SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
           For Annual and Transition Reports Pursuant to Sections 13
                 or 15(d) of the Securities Exchange Act of 1934

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended               September 30, 1998            
                          --------------------------------------------

                                     - or -

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period  __________________ to ____________________

Commission Number: 0-24648

                               FSF FINANCIAL CORP.
             (Exact name of Registrant as specified in its Charter)

              Minnesota                                     41-1783064
(State or other jurisdiction of incorporation            (I.R.S. Employer)
  or organization)                                       Identification No.)

201 Main Street South, Hutchinson, Minnesota                55350-2573
(Address of principal executive offices)                     Zip Code

Registrant's telephone number, including area code:  (320) 234-4500

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                                (Title of Class)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filling requirements for the past 90 days. YES X   NO
                                              ---

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.[X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Registrant,  based on the average  bid and asked price of the  Registrant's
Common Stock as quoted on the National Association of Securities Dealers,  Inc.,
Automated   Quotations   National   Market   on   November   30,   1998   was  $
35,477,505(2,365,167 shares at $ 15.00 per share).

     As of November 30, 1998 there were issued and outstanding  2,972,513 shares
of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     September 30, 1998. (Parts I, II and IV)

2.   Portions of the Proxy  Statement for the Annual Meeting of  Stockholders to
     be held January 19, 1999. (Part III)

<PAGE>

                                      INDEX

PART I                                                                      Page

Item 1.   Business.............................................................1

Item 2.   Properties..........................................................20

Item 3.   Legal Proceedings...................................................21

Item 4.   Submission of Matters to a Vote of Security Holders.................21


PART II

Item 5.   Market for Registrant's Common Equity and Related
           Stockholder Matters................................................21

Item 6.   Selected Financial Data ............................................21

Item 7.   Management's Discussion of Financial Condition and
           Results of Operations..............................................21

Item 7A.  Quantitative and Qualitative Disclosure about Market Risk ..........21

Item 8.   Financial Statements and Supplementary Data.........................21

Item 9.   Change in and Disagreements with Accountants on Accounting and
           Financial Disclosure...............................................21


PART III

Item 10.  Directors and Executive Officers of the Registrant..................21

Item 11.  Executive Compensation..............................................21

Item 12.  Security Ownership of Certain Beneficial Owners and Management......22

Item 13.  Certain Relationships and Related Transactions......................22


PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.....22

<PAGE>

                                     PART I

ITEM 1. BUSINESS

General

FSF Financial Corp. (the "Company"),  a Minnesota Corporation,  was organized in
May,  1994,  and as of October 6, 1994,  became the  holding  company  for First
Federal fsb ("First  Federal" or the  "Bank").  First  Federal is the  resulting
institution of the merger of First State Federal  Savings and Loan  Association,
Hutchinson, MN ("Hutchinson"), and First Federal Savings and Loan Association of
Hastings,  Hastings,  MN  ("Hastings").  The merger of the two  institutions was
completed in September,  1994  ("Merger").  Hutchinson  was organized as a state
chartered  mutual  savings and loan  association  in 1933 and received a federal
charter in 1934.  Hastings was initially chartered in 1881 as the "Dakota County
Building  and Loan  Association"  and  obtained a federal  charter in 1968.  The
Company operates three wholly owned subsidiaries, Insurance Planners, Homeowners
Mortgage  Corporation  ("Homeowners")  and the  Bank.  Insurance  Planners  (the
"Agency") is an independent  property and casualty  insurance  agency located in
Hutchinson,  MN.  Homeowners is a mortgage  banking  company  located in Vadnais
Heights, MN. The Agency was acquired by the Company on June 1, 1998.  Homeowners
is the result of an acquisition on November 17, 1998.

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 mortgage  loans secured by  residential  real estate  located in
Minnesota.  At September  30, 1998,  First  Federal  operated 11 retail  banking
offices in Minnesota.

