construction and consumer loans. This increase of $63.5 million,
or 22.8%,  was  comprised  of a  decline  in one to four  family  loans of $17.7
million.  This was partially  offset by increases in other real estate mortgages
($14.3  million),  net  construction  loans ($38.8  million),  consumer and home
equity loans ($28.7 million) and agricultural loans ($10.4 million).

The  composition  of the loans  originated  was  indicative of the change in the
Corporation's  loan  portfolio.  During the last five years,  one to four family
residential  mortgages  decreased from 64.7% of all loans to 26.3%. The interest
rate risk profile of residential  mortgages causes the Bank to sell the majority
of such loans in the secondary market. The diversification of the loan portfolio
had a positive  impact on the average  yield,  which  increased to 8.78% for the
year ended  September  30,  2000,  as compared  to 8.32% in the prior year.  See
"Average Balances".

Deposits
Total deposits increased by $63.2 million, or 27.3% during the 2000 fiscal year.
The  increase  in deposits  was  attributed  to an increase in savings  accounts
($14.5 million), an increase in demand deposits ($4.0 million) and a decrease in
certificates  of deposit  ($44.6  million).  The increase in total  deposits was
accompanied  by an increase in the weighted  average cost of funds from 4.39% to
4.66%  for the years  ended  September  30,  1999 and  2000,  respectively.  The
increase in cost is primarily  attributable  to the change in the composition of
deposits.

Borrowings
In addition to growth in deposits, borrowings may be utilized to fund the growth
in assets.  Management  utilizes a least  cost at the  margin  approach  to fund
assets.  As a  result,  borrowings  are  utilized  as a funding  source  when it
provides  the least cost at the margin.  FHLB  advances are used to fund lending
and investment activities,  withdrawals from deposit accounts and other ordinary
business activity.  Borrowings  decreased by $13.5 million dollars during fiscal
2000  due to  principal  payments.  The  Bank  was  able  to  fund  lending  and
investments with loan repayments and deposit growth.

                                       10
<PAGE>

Stockholders' Equity
At September 30, 2000,  total  stockholders'  equity  decreased  $2.5 million to
$39.8  million  from $42.3  million at  September  30,  1999.  The  decrease was
primarily  due to  stock  repurchases  of  approximately  400,000  shares  at an
aggregate cost of $4.9 million ($12.34 average price per share), a $458,000 loss
in accumulated  other  comprehensive  income and dividends paid of $1.2 million.
Such decreases in stockholders' equity were offset by net income of $3.5 million
for the period.

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

Comparison of Years Ended September 30, 2000 and 1999

Net Income
Net income increased to $3.5 million for the year ended September 30, 2000, from
$2.5 million for the year ended  September 30, 1999.  The increase was primarily
due to an increase in net interest income of $1.9 million.

Interest Income
Total interest income increased $3.5 million to $32.9 million for the year ended
September 30, 2000,  from $29.4  million for the year ended  September 30, 1999.
Interest  income on loans  increased by $4.2 million from $22.9  million for the
year ended September 30, 1999, to $27.1 million for the year ended September 30,
2000.  This was a result of a $34.0 million  increase in the average  balance of
loans receivable from $274.7 million at September 30, 1999, to $308.7 million at
September  30, 2000.  Furthermore,  the average  yield  increased  from 8.32% at
September  30,  1999,  to  8.77% at  September  30,  2000.  Interest  income  on
mortgage-backed  securities  increased  from  $2.3  million  for the year  ended
September 30, 1999, to $2.7 million for the year ended  September 30, 2000.  The
increase was  primarily the result of an increase in average rate from 5.00% for
the 1999 fiscal year to 6.17% for the 2000 fiscal year.  The average  balance of
investment  securities decreased by $30.5 million during the fiscal year and the
yield  increased  from  4.82% to  5.41%.  The yield on  interest-earning  assets
increased  from 7.19% for the year ended  September  30, 1999,  to 8.03% for the
year ended September 30, 2000.  Interest  income  increased by $1.2 million as a
result of  increased  volume  during the year while the changes in rates  caused
interest income to increase by $2.3 million and the rate/volume change decreased
interest income by $29,000.

Interest Expense
Total interest expense  increased to $19.8 million for 2000 the 2000 fiscal year
from $18.2  million for the 1999 fiscal  year,  as 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
$691,000,  while the  increase  associated  with a change in interest  rates was
approximately  $622,000.  The cost  associated  with  interest-bearing  deposits
increased  from 4.39% for the year ended  September  30, 1999,  to 4.66% for the
same period ended  September 30, 2000. The cost  associated  with borrowed funds
increased to 5.89% for fiscal 2000  compared to 5.47% for fiscal 1999.  $616,000
of the  increase  in the cost of  borrowed  funds was a result of  increases  in
rates, while increased volumes reduced interest expense by $405,000, and $31,000
of the decrease was rate/volume related.

Net Interest Income
Net interest income increased $1.9 million during the 2000 fiscal year.  Changes
in interest  rates  caused an increase in net interest  income of $1.1  million.
Volumes  accounted  for an increase  in net  interest  income of $908,000  while
rate/volume differences decreased $60,000.

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

                                       11
<PAGE>

ability to pay. The allowance for loan losses is established through a provision
for loan losses charged to expense.

The  Bank's  loan loss  provision  decreased  from  $456,000  for the year ended
September  30, 1999,  to $216,000  for the year ended  September  30, 2000.  The
Bank's  allowance  for loan losses was $1.5 million at September  30, 2000.  The
allowance for loan losses  represents 0.44% of total loans outstanding and 1.17%
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  decreased  by $434,000 to $4.8 million for the year
ended  September  30, 2000,  from $5.3 million for the year ended  September 30,
1999. HMC was acquired on November 17, 1998, and as a result,  the  consolidated
statements of income reflect twelve full months of income and expense for HMC in
fiscal  2000 but only ten and a half  months of income  and  expense  for fiscal
1999.  Gains on loans sold  decreased  from $2.3 million for fiscal year 1999 to
$1.2 million for fiscal year 2000 and other service  charges and fees  decreased
from  $801,000 for the year ended  September  30, 1999, to $765,000 for the year
ended  September 30, 2000,  primarily due to rising  interest  rates that slowed
down the purchase and refinance markets.  Continued  increases in interest rates
could  affect the  ability to  generate  new loans.  Service  charges on deposit
accounts increased $294,000 during the periods compared, due to a combination of
an  increase  in the number of  accounts  affected  and an  increase in the fees
associated with deposit accounts.

Non-interest Expense
Total  non-interest  expense  increased 1.7% to $12.0 million for the year ended
September 30, 2000,  from $11.8  million for the year ended  September 30, 1999.
Compensation and benefits  decreased  $158,000 from $7.4 million for fiscal 1999
to $7.2 million for fiscal  2000.  Occupancy  and  equipment  expense  increased
$93,000,  while deposit insurance premiums decreased $63,000.  Professional fees
increased  from  $276,000 for fiscal year 1999 to $378,000 for fiscal year 2000.
Data processing increased $45,000 to $689,000 for the period ended September 30,
2000, due to processing expense associated with increased delivery of electronic
services  to  customers,  the  introduction  of  agricultural  lending  and  the
expansion  of  commercial  lending.  Goodwill  amortization  during the year was
$91,000 for HMC and $27,000 for the Agency.

Income Tax Expense
Income tax expense  increased to $2.3 million for the year ended  September  30,
2000,  from $1.7 million for the year ended September 30, 1999. The increase was
primarily due to a gain in pre-tax income of $1.6 million.

Comparison of Years Ended September 30, 1999 and 1998

Net Income
Net income decreased to $2.5 million for the year ended September 30, 1999, from
$3.0 million for the year ended  September 30, 1998.  The decrease was primarily
due to an increase in non-interest expense and non-interest income, the majority
of which was attributable to the acquisition of the Agency and HMC.

Interest Income
Total  interest  income  decreased  $561,000 to $29.4 million for the year ended
September 30, 1999,  from $30.0  million for the year ended  September 30, 1998.
Interest  income on loans  decreased by $651,000 from $23.5 million for the year
ended  September  30, 1998,  to $22.9  million for the year ended  September 30,
1999,  as a result of a $2.0  million  decrease in the average  balance of loans
receivable  from $276.7  million at  September  30, 1998,  to $274.7  million at
September  30, 1999.  Furthermore,  the average  yield  decreased  from 8.50% at
September  30,  1998,  to  8.32% at  September  30,  1999.  Interest  income  on
mortgage-backed  securities  decreased  from  $3.0  million  for the year  ended
September 30, 1998, to $2.3 million for the year ended  September 30, 1999.  The
decrease was  primarily  the result of a decrease in average rate from 5.50% for
the 1998  fiscal  year to 5.00% for the 1999  fiscal  year and a decrease in the
average balance of $8.3 million.  The average  balance of investment  securities
increased by $22.7 million  during the fiscal year and the yield  decreased from
5.31% to 4.82% The decrease in yield for  investment  securities  was  primarily
impacted by maturities and the exercise of call options by issuers. The yield on
interest  earning assets  decreased from 7.56% for the year ended  September 30,
1998, to 7.19% for the year ended September 30, 1999.  Interest income increased
by $591,000 as a result of increased volume

                                       12
<PAGE>

during the year while the changes in rates caused interest income to decrease by
$1.1 million and the rate/volume change decreased interest income by $66,000.

Interest Expense
Total interest expense decreased to $18.2 million during 1999 from $18.5 million
in 1998 as the average balance of total interest bearing  liabilities  increased
and  the  average  cost of  funds  decreased.  The  increased  cost of  deposits
attendant  to the  growth  of  balances  was  approximately  $796,000  while the
decrease associated with a change in interest rates was approximately  $611,000.
The cost associated with interest bearing deposits  decreased from 4.67% for the
year ended  September 30, 1998, to 4.39% for the same period ended September 30,
1999. The cost associated with borrowed funds decreased to 5.47% for fiscal 1999
compared  to 5.79% for fiscal  1998.  $460,000  of the  decrease  in the cost of
borrowed funds was a result of decreases in rates, while increased volumes added
$18,000 in interest expense and $10,000 of the decrease was rate/volume related.

Net Interest Income
Net  interest  income  decreased  $260,000.  Changes in interest  rates caused a
decrease in net interest income of $15,000,  volumes accounted for a decrease in
net interest income of $223,000 and rate/volume differences decreased $22,000.

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  $302,000  for the year ended
September  30, 1998, to $456,000 for the year ended  September 30, 1999,  due to
the change in composition of the loan portfolio.  The Bank's  allowance for loan
losses was  $1,387,000  at September  30, 1999.  The  allowance  for loan losses
represents 0.48% of total loans  outstanding and 252.2% 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
Non-interest  income and  non-interest  expense were impacted by acquisitions in
two ways:  (1) only 4 months of income and expense for the Agency were  included
in fiscal 1998 and (2) 10 1/2 months of income and expense for HMC are  included
in fiscal  1999,  that  were not  present  in 1998.  Total  non-interest  income
increased by $3.0 million to $5.3 million for the year ended September 30, 1999,
from $2.3  million for the year ended  September  30,  1998.  The Agency and HMC
accounted for  approximately  $2.7 million of the increase.  Gains on loans sold
increased  from  $360,000 in the 1998  fiscal  year to $2.3  million in the 1999
fiscal year.  The gains are a result of fixed rate  mortgages  that were sold in
the secondary  market  because they do not fit the interest rate risk profile of
the Bank and also the addition of HMC. Other service  charges and fees increased
from  $457,000 for the year ended  September  30, 1998, to $801,000 for the year
ended September 30, 1999. Service charges on deposit accounts increased $146,000
during the periods compared as a result of an increase in the number of accounts
affected,  and to a lesser degree,  by an increase in the fees  associated  with
deposit  accounts.  Commission income increased from $543,000 for the year ended
September 30, 1998, to $946,000 for the year ended September 30, 1999.  $381,000
of the increase was a result of having the Agency for a full year.

Non-interest Expense
Total  non-interest  expense  increased  to $11.8  million  for the  year  ended
September 30, 1999,  from $8.4 million for the year ended September 30, 1998, or
40.5%.  The Agency and HMC  accounted  for  approximately  $2.6  million of this
increase.  Compensation and benefits increased from $5.4 million to $7.4 million
or 37.0%,  due to the acquisition of HMC ($1.6  million),  a full year's expense
for the Agency  ($278,000) and merit increases,  which averaged 4.5%.  Occupancy
and  equipment  expense  increased  $467,000,  and  deposit  insurance  premiums
increased $3,000. Professional fees increased from $258,000 for fiscal year 1998
to $276,000 for fiscal year 1999. Data processing increased $152,000 to $644,000
for the period ended  September 30, 1999, due to processing  expense  associated
with

                                       13
<PAGE>

increased  delivery of electronic  services to customers,  the  introduction  of
agricultural  lending and the  expansion of  commercial  lending and to a lesser
extent,  as a result of the costs  associated with the  Corporation's  Year 2000
compliance  program.  Goodwill  amortization during the year was $79,000 for HMC
and $26,000 for the Agency.

Income Tax Expense
Income tax expense  decreased to $1.7 million for the year ended  September  30,
1999,  from $2.0 million for the year ended September 30, 1998. The decrease was
primarily due to a reduction in pre-tax income of $855,000.

Liquidity and Capital Resources

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

Operating  activities  provided  cash of $6.9  million,  $7.0  million  and $1.3
million during the years ended September 30, 2000, 1999 and 1998,  respectively.
In fiscal 1998 and 1997,  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 1997,  which was paid out in fiscal 1998.
In fiscal 2000, the cash flow in operating  activities was influenced  primarily
by the change in loans held for sale and other liabilities.

Investing  activities  used $61.0 million,  $2.4 million and $8.0 million during
the years ended September 30, 2000,  1999 and 1998. The primary  activity of the
Bank  is  originating  and  purchasing  loans  and  purchasing   investment  and
mortgage-backed  securities.  The  primary  activity of HMC is  originating  and
selling loans in the secondary mortgage market. During the years ended September
30,  2000,  1999 and 1998,  the  Corporation  originated  loans in the amount of
$262.7 million ($72.9 million were originated by HMC), $260.7 million and $147.6
million.  The net loan  originations and principal  payments on loans used $32.3
million in 2000,  while  providing  $40.0 million and using $9.9 million in 1999
and 1998,  respectively.  The  increase  in 1999 was a result of  prepayment  on
mortgage loans refinancing elsewhere. The purchases of loans used $32.4 million,
$40.9  million and $10.8  million in fiscal year 2000,  1999 and 1998,  and were
largely  comprised of commercial  business loans that represented  participation
interest with other financial  institutions.  The Bank also sold a participation
in a  non-residential  loan in  fiscal  year  2000 for  $851,000.  Purchases  of
investment and mortgage-backed  securities held to maturity used $1.2 million in
1999. Maturities,  principal payments and the exercise of call provisions by the
issuers of such  securities  provided  $2.2  million,  $14.5  million  and $15.6
million for the years ended  September  30,  2000,  1999 and 1998.  Purchases of
investment  securities  available for sale used $50,000,  $13.0 million and $3.7
million.  Maturities  and the exercise of call  provision by the issuers of such
securities  provided  $0,  $3.0  million  and $1.0  million  for the years ended
September 30, 2000, 1999 and 1998. Other investment  activities included sale of
REO property,  purchase of equipment and property  improvements and the net cash
acquisition of HMC. For the fiscal year 1999, the Bank acquired  corporate owned
insurance policies in the amount of $5.5 million.

For the year ended  September 30, 2000,  $63.2 million in cash was provided as a
result of an  increase in  deposits  and $13.5  million in cash was paid on FHLB
advances. The purchase of treasury stock and dividends on common stock used $5.0
million and $1.2 million,  respectively.  During the fiscal year ended September
30,  1999,  $5.1  million in cash was  provided  as a result of an  increase  in
deposits  and $3.2  million  was used to pay off  borrowings.  The  purchase  of
treasury stock used $2.9 million and dividends on common stock used $1.3 million
during the 1999 fiscal year.  Basic and diluted  earnings per share for the year
ended  September 30, 2000, were $1.46 and $1.43,  correspondingly.  A portion of
the earnings per share was a result of the purchase of treasury stock during the
fiscal year.  Financing  activities provided $43.4 million during the year ended
September  30, 2000.  Those same  activities  used $7.9 million  during the year
ended  September  30, 1999,  and provided  $23.2 million in cash during the year
ended September 30, 1998.  Financing  activities in the  foreseeable  future are
expected to primarily  include changes in deposits and advances from FHLB of Des
Moines,  and to a lesser  extent,  the  repurchase  of  treasury  shares and the
payment of dividends. See Consolidated Statements of Cash Flow for FSF Financial
Corp. and Subsidiary.

                                       14
<PAGE>

The Bank's  liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits and other cash outflows in an efficient and cost  effective  manner.
The Bank's primary sources of funds are deposits and scheduled  amortization and
prepayments of loans and  mortgage-backed  security  principal.  During the past
several  years,  the Bank has used such funds  primarily to fund  maturing  time
deposits, to pay savings withdrawals,  to fund lending commitments,  to purchase
new  investments  and to  increase  liquidity.  The Bank  funds  its  operations
internally  and as needed with borrowed funds from the FHLB. As of September 30,
2000,  such  borrowed  funds  totaled  $127.5  million.  While loan  repayments,
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 mandated  under federal  regulations to maintain  certain  specified
levels of "liquid  investments,"  which include certain United States Government
obligations and other approved investments. In December of 1997, the OTS reduced
the  requirement  for banks to maintain  liquid assets at, from 5.0% to not less
than 4.0% of its net  withdrawable  accounts  plus  short term  borrowings.  The
Bank's  regulatory  liquidity was 9.03%,  13.3% and 6.05% at September 30, 2000,
1999 and 1998,  respectively.  The options from the previous method were used in
the current period, which are more restrictive.

The amount of  certificate  accounts  that are  scheduled  to mature  during the
twelve months ending September 30, 2001, is approximately $133.8 million. To the
extent  that these  deposits do not remain at the Bank upon  maturity,  the Bank
believes that it can replace these funds with deposits, current excess liquidity
and FHLB advances or outside borrowings.  It has been the Bank's experience that
substantial portions of such maturing deposits remain at the Bank.

At September  30, 2000,  the Bank and HMC had  commitments  to extend  credit of
$38.1 million.  Funds required to fill these  commitments are derived  primarily
from FHLB borrowings,  current excess liquidity,  deposit inflows, loan sales or
loan and security repayments.

OTS regulations  require the Bank to maintain core capital of 4.0% of assets, of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required  to  maintain  risk-based  capital  equal to 8.0% of  total  risk-based
assets.  The Bank's  regulatory  capital  exceeded its tangible  equity,  tier 1
(risk- based), tier 1 (core) and risk-based capital  requirements by 6.2%, 3.7%,
6.9% and 2.9%, respectively.

The Bank's  risk-based  capital  decreased  from $37.6  million to $36.1 million
during the year ended  September  30, 2000.  This was  primarily due to the $6.0
million dividend paid by the Bank to the Corporation less the Bank's earnings of
$3.9 million and the Corporation's non-cash capital contribution transfering HMC
to the Bank of $1.1 million.

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.  These require the  measurement  of
financial position and operating results in terms of historical dollars, without
consideration  for changes in the relative  purchasing  power of money over time
caused by inflation.

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

                                       15
<PAGE>

INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------





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

We have audited the accompanying  consolidated statements of financial condition
of FSF Financial Corp. and  Subsidiaries  (the  Corporation) as of September 30,
2000, and 1999, 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,  2000.   These   financial   statements  are  the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

 In our opinion the financial  statements  referred to above present fairly,  in
all material  respects,  the  consolidated  financial  position of FSF Financial
Corp. and  Subsidiaries as of September 30, 2000, and 1999, and the consolidated
results of their operations and their cash flows for each of the fiscal years in
the  three-year  period ended  September 30, 2000, in conformity  with generally
accepted accounting principles.