First Federal is regulated by the Office of Thrift Supervision  ("OTS"),  and by
the Federal Deposit Insurance  Corporation  ("FDIC") which,  through the Savings
Association  Insurance Fund ("SAIF"),  insures,  up to certain legal limits, the
deposit accounts of institutions such as First Federal.  First Federal is also a
member of the Federal Home Loan Bank ("FHLB") of Des Moines, which is one of the
twelve  regional banks for federally  insured savings  institutions  and certain
other residential lending entities comprising the Federal Home Loan Bank System.

Market Area

The Bank is  authorized  to make  loans  throughout  the  United  States.  First
Federal's primary market area consists of the ten Minnesota  counties of Benton,
Carver, Dakota, McLeod, Meeker,  Sherburne,  Sibley,  Stearns,  Washington,  and
Wright.  The  market  area  extends  from the St.  Cloud area  northwest  of the
Minneapolis/St  Paul metropolitan area to the Mississippi River southeast of the
Minneapolis/St.  Paul metropolitan area. The economic  composition of the market
area  is  extremely   diverse  and   contains   agriculture,   commercial,   and
manufacturing  enterprises.  The market  area is  generally  considered  to be a
"bedroom" community for the Minneapolis/St. Paul metropolitan area.

<PAGE>
Lending Activities

General.  The  following  table  sets forth  the composition  of the Bank's loan
portfolio in dollars and in percentages  of total loans at the dates  indicated.

<TABLE>
<CAPTION>
                                                                                At September 30,
                                      ----------------------------------------------------------------------------------------------
                                             1998              1997             1996              1995               1994
                                      ----------------------------------------------------------------------------------------------
                                        Amount       %       Amount     %       Amount     %     Amount      %      Amount     %
                                      ----------------------------------------------------------------------------------------------
Residential real estate:                                                          (Dollars in Thousands)
<S>                                  <C>          <C>    <C>         <C>    <C>         <C>    <C>        <C>     <C>       <C>  
   One-to-four family  (1)            $ 157,340    52.2   $ 170,422   60.3   $ 150,102   64.7  $ 121,034   64.6   $ 89,100   72.8
   Residential construction              21,960     7.3      20,796    7.4      19,676    8.5     20,366   10.9      4,474    3.7
   Multi-family                           2,975     1.0       3,370    1.2       3,753    1.6      3,708    2.0      3,209    2.6
                                      ----------------------------------------------------------------------------------------------
                                        182,275    60.4     194,588   68.9     173,531   74.8    145,108   77.4     96,783   79.1

Agricultural loans                       22,959     7.6           -      -           -      -          -      -          -      -
Land and commercial real estate          34,399    11.4      38,582   13.7      18,637    8.0     16,951    9.0      7,024    5.7
Commercial business                      21,095     7.0       8,114    2.9       6,089    2.6      2,715    1.4        439    0.4
                                      ----------------------------------------------------------------------------------------------
                                        260,728    86.4     241,284   85.4     198,257   85.4    164,774   87.9    104,246   85.1
Consumer:
   Home equity and second mortgage       23,606     7.8      20,812    7.4      17,692    7.6     10,950    5.8      4,427    3.6
   Automobile loans                       9,670     3.2      11,596    4.1      10,080    4.3      8,399    4.5      6,950    5.7
   Other                                  7,605     2.5       8,821    3.1       6,075    2.6      3,326    1.8      6,742    5.6
                                      ----------------------------------------------------------------------------------------------
          Total loans                   301,609   100.0     282,513  100.0     232,104  100.0    187,449  100.0    122,365  100.0
                                                ========            =======            ========          =======           =======
Less:
   Loans in process                     (16,658)            (20,364)           (13,401)          (15,010)           (3,982)
   Deferred fees                           (641)               (703)              (757)             (613)             (315)
   Allowance for loan losses             (1,035)               (852)              (776)             (764)             (748)
                                      ----------          ----------          ----------        ----------        ----------
          Total loans, net            $ 283,275           $ 260,594           $ 217,170         $ 171,062          $117,320
                                      ==========          ==========          ==========        ==========        ==========
</TABLE>
-------------------------------------
(1)  Includes  loans  held for sale in the  amount  of $2.7  million,  $204,000,
     $443,000, $230,000 and $729,000 as of September 30, 1998, 1997, 1996, 1995,
     and 1994, respectively.

The following  table sets forth the Bank's loan  originations,  loan  purchases,
loan sales, and principal payments for the periods indicated:
<TABLE>
<CAPTION>
                                                                      Years Ended September 30,
                                                  -----------------------------------------------------------------
                                                     1998         1997        1996         1995             1994
                                                  -----------------------------------------------------------------
                                                                           (In Thousands)
<S>                                               <C>          <C>          <C>          <C>            <C>      
Total gross loans receivable at
   end of period                                  $ 301,609    $ 282,513    $ 232,104    $ 187,449       $ 122,365
Loans  originated:
 Residential  real  estate:
  One-to-four family                                 56,768       55,144       53,801       45,988          42,462
  Residential  construction                          23,007       12,968       12,975       21,996           5,064
  Multi-family                                          240          190           --          437              --
                                                  ------------------------------------------------------------------
         Total  residential  real estate             80,015       68,302       66,776       68,421          47,526
 Land and commercial real estate                      4,960       20,077        3,241        8,588           1,665
 Commercial business                                  9,801        2,402          274          250             123
 Agricultural                                        27,049           --           --           --              --
 Consumer                                            25,740       28,465       27,270       17,465          13,438
                                                  ------------------------------------------------------------------
         Total loans  orginated                     147,565      119,246       97,561       94,724          62,752
Purchase of loans                                    10,832        8,528       17,447       20,993              --
Sale of loans                                       (24,953)      (6,661)      (3,509)        (810)        (19,141)
Principal repayments                               (112,284)     (72,035)     (63,813)     (49,651)        (49,698)
Other (net)                                          (2,064)       1,331       (3,031)        (172)          2,530
                                                  ------------------------------------------------------------------
Net loan activity                                 $  19,096    $  50,409    $  44,655    $  65,084       $  (3,557)
                                                  ==================================================================
</TABLE>


                                       2

<PAGE>

Maturity of Loans.  The  following  table sets forth the  maturity of the Bank's
loans at September 30, 1998. The table does not include prepayments or scheduled
principal  repayments.  Prepayments and scheduled principal  repayments on loans
totaled $112.0 million,  $72.0 million,  $63.8 million, $49.7 million, and $49.7
million for the years ended  September  30,  1998,  1997,  1996,  1995 and 1994,
respectively.  Adjustable-rate  mortgage  loans are shown as  maturing  based on
contractual maturities.

<TABLE>
<CAPTION>
                                 Family             Multi-Family                             Business,
                               Real Estate          and Commercial                       Agriculture and
                                Mortgages             Real Estate         Construction      Consumer              Total
                             --------------------------------------------------------------------------------------------
Amounts Due:                                                            (In Thousands)
<S>                            <C>                <C>                    <C>              <C>                 <C>      

Within 3 months                 $  9,296           $     2,878            $   4,476        $  39,089           $  55,739
3 months to 1 year                16,749                 6,443               17,484            8,714              49,390
                             --------------------------------------------------------------------------------------------
Total due before one year         26,045                 9,321               21,960           47,803             105,129
                             --------------------------------------------------------------------------------------------

After 1 year:
   1 to 3 years                   10,742                13,985                                12,784              37,511
                                                                                  -
   3 to 5 years                   26,708                 9,187                                18,276              54,171
                                                                                  -
   5 to 10 years                  38,753                 3,242                                 5,071              47,066
                                                                                  -
   10 to 20 years                 41,327                 1,639                                 1,001              43,967
                                                                                  -
   Over 20 years                  13,765                                                                          13,765
                                                             -                    -                -
                             --------------------------------------------------------------------------------------------
Total due after one year         131,295                28,053                    -           37,132             196,480
                                                                                  -
                             --------------------------------------------------------------------------------------------
Total amount due               $ 157,340           $    37,374            $  21,960        $  84,935           $ 301,609
                             ============================================================================================
</TABLE>

The  following  table  sets  forth  the  dollar  amount  of all  loans due after
September  30,  1999,  which have  predetermined  interest  rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>