/s/Bertram Cooper & Co., LLP

Bertram Cooper & Co., LLP
Waseca, Minnesota
October 25, 2000

                                       16
<PAGE>
<TABLE>
<CAPTION>

FSF FINANCIAL CORP. AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------

                                                                                                 September 30,
                                                                                    ------------------------------------
                                                                                             2000              1999
                                                                                    ------------------------------------
                                     ASSETS
                                     ------
<S>                                                                                       <C>              <C>
Cash and cash equivalents                                                                  $    8,482       $    19,265
Securities available for sale, at fair value:
   Equity securities                                                                           18,246            19,284
   Mortgage-backed and related securities                                                      15,369            15,979
   Debt securities                                                                             12,728            12,794
Securities held to maturity, at amortized cost:
   Debt securities (Fair value of $16,974 and $18,999)                                         18,393            19,937
   Mortgage-backed and related securities (Fair value of $25,145 and $26,338)                  26,986            27,587
Loans held for sale                                                                             3,191             5,334
Loan receivable, net                                                                          341,813           278,290
Foreclosed real estate                                                                            321               323
Accrued interest receivable                                                                     4,432             3,328
Premises and equipment                                                                          5,514             5,314
Other assets                                                                                   11,040            10,659
                                                                                    ------------------------------------
          Total Assets                                                                    $   466,515       $   418,094
                                                                                    ====================================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
Liabilities:
     Demand deposits                                                                      $    36,964       $    32,952
     Savings accounts                                                                          80,087            65,554
     Certificates of deposit                                                                  177,772           133,145
                                                                                    ------------------------------------
          Total deposits                                                                      294,823           231,651
     Federal Home Loan Bank borrowings                                                        127,500           140,967
     Advances from borrowers for taxes and insurance                                              658               669
     Other liabilities                                                                          3,769             2,482
                                                                                    ------------------------------------
          Total liabilities                                                                   426,750           375,769

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                                                                43,391            43,292
     Retained earnings, substantially restricted                                               28,925            26,627
     Treasury stock at cost (2,094,822 and 1,695,390 shares)                                  (29,504)          (24,575)
     Unearned ESOP shares at cost (126,823 and 162,798 shares)                                 (1,268)           (1,628)
     Unearned MSP stock grants at cost (42,964 and 49,825 shares)                                (458)             (528)
     Accumulated other comprehensive (loss)                                                    (1,771)           (1,313)
                                                                                    ------------------------------------
          Total stockholders' equity                                                           39,765            42,325
                                                                                    ------------------------------------
          Total Liabilities and Stockholders' Equity                                      $   466,515       $   418,094
                                                                                    ====================================
</TABLE>
         The accompanying notes are an integral part of these statements

                                       17
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
                                                                                 Years Ended September 30,
                                                                         -------------------------------------------
                                                                                 2000           1999          1998
                                                                         -------------------------------------------
<S>                                                                        <C>            <C>           <C>
Interest income:
     Loans receivable                                                        $  27,097      $  22,861     $  23,512
     Mortgage-backed and related securities                                      2,668          2,318         3,006
     Investment securities                                                       3,112          4,241         3,463
                                                                         -------------------------------------------
          Total interest income                                                 32,877         29,420        29,981
                                                                         -------------------------------------------
Interest expense:
     Deposits                                                                   11,608         10,233        10,082
     Borrowed funds                                                              8,145          7,965         8,417
                                                                         -------------------------------------------
          Total interest expense                                                19,753         18,198        18,499
                                                                         -------------------------------------------
          Net interest income                                                   13,124         11,222        11,482
     Provision for loan losses                                                     216            456           302
                                                                         -------------------------------------------
          Net interest income after provision for loan losses                   12,908         10,766        11,180
                                                                         -------------------------------------------
Non-interest income:
     Gain (loss) on loans - net                                                  1,197          2,341           360
     Other service charges and fees                                                765            801           457
     Service charges on deposit accounts                                         1,262            968           822
     Commission income                                                           1,108            946           543
     Other                                                                         493            203            87
                                                                         -------------------------------------------
          Total non-interest income                                              4,825          5,259         2,269
                                                                         -------------------------------------------
Non-interest expense:
     Compensation and benefits                                                   7,232          7,390         5,393
     Occupancy and equipment                                                     1,406          1,313           846
     Deposit insurance premiums                                                     71            134           131
     Data processing                                                               689            644           492
     Professional fees                                                             378            276           258
     Other                                                                       2,203          2,069         1,275
                                                                         -------------------------------------------
          Total non-interest expense                                            11,979         11,826         8,395
                                                                         -------------------------------------------
          Income before provision for income taxes                               5,754          4,199         5,054
Income tax expense                                                               2,250          1,694         2,024
                                                                         -------------------------------------------
          Net income                                                             3,504          2,505         3,030
                                                                         ===========================================
Basic earnings per share                                                     $    1.46      $    0.94     $    1.14
Diluted earnings per share                                                   $    1.43      $    0.90     $    1.05
</TABLE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>            <C>
Net Income                                                                  $   3,504      $   2,505      $   3,030
Other comprehensive income
       Unrealized (losses) on securities                                            -              -              -
          Unrealized holding (losses) arising during period                      (736)          (976)          (250)
          Tax benefit                                                             278            324             64
                                                                       ---------------------------------------------
          After-tax amount                                                       (458)          (652)          (186)
           Less:  reclassification adjustment
              for gains included in net income, net                                 -              -             (7)
                                                                       ---------------------------------------------
Other comprehensive income (loss)                                                (458)          (652)          (193)
                                                                       ---------------------------------------------
Comprehensive income                                                        $   3,046      $   1,853      $   2,837
                                                                       =============================================
</TABLE>
         The accompanying notes are an integral part of these statements
                                       18
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY  (IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------------------

                                                                     Unallocated
                                                           Retained    Common       Unearned               Accumulated
                                               Additional  Earnings     Stock        Stock                   Other
                                         Common Paid-in  Substantially Held by    Acquired by  Treasury   Comprehensive
                                         Stock  Capital    Restricted   ESOP          MSP        Stock       (Loss)       Total
                                       -------------------------------------------------------------------------------------------
<S>                                     <C>   <C>       <C>          <C>            <C>        <C>          <C>          <C>
Balance, September 30, 1997              $450  $43,334   $  23,779    $(2,347)       $(1,108)   $(20,267)    $   (479)    $43,362
  Net earnings                              -        -       3,030          -              -           -            -       3,030
  Treasury stock acquired                   -        -           -          -              -      (5,492)           -      (5,492)
  Stock issued for stock options            -     (341)          -          -              -       1,911            -       1,570
  Amortization of MSP shares                -      100           -          -            290           -            -         390
  Common stock dividends
  ($0.50 per share)                         -        -      (1,358)         -              -           -            -      (1,358)
   Purchase of subsidiary                   -      106           -          -              -         550            -         656
  Allocated ESOP shares                     -      183           -        359              -           -            -         542
  Other comprehensive income                -        -           -          -              -           -         (182)       (182)
                                       -------------------------------------------------------------------------------------------
Balance September 30, 1998                450   43,382      25,451     (1,988)          (818)    (23,298)        (661)     42,518
  Net earnings                              -        -       2,505          -              -           -            -       2,505
  Treasury stock acquired                   -        -           -          -              -      (2,912)           -      (2,912)
  Stock issued for stock options            -     (145)          -          -              -         509            -         364
  Amortization of and tax on MSP shares     -       54           -          -            290           -            -         344
  Common stock dividends
  ($0.50 per share)                         -        -      (1,329)         -              -           -            -       1,329)
  Purchase of subsidiary                    -     (109)          -          -              -       1,126            -       1,017
  Allocated ESOP shares                     -      110           -        360              -                        -         470
  Other comprehensive income                -        -           -          -              -           -         (652)       (652)
                                       -------------------------------------------------------------------------------------------
Balance September 30, 1999                450   43,292      26,627     (1,628)          (528)    (24,575)      (1,313)     42,325
  Net earnings                              -        -       3,504          -              -           -            -       3,504
  Treasury stock acquired                   -        -           -          -              -      (4,947)           -      (4,947)
  Stock issued for stock options            -        -           -          -              -          18            -          18
  Amortization of and tax on MSP shares     -       18           -          -             70           -            -          88
  Common stock dividends
     ($0.50 per share)                      -        -      (1,206)         -              -           -            -      (1,206)
  Allocated ESOP shares                     -       81           -        360              -           -            -         441
  Other comprehensive income                -        -           -          -              -                     (458)       (458)
                                       -------------------------------------------------------------------------------------------
Balance September 30, 2000               $450  $43,391   $  28,925    $(1,268)       $  (458)   $(29,504)  $   (1,771)     $39,765
                                       ===========================================================================================
</TABLE>
         The accompanying notes are an integral part of these statements

                                       19
<PAGE>
<TABLE>
<CAPTION>

FSF FINANCIAL CORP. AND SUBSIDIARIES
---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------

                                                                                    Years Ended September 30,
                                                                      -----------------------------------------------
                                                                               2000            1999           1998
                                                                      -----------------------------------------------
<S>                                                                      <C>             <C>             <C>
Cash flows from operating activities:
     Net income                                                             $   3,504      $   2,505       $   3,030
     Adjustments to reconcile net income to net cash
        provided by operating activities:
     Depreciation                                                                 603            490             359
     Net amortization of discounts and premiums on securities
        held to maturity                                                          (40)           (37)            (42)
     Provision for loan losses                                                    216            456             302
     Net market value adjustment on ESOP shares                                    71            104             185
     Tax benefit on stock options                                                   -             24             254
     Amortization of ESOP and MRP stock compensation                              451            656             650
     Amortization of intangibles                                                  118            105              10
     Net gain on sale of assets                                                  (126)           (11)            (18)
     Net loan fees deferred and amortized                                        (203)          (134)           (194)
     Loans originated for sale                                                (52,221)      (131,586)        (27,625)
     Loans sold                                                                54,364        134,539          25,156
     (Increase) decrease in:
        Accrued interest receivable                                            (1,104)          (234)           (653)
        Other assets                                                             (435)           (95)           (142)
     Increase (decrease) other liabilities                                      1,699            216              67
                                                                      -----------------------------------------------
Net cash provided by operating activities                                       6,897          6,998           1,339
                                                                      -----------------------------------------------
Cash flows from investing activities:
     Loan originations and principal payments on loans, net                   (32,349)        40,038          (9,928)
     Purchase of loans                                                        (32,417)       (40,883)        (10,832)
     Loan participations sold                                                     851          3,000               -
     Principal payments on securities held to maturity                            604         10,002           2,125
     Purchase of mortgage related securities held to maturity                       -         (1,161)              -
     Purchase of securities available for sale                                    (50)       (12,987)         (3,671)
     Proceeds from securities available for sale                                1,038              -             411
     Proceeds from maturities of securities available for sale                      -          3,000           1,000
     Proceeds from maturities of securities held to maturity                    1,570          4,500          13,500
     Investment in foreclosed real estate                                          (7)           (38)            (12)
     Proceeds from sale of REO                                                    428            500              24
     Purchase paid up life insurance policies                                       -         (5,495)              -
     Proceeds from sale of fixed assets                                           157              -               5
     Acquisition of Homeowners, net of cash acquired                                -         (1,245)              -
     Purchase of equipment and property improvements                             (872)        (1,677)           (666)
                                                                      -----------------------------------------------
Net cash used in investing activities                                     $   (61,047)    $   (2,446)     $   (8,044)
                                                                      -----------------------------------------------
</TABLE>
         The accompanying notes are an integral part of these statements