                                                           Fixed-           Balloon           Adjustable
                                                           rates             Rates              Rates             Total
                                                     ---------------     --------------     --------------    -------------
                                                                               (In Thousands)
<S>                                                      <C>                <C>              <C>               <C>     
One-to four-family real estate and construction          $  76,315          $  9,354          $  45,626         $131,295
Land, multi-family and commercial real estate               11,601             5,144             11,308           28,053
Commercial business, agricultural and consumer              30,848                                6,284           37,132
                                                                                   -
                                                     ---------------     --------------     -------------     -------------
     Total                                               $ 118,764          $ 14,498          $  63,218         $196,480
                                                     ===============     ==============     =============     =============
</TABLE>


One- to Four-Family  Mortgage Loans. The largest portion of the Bank's loans are
made for the  purpose of enabling  borrowers  to  purchase  one- to  four-family
residences secured by first liens on the properties. The Bank originates balloon
mortgage  loans,  ARM loans and  fixed-rate  mortgage  loans  secured by one- to
four-family  residences with loan terms up to 30 years. The Bank also offers FHA
and VA loans that are  originated  and then  sold,  servicing  released,  in the
secondary  market.  Borrower demand for balloon and ARM loans versus  fixed-rate
mortgage  loans  depends on various  factors,  including,  but not  limited  to,
interest rates offered,  the expectations of changes in the short- and long-term
levels  of  interest  rates  and loan  fees  charged.  The  relative  amount  of
fixed-rate mortgage loans, balloon loans and ARM loans that can be originated at
any  time  is  largely  determined  by the  demand  for  each  in a  competitive
environment.  The Bank sells  substantially  all of its fixed-rate  loans to the
secondary  market and retains  servicing  on loans sold to the Federal Home Loan
Mortgage Corporation ("FHLMC").

The Bank originates  three-,  five- and seven-year  balloon  mortgage loans, the
majority of which are three-year balloon  mortgages.  These mortgages contain no
contractual  assurances  that the loan will be renewed.  At maturity the loan is
generally  rewritten and  re-recorded;  however,  if the borrower's loan payment
history is satisfactory,  a new appraisal is not required.  Management  believes
that  balloon  loans  have  a  pricing  characteristic  that  helps  offset  the
detrimental  effect that rising rates could have on net interest  income because
the balloon loans do not contain interest rate adjustment caps. At September 30,
1998,  balloon  mortgages  were  $35.2  million,  or  11.4% of the  Bank's  loan
portfolio.

The Bank offers ARM loans that adjust  every year,  with the initial  adjustment
coming one, three,  five, seven or ten years after  origination.  The loans have
terms from 10 to 30 years and the  interest  rates on these loans are  generally
based on treasury bill indices. The annual interest rate cap (the maximum amount
by which the  interest  rate may be increased in a year) on the Bank's ARM loans
is generally  2.0% and the lifetime cap is generally  6.0% over the initial rate
of the loan. The Bank considers market factors and competitive rates on loans as
well as its own cost of funds when determining the rates on the loans it offers.
The Bank does not originate loans with negative amortization.

Residential  Construction Lending. The Bank originates residential  construction
loans to qualified  borrowers for construction of one-to-four family residential
properties  located in the Bank's  market area.  Construction  loans are made to
builders  on a  pre-

                                       3
<PAGE>

sold,  speculative and model home basis and to owners for  construction of their
primary residence on a  construction/permanent  basis. Such loans generally have
terms from six to nine months.  Loans for speculative  housing  construction are
made to area builders only after a thorough  background check has been made. The
background  check  includes an analysis of the builder's  financial  statements,
credit reports and reference checks with sub-contractors and suppliers. The Bank
usually will have no more than two speculative or model home construction  loans
outstanding  at any time to any single  builder.  Loan proceeds are disbursed in
increments as  construction  progresses and only after a physical  inspection of
the  project  is  made  by a  Bank  representative.  Accrued  interest  on  loan
disbursements is paid monthly.