                                       20
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------------

                                                                                  Years Ended September 30,
                                                                      ---------------------------------------------
                                                                              2000           1999           1998
                                                                      ---------------------------------------------
<S>                                                                       <C>            <C>            <C>
Cash flows from financing activities:
     Net increase in deposits,                                             $  63,176      $   5,109      $  18,297
     FHLB Advances                                                            88,000              -         10,500
     Payments on FHLB Advances                                              (101,467)        (3,210)          (141)
     Net short term borrowings                                                  (200)        (5,726)             -
     Net increase (decrease) in mortgage escrow funds                            (12)          (152)            46
     Treasury stock purchased                                                 (4,947)        (2,912)        (5,492)
     Dividends on common stock                                                (1,206)        (1,329)        (1,358)
     Proceeds from exercise of stock options                                      23            336          1,315
                                                                      ---------------------------------------------
Net cash provided by financing activities                                     43,367         (7,884)        23,167
                                                                      ---------------------------------------------

Net increase in cash and cash equivalents                                    (10,783)        (3,332)        16,462

Cash and cash equivalents:
     Beginning of year                                                        19,265         22,597          6,135
                                                                      ---------------------------------------------
     End of period                                                         $   8,482      $  19,265      $  22,597
                                                                      ============================================

Supplemental disclosures of cash flow information: Cash payments for:
        Interest on advances and other borrowed money                      $   8,144      $   7,980      $   8,464
        Interest on deposits                                                  10,828          9,588         10,220
        Income taxes                                                           1,963          1,443          1,850

Supplemental schedule of non-cash investing and
     financing activities:
     Reinvested amounts of capital gains and dividends
           from mutual fund investments                                     $     72       $     80       $    121
     Foreclosed real estate                                                      378            197            449
     Stock acquisition of Insurance Planners                                       -              -
                                                                                                               656
     Acquisition of Homeowners Mortgage Corporation non-cash
           asset, net of assumed liabilities                                       -          1,037              -

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

                                       21
<PAGE>


FSF FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------


(1)      Description of Business and Summary of Significant Accounting Policies

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

Nature of Business
The  Corporation  is a holding  company  whose  subsidiaries  provide  financial
services. The Bank is a community financial institution attracting deposits from
the general public and using such deposits,  together with  borrowings and other
funds,  to make  mortgage,  consumer,  commercial  and  agricultural  loans.  At
September 30, 2000,  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,  therefore
undergoing periodic examinations by those regulatory authorities.  The Agency is
a property and  casualty  insurance  agency.  HMC is a mortgage  banking  entity
located in Vadnais Heights,  MN., that originates and sells residential mortgage
loans.

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

Cash Equivalents (In thousands)
For  purposes of the  consolidated  statements  of cash flows,  the  Corporation
considers all highly liquid debt instruments  with original  maturities of three
months  or less and money  market  funds to be cash  equivalents.  Cash and cash
equivalents include interest-bearing deposits of $5,552 and $16,020 at September
30, 2000, and 1999, 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
         during the three fiscal years ended September 30, 2000.

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

                                       22
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

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

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

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

Uncollectible interest on loans that are contractually past due for three months
is charged off or an allowance is established,  based on  management's  periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest  previously accrued.  Income is subsequently  recognized only until
cash payments are received and 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.

                                       23
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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,  management  periodically performs valuations and
the real estate is carried at the lower of  carrying  amount or fair value minus
estimated  costs to sell.  Revenues and expenses from  operations and changes to
the valuation allowance are included in operations.

Advertising Costs
The Corporation expenses all advertising costs as incurred.

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

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

Mortgage Loan Servicing Rights
The Bank has  established  accounting and reporting  standards for transfers and
servicing of financial assets and  extinguishments  of liabilities  based on the
consistent  application  of the  financial-components  approach.  This  approach
requires the  recognition  of  financial  assets and  servicing  assets that are
controlled  by  the  Bank  and  the   de-recognition  of  financial  assets  and
liabilities when control is extinguished.  Liabilities and derivatives  incurred
or obtained in conjunction with the transfer of financial assets are measured at
fair value,  if  practicable.  Servicing  assets and other retained  interest in
transferred  assets are measured by allocating  the carrying  amount between the
assets sold and the interest retained, based on their relative fair value.

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

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

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.

                                       24
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

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

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 and
     loans with relatively near term  maturities  (such as consumer  installment
     loans) carrying values approximate fair values. The fair value of long-term
     fixed  rate  loans has been  estimated  using  present  value  cash  flows,
     discounted  at  a  rate  approximating  current  market  rates  and  giving
     consideration  to estimated  prepayment  risk and credit loss factors.  The
     estimated  fair  value of loans  held  for sale is based on  quoted  market
     prices of similar instruments trading in the secondary market.
Originated  mortgage  servicing  rights-  the  carrying  amounts  of  originated
     mortgage servicing rights approximate fair values.
Accrued interest-  the  carrying   amounts   of  accrued   interest   receivable
     approximate their fair values.
Life Insurance policies- cash value of the policies approximates fair value.

Deposit  liabilities- the  fair  values  of demand deposits are, by  definition,
     equal to the amount payable on demand at the reporting date (that is, their
     carrying amounts).  The carrying amounts of variable rate, fixed term money
     market accounts and certificates of deposits  approximate their fair values
     at the reporting  date.  Fair values of fixed rate  certificates of deposit
     are  estimated  using a  discounted  cash  flow  calculation  that  applies
     interest rates  currently  being offered on  certificates  to a schedule of
     aggregated expected monthly maturities on time deposits.

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 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  charges  to enter  into  similar  agreements,
     taking  into  account  the  remaining  terms  of  the  agreements  and  the
     counterparties'  credit  standings.  The  carrying  value and fair value of
     commitments to extend credit are not considered material for disclosure.

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

                                       25
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(2)      Business Combinations

On November 17, 1998, the Corporation  acquired 100% of the  outstanding  common
stock of HMC,  an  originator  and seller of  residential  mortgage  loans.  The
business  combination was accounted for by the purchase method, and accordingly,
the results of operations have been included in the  Corporation's  consolidated
financial  statements  since the date of  acquisition.  The  Corporation  issued
77,839 shares of common stock held as treasury  shares and $1.25 million in cash
to complete  the  transaction.  In  addition,  options for 50,000  common  stock
shares, at an exercise price of $15.00,  were also issued. The acquisition price
of $2.5 million  resulted in goodwill of  approximately  $2.3 million,  which is
being amortized using the straight-line method over twenty-five years.  Goodwill
is evaluated for impairment  based on all operations  that it directly  benefits
using the undiscounted cash flows method.  The goodwill  represents the inherent
value of the growing  concern  element of HMC and the ability of the Corporation
to generate a return on its investment.

The following unaudited pro forma supplemental information is presented based on
historical  financial  statements of the  Corporation and HMC. The unaudited pro
forma supplemental  information for the two years ended September 30, 1999, were
prepared  as if  the  acquisition  had  occurred  as of  the  beginning  of  the
respective periods.

<TABLE>
<CAPTION>
                                                             For the Two Years Ended
                                                                  September 30,
                                                            --------------------------
                                                               1999             1998
                                                            --------------------------
                                                                  (In thousands)
<S>                                                        <C>              <C>
           Interest income                                  $    29,434      $ 30,208
           Interest Expense                                      18,230        18,611
                                                            --------------------------
                     Net interest income                         11,204        11,597
                Provision for loan losses                           456           302
                                                            --------------------------
                     Net interest income after provision
                      for loan losses                            10,748        11,295
                                                            --------------------------
           Non-interest income                                    6,173         5,831
           Non-interest expense                                  12,470        11,198
                                                            --------------------------
                     Income before provision for income taxes     4,451         5,928
           Income tax expense                                     1,796         2,378
                                                            --------------------------
           Net income                                           $ 2,655       $ 3,550
                                                            ==========================

           Basic earnings per share                             $  0.99       $  1.30
           Diluted earnings per share                           $  0.95       $  1.20
</TABLE>

As of June 1, 2000,  HMC became an operating  subsidiary  of the Bank  following
regulatory  approval.  The  transfer of HMC was  recorded as a non-cash  capital
contribution by the Corporation to the Bank.

                                       26
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(3)      Debt and Equity Securities (in thousands)

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets according to management's  intent.  The carrying amount of securities and
their approximate fair values at September 30, are presented as follows:
<TABLE>
<CAPTION>
                                                                    September 30, 2000
                                         --------------------------------------------------------------------------
                                                                 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          $       -          $     651        $    11,871
           Stock in FHLB                            6,375                  -                  -        $     6,375
                                         -----------------  -----------------   ----------------   ================
                      Total                   $    18,897          $       -          $     651        $    18,246
                                         =================  =================   ================   ================
     Mortgage backed securities:
           REMICs                             $    16,981          $       -         $    1,612        $    15,369
                                         =================  =================   ================   ================
     Debt Securities:                         $    12,998          $       -          $     270        $    12,728
                                         =================  =================   ================   ================
Held to maturity securities:
     Debt securities:
           U.S. Government and Agency         $    18,393          $     106         $    1,525        $    16,974
                                         =================  =================   ================   ================
     Mortgage backed securities:
           REMICs                             $    25,992          $      80         $    1,919        $    24,153
           FNMA certificates                          970                  -                  2        $       968
           Other certificates                          24                  -                  -        $        24
                                         -----------------  -----------------   ----------------   ----------------
                      Total                   $    26,986          $      80         $    1,921        $    25,145
                                         =================  =================   ================   ================
</TABLE>
The amortized cost of debt and mortgage-backed securities at September 30, 2000,
included  unamortized  premiums  of  $208  and  unaccreted  discounts  of  $305,
respectively.
<TABLE>
<CAPTION>
                                                                  September 30, 1999
                                         --------------------------------------------------------------------------
                                                                 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          $       -         $      601        $    11,921
           Stock in FHLB                            7,363                  -                  -              7,363
                                         ----------------   -----------------   ----------------  ----------------
                      Total                   $    19,885          $       -         $      601        $    19,284
                                         =================  =================   ================  =================
     Mortgage backed securities:
           REMICs                             $    16,980          $       -         $    1,002        $    15,979
                                         =================  =================   ================  =================
     Debt Securities:                         $    12,988          $      22         $      216        $    12,794
                                         =================  =================   ================  =================
Held to maturity securities:
     Debt securities:
           U.S. Government and Agency         $    18,367          $      92         $    1,037        $    17,422
           Other Debt Securities              $     1,570          $       7                  -        $     1,577
                                         --------------------------------------------------------------------------
                      Total                   $    19,937          $      99         $    1,037        $    18,999
                                         ==========================================================================
     Mortgage backed securities:
           REMICs                             $    26,415          $     162         $    1,414        $    25,163
           GNMA certificates                        1,142                  2                  -              1,144
           FHLMC certificates                          30                  1                  -                 31
                                         -----------------  -----------------   ----------------  -----------------
                      Total                   $    27,587          $     165         $    1,414        $    26,338
                                         =================  =================   ================  =================
</TABLE>
                                       27
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

The amortized cost of debt and mortgage backed securities at September 30, 1999,
includes  unamortized  premiums  of  $214  and  unaccreted  discounts  of  $337,
respectively.

Gross realized gains on sales of available for sale  securities were $11 for the
year ended September 30, 1998. There were no sales of securities  during the two
years ended September 30, 2000 and 1999.

The scheduled  maturities of securities  held to maturity and securities  (other
than equity  securities)  available  for sale at  September  30,  2000,  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                            $      1           $      1         $       -          $       -
Due from one to five years                            9,188              8,366            12,998             12,728
Due from five to ten years                            8,013              7,310                 -                  -
Due after ten years                                  28,177             26,442            16,981             15,369
                                            ----------------  -----------------  ----------------  -----------------
                                     Total         $ 45,379           $ 42,119         $  29,979          $  28,097
                                            ================  =================  ================  =================
</TABLE>
For purposes of this 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  $22.0 million at September
30, 2000,  and $20.0 million at September 30, 1999 were pledged to secure public
deposits and for other purposes required or permitted by law.

(4)      Loans Receivable (in thousands)

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                                  September 30,
                                                                           ----------------------------
                                                                            2000           1999
                                                                           -------------  -------------
<S>                                                                       <C>            <C>
First mortgage loans:
     Secured by one to four family residences                              $     97,843   $    115,550
     Secured by other properties                                                 43,133         28,824
     Construction and Land Development loans                                     94,982         56,177
                                                                           -------------  -------------
                                                                                235,958        200,551
     Less:
           Undisbursed portion of construction
              and land development loans                                        (36,864)       (26,156)
           Net deferred loan origination fees                                      (988)          (744)
                                                                           -------------  -------------
                          Subtotal first mortgage loans                         198,106        173,651
                                                                           -------------  -------------
Consumer and other loans:
     Consumer loans                                                              43,198         18,326
     Home equity and second mortgages                                            28,106         24,312
     Commercial                                                                  29,831         29,767
     Agricultural loans                                                          43,829         33,384
                                                                           -------------  -------------
                                                                                144,964        105,789
     Add:  net deferred loan origination costs                                      277            237
                                                                           -------------  -------------
                        Subtotal consumer and other loans                       145,241        106,026
                                                                           -------------  -------------
                                  Subtotal all loans                            343,347        279,677
     Less: allowance for loan losses                                             (1,534)        (1,387)
                                                                           -------------  -------------
                                             Total                         $    341,813   $    278,290
                                                                           =============  =============
</TABLE>
                                       28
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

                                          Years Ended September 30,
                                 ----------------------------------------------
                                     2000               1999           1998
                                 -----------  ------------------  -------------
Balance, beginning of period     $    1,387          $    1,035      $     852
Provision for losses                    216                 456            302
Charge offs                             (98)               (142)          (132)
Recoveries                               29                  38             13
                                 -----------  ------------------  -------------
Balance, end of period           $    1,534          $    1,387     $    1,035
                                 ===========  ==================  =============


The Bank had no loans classified as impaired at September 30, 2000, and 1999.

Loans,  having carrying values of $474 and $197, were  transferred to foreclosed
real estate in 2000 and 1999, 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 $366 and $366 at September 30, 2000,  and 1999,  respectively.
During 2000,  repayments on loans to executive officers and directors aggregated
$259 and $136 was advanced. These loans were current at September 30, 2000.

(5)      Loan Servicing (in thousands)

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans  serviced for others was $52,128 and $55,488 at September  30, 2000,
and 1999, respectively.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing and included in demand  deposits,  were $318 and $296 at September 30,
2000, and 1999, respectively.

Capitalized  mortgage  servicing  rights and excess  servicing  receivables  are
summarized as follows:
<TABLE>
<CAPTION>
                                                         Years Ended September 30,
                                                    ----------------------------------
                                                       2000       1999         1998
                                                    ----------  ----------  ----------
<S>                                                <C>         <C>         <C>
Beginning balance, net of accumulated amortization  $     253   $     201   $     148
Amounts capitalized                                        19         132          98
Amortization                                              (65)        (80)        (42)
Valuation adjustments                                       -           -          (3)
                                                    ----------  ----------  ----------
Balance, end of period                              $     207   $     253   $     201
                                                    ==========  ==========  ==========
</TABLE>

(6)      Foreclosed Real Estate (in thousands)

Net gains on foreclosed real estate, including net revenues from operations, was
not  material  for the three  years  ended  September  30,  2000.  The Bank held
foreclosed  real estate at September 30, 2000,  and 1999,  amounting to $321 and
$323, correspondingly.

                                       29
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(7)      Premises and Equipment (in thousands)

Premises and equipment are summarized as follows:
                                                            September 30,
                                                     ---------------------------
                                                         2000           1999
                                                     ------------    -----------
Land                                                 $       728     $      669
Buildings, improvements and leasehold improvements         4,838          4,637
Furniture, equipment and automobiles                       4,114          3,582
                                                     ------------    -----------
   Total costs                                             9,680          8,888
Less accumulated depreciation                              4,166          3,574
                                                     ------------    -----------
   Total                                             $     5,514     $    5,314
                                                     ============    ===========

At September  30, 2000,  the  Corporation  was  obligated  under  non-cancelable
operating  leases for office  space and  equipment.  Net  rental  expense  under
operating  leases,  included in occupancy and equipment,  was $436, $275 and $51
for the years ended September 30, 2000, 1999 and 1998.  Projected  minimum lease
commitments  under the terms of the leases for the three years ending  September
30, 2003, are $347, $289 and $147, respectively.

(8)      Deposits (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of $100, was $43,910 and $20,681 in 2000 and 1999, respectively.

Interest expense is summarized as follows:

                                              September 30,
                            -----------------------------------------------
                                2000             1999             1998
                            -------------     ------------     ------------
Savings accounts             $     3,110      $     1,896      $     1,690
Demand deposits                      259              289              407
Certificates of deposit            8,239            8,048            7,985
                            -------------     ------------     ------------
                             $    11,608      $    10,233      $    10,082
                            =============     ============     ============

Non-interest bearing demand deposits amounted to $16,124, $12,583 and $7,477 for
the years ended September 30, 2000, 1999 and 1998, respectively.

At September 30, 2000, the scheduled  maturities of  certificates of deposit are
as follows:

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

                         2001                        $  128,571
                         2002                            30,061
                         2003                            12,723
                         2004                             2,182
                         2005 and thereafter              4,235
                                                     -----------
                                                     $  177,772
                                                     ===========

                                       30
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

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

                                                    September 30,
                                      ------------------------------------------
                                            2000                   1999
                                      ------------------   ---------------------
Fiscal Year of Maturity - Advances              Weighted               Weighted
----------------------------------    Amount     Rate         Amount     Rate

                                    ----------  -------     ----------  ------
2000                                $       -        - %    $  24,467    5.89 %
2001                                   35,000     6.18         24,000
2002                                   25,500     6.41              -       -
2003                                        -        -              -       -
2004 and thereafter                    67,000     5.54         92,500    5.15
                                    ----------  -------     ----------  ------
     Total                          $ 127,500     5.88 %    $ 140,967    5.39 %
                                    ==========  =======     ==========  ======

At September 30, 2000,  borrowed funds are  collateralized by stock in the FHLB,
first mortgage loans with carrying value of $96,864 and debt and mortgage-backed
securities with carrying values of $56,268 under a collateral agreement.

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

Salary Continuation Plans
The Bank has  adopted  insured  salary  continuation  plans for the  benefit  of
selected  members of  management  by providing  them with  retirement  and death
benefits. The estimated liability under the agreements is charged to income over
the expected  remaining  years of  employment.  The Bank's policy is to fund the
costs accrued with insurance contracts.  Salary continuation expense amounted to
$126, $114 and $151 for the three years ended September 30, 2000, respectively.

Deferred Compensation 401(k) Plans
The  Corporation  provides 401(k) plans that cover  substantially  all employees
meeting age and length of service requirements.  The plan maintained by the Bank
covers  employees of both the Bank and the Agency.  Employees  participating  in
this plan are eligible to contribute up to 15% of their annual compensation. The
plan  maintained by HMC for the benefit of its  employees  provides for employee
contribution  up  to  15%  of  annual  compensation.   Both  plans  provide  for
discretionary  contributions  by  the  employers,  which  are  allocated  to the
participants' accounts in proportion to employee contributions.  The Corporation
made no  discretionary  contributions  to these  plans for the three years ended
September 30, 2000.

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

Self Insurance
The  Corporation  has a  self-insured  health  plan for all its  employees.  The
Corporation  has purchased  stop loss  insurance to supplement  the health plan,
which will reimburse the Corporation for individual  claims in excess of $25,000
annually or aggregate claims exceeding $231,600 annually.

                                       31
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

Employee Stock Ownership Plan
The Corporation 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,  with  the  loan  being  collateralized  by the  common  stock.  Employer
contributions,  along with dividends  received on unallocated  shares, are being
used to repay the loan with shares being  released from the  Corporation's  lien
proportional  to the loan  repayments.  Annually,  on September 30, the released
shares are allocated to the participants in the same proportion that their wages
bear to the  total  compensation  of all of the  participants.  Unreleased  ESOP
shares are not considered outstanding in calculating earnings per share.

The Corporation presents these financial statements in accordance with the AICPA
Statement of Position (SOP) No. 93-6,  "Employers' Accounting for Employee Stock
Ownership  Plans." The prices of the shares issued and unreleased are charged to
unearned compensation,  a contra equity account. Shares released are reported as
compensation  expense  equal to the current  market  value price of the released
shares.  Dividends paid on allocated shares are charged to retained earnings and
those on unallocated shares are charged to expense.

A summary of the ESOP share allocation is as follows:

                                                  September 30,
                                     ------------------------------------
                                         2000         1999        1998
                                     ------------  ----------  ----------
Shares allocated beginning of year       196,919     160,947     124,975
Shares allocated during year              35,972      35,975      35,972
Unreleased shares                        126,829     162,798     198,773
                                     ------------  ----------  ----------
Total ESOP                               359,720     359,720     359,720
                                     ============  ==========  ==========

Fair value of unreleased shares        $   1,585   $   1,913   $   3,131
Amount charged to expense              $     323   $     442   $     668
Dividend used for debt reduction       $     171   $     136   $      77

Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended  September  30, 1995.  Following  shareholder  approval of the MSP in
January 1995, the Bank  purchased  179,860  shares of the  Corporation's  common
stock in the open  market  at $10.59  per share to be  awarded  to  officers  in
accordance  with the provisions of the MSP. The cost of the shares awarded under
these plans is recorded as unearned  compensation,  a contra equity account, and
is recognized as an expense in accordance with the vesting  requirements defined
by the MSP.  For each of the three fiscal years ended  September  30, 2000,  the
amount included in compensation expense related to the MSP was $73.

The  following  summarizes  the  activity  in the MSP for the three  years ended
September 30, 2000.

                                     Unawarded             Awarded
                                       Shares               Shares
                                  --------------        -------------
At September 30, 1997                    42,964               82,138
          Vested                              -              (27,379)
                                  --------------        -------------
At September 30, 1998                    42,964               54,759
          Vested                              -              (27,379)
                                  --------------        -------------
At September 30, 1999                    42,964               27,380
          Vested                              -              (27,380)
          Shares Granted                 (2,000)               2,000
                                  --------------        -------------
At September 30, 2000                    40,964                2,000
                                  ==============        =============

                                       32
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

Director's Stock Compensation Plan
In  January  1998,  the  shareholders  of  the  Corporation   approved  a  stock
compensation plan for its non-employee directors.  The plan granted 6,000 shares
of common stock issued from  treasury that vests over a four-year  period,  with
1,200 shares awarded in January 1998. The compensation cost associated with this
plan is the fair value of the stock ($19.42/share) on the date that the plan was
approved  by  shareholders.  Compensation  cost  included  in  the  accompanying
financial statements for the year ended September 30, 2000 and 1999 were $23,300
and $23,292,  respectively.  During the year ended  September  30,  2000,  1,200
shares of the total grant were vested to the plan recipients.

Stock Option Plans
The  Corporation   maintains  the  1994  stock  option  plan,  approved  by  the
Corporation's  stockholders  on January 17,  1995 (the 1994 Plan);  and the 1998
stock option plan,  approved by the  Corporation's  stockholders  on January 20,
1998 (the 1998 Plan). These plans permit the granting of stock options,  with an
exercise price equal to the fair value of the Corporation's stock on the date of
the option grant.  All options granted under these plans may be exercised over a
ten-year period  beginning on the date the option is granted.  Awards made under
the Plans may be incentive  stock plans (ISO's) as defined by Section 422 of the
Internal Revenue Code or options that do not qualify. Those options granted that
qualify as ISO's are generally  exercisable on the date of the grant while those
not qualifying  (non-incentive stock options granted to executives and directors
of the Corporation)  vest over 3-5 years. The following  summarizes the activity
in the two Plans for the three years ended September 30, 2000:
<TABLE>
<CAPTION>
                                                Shares Available          Options Shares          Weighted Average
                                                    for Grant              Outstanding             Exercise Price
                                               --------------------     -------------------     ---------------------
<S>                                                    <C>                   <C>                    <C>
At September 30, 1997                                        8,988                 426,253                $        -
           1998 Plan Created                               300,000                       -                         -
           Granted                                        (145,601)                145,601                     19.08
           Exercised                                             -                (135,957)                     9.50
                                               --------------------     -------------------     ---------------------
At September 30, 1998                                      163,387                 435,897                     12.73
           Granted                                         (90,074)                 90,074                     14.34
           Exercised                                             -                 (33,988)                     9.50
        Cancelled                                            6,582                  (6,582)                    19.13
                                               --------------------     -------------------     ---------------------
At September 30, 1999                                       79,895                 485,401                     13.40
           Granted                                         (32,187)                 32,187                     23.30
           Exercised                                             -                  (3,600)                    19.42
           Cancelled                                         2,995                  (2,995)                    19.13
                                               --------------------     -------------------     ---------------------
At September 30, 2000                                       50,703                 510,993              $      13.33
                                               ====================     ===================     =====================
Shares available for future grants
           1994 Plan                                         7,988
           1998 Plan                                        42,715
</TABLE>
The following table summarizes  information  about stock options  outstanding at
September 30, 2000:

----------------------------------------------------- --------------------------
                   Options Outstanding                 Options Exercisable
----------------------------------------------------- --------------------------
                                  Weighted average
    Exercise         Number     remaining contractual
      Price        Outstanding     life in years        Price      Number
----------------------------------------------------- --------------------------
$      9.500         256,308            4.3           $  9.500     256,308
      20.000           1,000            7.3             20.000         600
      19.125          93,324            7.3             19.125      64,294
      19.416           8,400            7.7             19.416           -
      19.250          30,000            8.2             19.250      22,500
      15.000          50,000            8.2             15.000      20,000
      14.750          19,187            9.0             14.750      19,187
      12.375          20,587           10.0             12.375      20,587
      12.375          22,187           10.0             12.375      22,187
      12.125          10,000                            12.125       2,000
                  -----------                                     ---------
                     510,993                                       427,663
                  ===========                                     =========
                                       33
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

The  Corporation  elected  to  follow  APB 25  and  related  interpretations  in
accounting for its employee  stock  options.  The exercise price of the employee
stock  options  equal the market  price of the  underlying  stock on the date of
grant and,  therefore;  no compensation  expense is recognized under APB 25. Pro
forma  information  regarding  net income and  earnings per share is required by
SFAS No. 123 and has been determined as if the Corporation had accounted for its
employee stock option under the fair value method of that  statement.  Pro forma
net income and earnings per share follows:

                                        Years Ended September 30,
                               -------------------------------------------
                                    2000           1999            1998
                               ------------   ------------    ------------
Net Income
           As reported         $     3,504    $     2,505     $     3,030
           Pro forma                 3,371          2,322           2,943
                               ------------   ------------    ------------
Earnings per common share
           As reported
                  Basic        $      1.46    $      0.94     $      1.14
                  Diluted             1.43           0.90            1.05
                               ------------   ------------    ------------
           Pro forma
                  Basic        $      1.41    $      0.87     $      1.10
                  Diluted             1.38           0.83            1.02
                               ------------   ------------    ------------

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

The fair value for each option grant is estimated on the date of the grant using
the Black Scholes Model. The Model  incorporates  the following  assumptions for
the grants:
                                  2000             1999             1998
                            ----------------------------------------------
Risk free interest rate           5.45%            5.22%            5.32%
Expected life                  10 years         10 years         10 years
Expected volatility              26.00%           27.00%           62.65%
Expected dividends                   -                -                -

The weighted  average fair value of the options  granted in fiscal 2000 and 1999
were $7.19 and $8.64 per option, respectively.

(11)     Income Taxes (in thousands)

The Corporation files a consolidated  federal income tax return. The Corporation
and its subsidiaries  entered into a tax sharing agreement that provides for the
allocation  and payment of federal and state income  taxes.  The  provision  for
income  taxes of each  corporation  is  computed  on a separate  company  basis,
subject to certain  adjustments.  Income tax expense  (benefit) is summarized as
follows:
<TABLE>
<CAPTION>
                                                              September 30,
                                               -------------------------------------------
                                                   2000           1999            1998
                                               ------------   ------------    ------------
<S>                                          <C>             <C>            <C>
Current
      Federal                                  $     1,565     $      936     $     1,650
      State                                            509            308             534
                                               ------------   ------------    ------------
             Subtotal                                2,074          1,244           2,184
Deferred
      Federal                                          132            338           (120)
      State                                             44            112            (40)
                                               ------------   ------------    ------------
             Subtotal                                  176            450           (160)
                                               ------------   ------------    ------------
                    Total income tax provision $     2,250    $     1,694     $     2,024
                                               ============   ============    ============
</TABLE>
                                       34
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

The State of Minnesota  follows the Internal Revenue Code for the  determination
of taxable  income,  in connection  with temporary  differences.  The portion of
deferred  tax  assets  and  liabilities  attributed  to  state  income  taxes is
approximately 25 percent.  Temporary differences between the financial statement
carrying  amounts  and the tax basis of assets and  liabilities  that can create
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
                                                                                       September 30,
                                                                        --------------------------------------------
                                                                               2000                    1999
                                                                        -------------------     --------------------
<S>                                                                           <C>                      <C>
Deferred tax assets:
      Deferred compensation                                                     $      564               $      693
      Deferred net loan fees                                                           287                      205
      Securities unrealized loss                                                     1,018                      719
      Allowance for loan losses                                                        621                      562
                                                                        -------------------     --------------------
           Subtotal                                                                  2,490                    2,179
      Less:  Valuation allowance                                                       264                      243
                                                                        -------------------     --------------------
                        Total                                                        2,226                    1,936
Deferred tax liabilities:
      FHLB Stock                                                                       208                      241
      Tax bad debt reserve                                                             170                      213
      Premises and equipment                                                           416                      375
      Installment obligation sale of former building                                    27                       28
      Mortgage servicing rights                                                         59                       74
      Discount on loans                                                                  3                        6
      Section 475 "For Sale Assets"                                                    762                      484
                                                                        -------------------     --------------------
                        Total                                                        1,645                    1,421
                                                                        -------------------     --------------------
Net deferred tax asset                                                          $      581               $      515
                                                                        ===================     ====================
</TABLE>
A valuation  allowance was  established to reduce the deferred tax asset related
to the unrealized loss on equity securities  because  management is uncertain if
it will be  realized.  The  Corporation  has  paid  sufficient  taxes  in  prior
carryback years, which will enable it to recover the balance of the net deferred
tax  assets.  Therefore,  no  additional  valuation  allowance  was  required at
September 30, 2000, and 1999.

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,
                                               -------------------------------------
                                                 2000          1999          1998
                                               ---------     ---------     ---------
<S>                                          <C>           <C>           <C>
Computed "expected" tax expense                $  1,956      $  1,428      $  1,718
Tax exempt income                                  (117)          (95)           (5)
State income taxes, net of federal tax benefit      365           278           322
Other, net                                           46            83          (11)
                                               ---------     ---------     ---------
Total income tax provision                     $  2,250      $  1,694      $  2,024
                                               =========     =========     =========
</TABLE>
Retained  earnings at  September  30, 2000  include  $6,492 of which no deferred
federal  income tax liability  has been  recognized.  This amount  represents an
allocation of income to bad debt  deductions for tax purposes only that arose in
tax years beginning  before  September 30, 1988, (that is the base year amount).
Reduction  of the amount,  so  allocated  for  purposes  other than tax bad debt
losses or  adjustments  arising from this  carry-back of net  operating  losses,
would  create  income for tax purposes  only.  This would be subject to the then
current corporate income tax rate. The unrecorded  deferred income tax liability
on the above amount was approximately $2,600 at September 30, 2000.

                                       35
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(12)     Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
                                                                              For the Years ended
                                                                                September 30,
                                                          ----------------------------------------------------------
                                                                   2000               1999                1998
                                                          ----------------------------------------------------------
<S>                                                          <C>                 <C>                <C>
Numerator:
   Net income - Numerator for basic earnings
      per share and diluted earnings per share--
      income available to common stockholders                  $   3,504,000       $   2,505,000      $   3,030,000
                                                          ==========================================================

Denominator:
   Denominator for basic earnings per share--
      weighted-average shares                                      2,395,287           2,663,691          2,669,586

   Effect of dilutive securities:
      Stock - based compensation plans                                56,224             108,713            222,598
                                                          ----------------------------------------------------------

      Denominator for diluted earnings per share--
         adjusted weighted-average shares and
         assumed conversions                                       2,451,511           2,772,404          2,892,184
                                                          ==========================================================
Basic earnings per share                                         $      1.46         $      0.94        $      1.14
Diluted earnings per share                                       $      1.43         $      0.90        $      1.05
</TABLE>

(13)     Commitments and Contingencies

In the ordinary  course of business,  the  Corporation  has various  outstanding
commitments   and  contingent   liabilities   that  are  not  reflected  in  the
accompanying  consolidated financial statements. In addition, the Corporation is
a defendant in certain claims and legal actions  arising in the ordinary  course
of  business.  In the  opinion  of  management,  after  consultation  with legal
counsel,  the ultimate  disposition  of these  matters is not expected to have a
material  adverse  effect  on  the  consolidated   financial  condition  of  the
Corporation.

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

On October 6, 1994, the Bank converted from a federally chartered mutual savings
and loan  association to a federally  chartered stock savings bank pursuant to a
Plan of  Conversion  (Conversion)  via the  issuance of common  stock.  Upon the
Conversion,  the  preexisting  liquidation  rights of the depositors of the Bank
were  unchanged.  Such rights are  accounted  for by the Bank for the benefit of
such  depositors  in  proportion  to  their  liquidation  interests  as  of  the
Eligibility Record Date or the Supplemental  Eligibility Record Date, as defined
in the Conversion.

The 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.  If undertaken,  these could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated

                                       36
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

under  regulatory   accounting   practices.   The  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below) of total and Tier 1  capital  (as  defined  in the  regulations)  to risk
weighted  assets (as defined) and of tangible and Tier 1 capital (as defined) to
adjusted  total assets (as defined).  Management  believes that, as of September
30,  2000,  the Bank  meets all  capital  adequacy  requirements  to which it is
subject.

As of September 30, 2000, the most recent  notification from the OTS categorized
the Bank as  "well  capitalized"  under  the  regulatory  framework  for  prompt
corrective  action. To be categorized as well capitalized the Bank must maintain
minimum total risk based,  Tier 1 risk based,  and Tier 1 leverage ratios as set
forth  in the  table  below.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

The  Bank's  actual  regulatory  capital  amounts,  with  reconciliation  to the
Corporation's  investment in the Bank  determined in accordance  with  Generally
Accepted  Accounting  Principles  (GAAP),  and ratios are also  presented in the
table below.
<TABLE>
<CAPTION>
                                                                                                   To Be Well
                                                                                                Capitalized Under
                                                                            For Capital         Prompt Corrective
                                                        Actual           Adequacy Purposes      Action Provisions
                                                 ---------------------- ---------------------  ---------------------
<S>                                               <C>           <C>      <C>          <C>       <C>          <C>
GAAP capital, September 30, 2000                    $36,943
Add:  Unrealized losses on debt
        securities held for sale                      1,120
Less:  Goodwill                                     (2,101)
                                                 -----------
Tangible equity capital and ratio to
        adjusted total assets                       $35,962       7.7%     $ 6,947      1.5%      $ 9,262      2.0%
                                                 ---------------------- ---------------------  ---------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                       $35,962       7.7%     $18,524      4.0%      $23,155      5.0%
                                                 ---------------------- ---------------------  ---------------------
Total risk based capital and ratio to
        risk weighted assets                        $35,962      10.9%     $13,257      4.0%      $19,885      6.0%
                                                            ----------- ---------------------  ---------------------
Tier 2 risk based capital, net adjustment               106
                                                 -----------
Total risk based capital and ratio to risk
       weighted assets, September 30 , 2000         $36,068      10.9%     $26,513      8.0%      $33,142     10.0%
                                                 ====================== =====================  =====================
</TABLE>
<TABLE>
<CAPTION>
                                                                                                    To Be Well
                                                                                                Capitalized Under
                                                                             For Capital         Prompt Corrective
                                                        Actual            Adequacy Purposes      Action Provisions
                                                 ---------------------- ---------------------- ----------------------
<S>                                               <C>           <C>      <C>          <C>       <C>          <C>
GAAP capital, September 30, 1999                    $36,534
Add:  Unrealized losses on debt
        securities held for sale                        712
                                                 -----------
Tangible equity capital and ratio to
        adjusted total assets                       $37,246       9.0%      $ 6,201      1.5%      $ 8,268      2.0%
                                                 ---------------------- ---------------------- ----------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                       $37,246       9.0%     $ 16,536      4.0%     $ 20,670      5.0%
                                                 ---------------------- ---------------------- ----------------------
Tier 1 capital and ratio to
        risk weighted assets                        $37,246      14.2%     $ 10,528      4.0%     $ 15,793      6.0%
                                                            ----------- ---------------------- ----------------------
Tier 2 capital, allowance for loan losses               383
                                                 -----------
Total risk based capital and ratio to risk
        weighted assets, September 30 , 1999        $37,629      14.3%     $ 21,057      8.0%     $ 26,321     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.

                                       37
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(15)     Concentration of Credit Risk (in thousands)

The  Corporation  is primarily  engaged in  originating  mortgage,  consumer and
business  loans in the Minnesota  counties of McLeod,  Dakota,  Meeker,  Wright,
Carver,  Washington and Sibley.  The Bank offers fixed and  adjustable  rates of
interest on these loans that have amortization terms ranging up to thirty years.

The  Corporation  had cash on deposit in a  financial  institution  in excess of
Federal deposit insurance limits of approximately $5,452 at September 30, 2000.

(16)     Financial Instruments (in thousands)

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

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

Typically,  the Bank issues  letters of credit to  municipalities  and generally
does not require collateral for standby letters of credit.

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

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

A summary of the notional amounts of the Corporation's  financial instruments at
September 30, 2000 follows:

                         Commitments to extend credit      $   38,091
                            Standby letters of credit              37
                            Commitments to sell loans           3,327


                                       38
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

<TABLE>
<CAPTION>
                                                                       September 30,
                                                        2000                                     1999
                                           -------------------------------------------------------------------------
                                            Carrying                 Fair             Carrying               Fair
                                              Value                  Value              Value                Value
                                           -------------------------------------------------------------------------
<S>                                          <C>                  <C>                <C>                 <C>
Financial Assets:
Cash & cash equivalents                       $  8,482             $  8,482            $ 19,265            $ 19,265
Investment securities                           49,367               47,948              52,015              51,077
Mortgage-backed and related securities          42,355               40,514              43,566              42,315
Loans held for sale                              3,191                3,191               5,334               5,334
Loans receivable, net                          341,813              341,374             278,290             278,977
Accrued interest receivable                      4,432                4,432               3,328               3,328
Life Insurance Policies                          5,743                5,743               6,835               6,835
Financial Liabilities:
Deposits                                       294,823              292,267             231,651             232,608
Borrowings                                     127,500              131,555             140,967             138,239

</TABLE>

(17)     Effects of New Financial Accounting Standards

SFAS No. 133,  "Accounting For Derivative  Instruments and Hedging Activities" -
issued June 1998,  establishes accounting and reporting standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
It  requires  that  entities  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair  value.  SFAS No. 137 issued on July 7, 1999  deferred  Statement  133's
effective date until the fiscal year  beginning  October 1, 2000. On the date of
adoption,  the Corporation  may transfer any held to maturity  security into the
available  for sale  category  and  then be able to  designate  the  transferred
security as a hedge item.  Any  unrealized  holding gain or loss on  transferred
securities  will be reported in net income or  accumulated  other  comprehensive
income. Management has determined its strategy for the adoption of Statement No.
133 and believes the adoption  will not have a material  effect on the financial
statements.

SFAS No. 140 was issued  September 29, 2000,  as a  replacement  to SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities".  Statement No. 140 is effective for transfers  after March 31,
2001. It is effective for disclosures about securitizations and collateral,  and
for  recognition  and  reclassification  of  collateral  for fiscal  year ending
September 30, 2001.  Adoption  will not have a material  effect on the financial
statements.

                                       39
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

The  information  should  be  read  in  conjunction  with  the  other  Notes  to
Consolidated  Financial  Statements.   Stockholder's  equity  differs  from  the
consolidated statements by the amount of consolidating ESOP and MSP adjustments.
The  investment in the Bank  subsidiary is carried net of the Bank's  unrealized
loss on securities available for sale.
<TABLE>
<CAPTION>
                        STATEMENT OF FINANCIAL CONDITION

                                                                                              September 30,
                                                                                      ------------------------------
ASSETS                                                                                    2000             1999
                                                                                      -------------    -------------
<S>                                                                                     <C>              <C>
        Cash and cash equivalents                                                         $  2,152          $   278
        Investment securities held to maturity                                                   -            1,570
        Investment in subsidiaries                                                          37,674           40,461
        Loan to Bank ESOP                                                                    1,268            1,628
        Other assets                                                                            12               67
                                                                                      -------------    -------------
                                                                                          $ 41,106         $ 44,004
                                                                                      =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
        Other liabilities                                                                  $    73          $    51

        Stockholders' equity:
                     Common stock                                                              450              450
                     Additional paid in capital                                             43,391           43,292
                     Treasury stock                                                        (29,504)         (24,575)
                     Unearned MSP stock                                                       (458)            (528)
                     Retained earnings                                                      28,925           26,627
                     Accumulated other comprehensive (loss)                                 (1,771)          (1,313)
                                                                                      -------------    -------------
                                 Total stockholders' equity                                 41,033           43,953
                                                                                      -------------    -------------
                                                                                          $ 41,106         $ 44,004
                                                                                      =============    =============
</TABLE>

<TABLE>
<CAPTION>
                               STATEMENT OF INCOME

                                                                                  Years Ended September 30,
                                                                              2000           1999           1998
                                                                         ------------   ------------   ------------
<S>                                                                        <C>            <C>            <C>
Income:
Dividends from Bank Subsidiary                                               $ 6,000        $ 3,000        $ 4,500
Interest From:
              Bank's ESOP Plan                                                   142            159            193
              Investments                                                        133            180            309
                                                                               6,275          3,339          5,002
Expense:
       Non-Interest Expense                                                      400            462            615
                                                                         ------------   ------------   ------------
Income before income taxes and equity in undistributed
   net income of subsidiaries                                                  5,875          2,877          4,387
Income tax (benefit)                                                             (47)           (48)           (54)
                                                                         ------------   ------------   ------------
                                                                               5,922          2,925          4,441
Subsidiaries dividends received in excess of subsidiaries net income          (2,418)          (420)        (1,423)
                                                                         ------------   ------------   ------------
Net income                                                                   $ 3,504        $ 2,505        $ 3,018
                                                                         ============   ============   ============
</TABLE>

                                       40
<PAGE>

                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                Years Ended September 30,
                                                                         2000              1999             1998
                                                                      ------------     -------------     ------------
<S>                                                                     <C>               <C>              <C>
Cash flows from operating activities:
            Net Income                                                    $ 3,504           $ 2,505          $ 3,030
            Adjustments:
                        Subsidiaries dividends received in excess
                           of subsidiaries net income                       2,418               420            1,423
                       (Increase) decrease in other assets                     55               215            (123)
                        Increase (decrease)in other liabilities                22                 6               82
                        Other                                                  75                80              356
                                                                      ------------     -------------     ------------
Net cash provided by operations                                             6,074             3,226            4,768
                                                                      ------------     -------------     ------------

Cash flows from investing activities:
            Proceeds from maturities of investments                         1,570                 -            1,500
            Investment in Homeowners                                            -            (2,267)               -
            Proceeds from securities available for sale                         -                 -              411
                                                                      ------------     -------------     ------------
Net cash provided (used) by investing activities                            1,570            (2,267)           1,911
                                                                      ------------     -------------     ------------
Cash flows from financing activities:
            Payments received on ESOP bank loan                               360               360              360
            Purchases of treasury stock                                    (4,947)           (2,912)          (5,492)
            Proceeds from exercise of stock options                            23               336            1,315
            Payments of cash dividends                                     (1,206)           (1,381)          (1,358)
                                                                      ------------     -------------     ------------
Net cash used in financing activities                                      (5,770)           (3,597)          (5,175)
                                                                      ------------     -------------     ------------

Increase (decrease) in cash and cash equivalents                            1,874            (2,638)           1,504
Cash and cash equivalents:
            Beginning of year                                                 278             2,916            1,412
                                                                      ------------     -------------     ------------
            End of year                                                   $ 2,152            $  278          $ 2,916
                                                                      ============     =============     ============
</TABLE>

(19)     Business Segments

The  Corporation's  reportable  business  segments are business units that offer
different products and services that are marketed through different channels. In
accordance  with SFAS No. 131,  "Disclosure  about Segments of an Enterprise and
Related   Information",   the  Corporation   has  identified  its   wholly-owned
subsidiaries  First Federal,  fsb,  (Bank) and Homeowners  Mortgage  Corporation
(HMC) as reportable  business  segments.  Both segments  operate and are managed
independently.

The  accounting  policies  and the  nature of  business  of these  segments  are
described in the summary of significant accounting policies (Note 1). Management
evaluates  segment  performance  based on segment  profit or loss before  income
taxes and  nonrecurring  gains and  losses,  and  returns on average  assets and
average equity. Transfers between segments are accounted for at market value.

Firstate Services,  the Agency and FSF Financial  Corporation (holding company),
did not meet the quantitative thresholds for determining reportable segments and
therefore are included in the "Other" category.

                                       41
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(19)     Business Segments- Continued (in thousands)
(20)

<TABLE>
<CAPTION>
                                                         First       Homeowners                             Consolidated
                                                      Federal fsb  Mortgage Corp.    Other     Eliminations    Total
                                                   --------------------------------------------------------------------
<S>                                                  <C>           <C>           <C>         <C>           <C>
As of and for the year ended September 30, 2000
        Interest income from external sources          $  32,565      $     180      $   132            -    $  32,877
        Non-interest income from external sources          2,708          1,134          982            -        4,824
        Intersegment interest income                         148              -        5,994       (6,142)           -
        Interest expense                                  19,760            141            -         (148)      19,753
        Provision for loan loss                              216              -            -            -          216
        Depreciation and Amortization                        553            123           45            -          721
        Other non-interest expense                         9,186          2,341        1,267         (815)      11,979
        Income tax expense (benefit)                       2,396           (162)          16            -        2,250
        Net Income (loss)                                  3,850           (334)       5,988       (6,000)       3,504
                                                   --------------------------------------------------------------------
        Total Assets                                   $ 464,880     $    4,559    $  38,452   $  (41,377)   $ 466,515
                                                   ====================================================================

As of and for the year ended September 30, 1999
        Interest income from external sources          $  29,061      $     171      $     8            -    $  29,240
        Non-interest income from external sources          2,189          2,180          890            -        5,259
        Intersegment interest income                         183              -        3,152       (3,335)           -
        Interest expense                                  18,079            301            -         (182)      18,198
        Provision for loan loss                              456              -            -            -          456
        Depreciation and Amortization                        454             99           42            -          595
        Other non-interest expense                         8,683          2,333        1,214         (404)      11,826
        Income tax expense (benefit)                       1,652             11           31            -        1,694
        Net Income (loss)                                  2,563            (64)       3,006       (3,000)       2,505
                                                   --------------------------------------------------------------------
        Total Assets                                   $ 413,391     $    6,210    $  43,058   $  (44,565)   $ 418,094
                                                   ====================================================================

As of and for the year ended September 30, 1998
        Interest income from external sources          $  29,667              -      $   314            -    $  29,981
        Non-interest income from external sources          1,758              -          511            -        2,269
        Intersegment interest income                           5              -        4,692       (4,697)           -
        Interest expense                                  18,494              -            -           (5)      18,489
        Provision for loan loss                              302              -            -            -          302
        Depreciation and Amortization                        355                          14                       369
        Other non-interest expense                         7,574                       1,014         (193)       8,395
        Income tax expense (benefit)                       2,036              -          (12)           -        2,024
        Net Income (loss)                                  3,013              -        4,517       (4,500)       3,030
                                                   --------------------------------------------------------------------
        Total Assets                                   $ 411,753              -    $  42,614   $  (38,135)   $ 416,232
                                                   ====================================================================
</TABLE>
                                       42
<PAGE>
                  Selected Quarterly Financial Data (Unaudited)
                  For the Three Years Ended September 30, 2000
<TABLE>
<CAPTION>

                                                     First        Second        Third        Fourth
                                                    Quarter      Quarter       Quarter       Quarter        Year
                                               ---------------------------------------------------------------------
<S>                                                <C>          <C>           <C>           <C>          <C>
Fiscal 2000
Interest income                                       $7,534       $7,797        $8,422        $9,124       $32,877
Interest expense                                       4,386        4,626         5,054         5,687        19,753
                                               ---------------------------------------------------------------------
Net Interest Income                                    3,148        3,171         3,368         3,437        13,124
Provision for loan losses                                 54           54            54            54           216
Gain on sale of assets                                   346          246           246           359         1,197
Net income                                              $821         $856          $954          $873        $3,504
Basic earnings per share                                0.32         0.35          0.41          0.39          1.46
Diluted earnings per share                              0.31         0.35          0.40          0.38          1.43
Cash dividends declared per share                     $0.125       $0.125        $0.125        $0.125         $0.50
Market range:
     High bid (1)                                     $12.38       $12.38        $13.00        $12.63        $13.00
     Low bid (1)                                      $11.81       $10.50        $10.45        $11.88        $10.50

Fiscal 1999
Interest income                                       $7,503       $7,242        $7,267        $7,408       $29,420
Interest expense                                       4,704        4,522         4,526         4,446        18,198
                                               ---------------------------------------------------------------------
Net Interest Income                                    2,799        2,720         2,741         2,962        11,222
Provision for loan losses                                114          114           114           114           456
Gain on sale of assets                                   700          573           624           444         2,341
Net income                                              $842         $693          $525          $445        $2,505
Basic earnings per share                                0.32         0.26          0.20          0.17          0.94
Diluted earnings per share                              0.30         0.25          0.19          0.17          0.90
Cash dividends declared per share                     $0.125       $0.125        $0.125        $0.125         $0.50
Market range:
     High bid (1)                                     $15.75       $15.50        $14.44        $14.13        $15.75
     Low bid (1)                                      $14.25       $13.56        $13.50        $11.75        $11.75

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

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

 (1)  As reported by the Nasdaq Stock Market.  Such over the counter  quotations
      do not reflect inter dealer  prices,  without retail mark up, mark down or
      commission and may not necessarily represent actual transactions.

                                       43