Loans  involving  construction  financing  present a greater  level of risk than
loans  for  the  purchase  of  existing  homes  because   collateral  value  and
construction  costs can only be estimated at the time the loan is approved.  The
Bank has  sought  to  minimize  the risk by  limiting  construction  lending  to
qualified  borrowers  in the  Bank's  market  area,  by  limiting  the number of
construction  loans for  speculative  purposes  outstanding  at any time, and by
installing   a  system  to  inspect  the   property  and  to  monitor  the  loan
disbursements.

Land Acquisition and Development Loans,  Commercial Real Estate and Multi-Family
Lending. The Bank originates land loans on residential properties located in the
Bank's primary market area. Land lending generally involves  additional risks to
the lender as  compared  with  residential  mortgage  lending.  These  risks are
attributable to the fact loan funds are advanced upon the security of land under
development,  and predicated on the future value of the property upon completion
of  development.  Loans on  undeveloped  land may run the risk of adverse zoning
changes,  environmental  or other  restrictions on future use.  Because of these
factors,  the analysis of land loans  requires an expertise that is different in
significant respects from that which is required for residential lending.

Commercial  real estate loans are permanent  loans secured by improved  property
such as office buildings,  retail-wholesale facilities, industrial buildings and
other non-residential buildings.  Commercial real estate loans may be originated
in  amounts  up to 80% of the  appraised  value  of the  mortgaged  property  as
determined by a certified or licensed independent appraiser.

Multi-family  residential  real  estate  loans are  permanent  loans  secured by
apartment buildings. Of primary concern in multi-family  residential real estate
lending is the borrower's creditworthiness,  feasibility and cash flow potential
of the project.  Loans  secured by income  properties  generally  are larger and
involve greater risks than residential  mortgage loans because payments on loans
secured by income properties are often dependent on the successful  operation or
management  of the  properties.  As a  result,  repayment  of such  loans may be
subject  to a greater  extent  than  residential  real  estate  loans to adverse
conditions  in the real estate  market or the economy.  In order to monitor cash
flows on income properties,  the Bank requires borrowers and loan guarantors, if
any,  to provide  annual  financial  statements  and rent rolls on  multi-family
loans. At September 30, 1998, the five largest land acquisition and development,
commercial real estate and  multi-family  loans ranged from $2.5 million to $5.1
million with an average committed  outstanding balance of $3.8 million. All such
loans were current and have performed in accordance with their terms.

Commercial  Business  Lending.  The Bank's  commercial  business loans are for a
variety of purposes including working capital,  accounts receivable,  inventory,
equipment and acquisitions. The Bank has no energy or foreign loans.

Unlike residential  mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property with a value that tends to be more easily
ascertainable,  commercial business loans typically are made on the basis of the
borrower's  ability  to make  repayment  from  the cash  flow of the  borrower's
business. As a result, the availability of funds for the repayment of commercial
business  loans may be  substantially  dependent  on the success of the business
itself (which is likely to be dependent upon the general economic  environment.)
The Bank's commercial business loans are sometimes,  but not always,  secured by
business assets, such as accounts receivable,  equipment and inventory,  as well
as real estate.  However,  the collateral securing the loans may depreciate over
time,  may be  difficult to  appraise,  and may  fluctuate in value based on the
success of the business.

The Bank  recognizes the generally  increased  risks  associated with commercial
business lending.  The Bank's commercial  business lending policy emphasizes (1)
credit  file  documentation,  (2)  analysis  of the  borrower's  character,  (3)
analysis  of the  borrower's  capacity  to repay the loan,  (4)  adequacy of the
borrower's capital and collateral, and (5) evaluation of the industry conditions
affecting the borrower. Analysis of the borrower's past, present and future cash
flows is also an important aspect of the Bank's credit analysis.  The Bank plans
to  continue  to expand  its  commercial  business  lending,  subject  to market
conditions.

The Bank  generally  obtains  annual  financial  statements  from  borrowers for
commercial  business loans. These statements are analyzed to monitor the quality
of the loan.  As of September  30, 1998,  the five largest  commercial  business
loans  ranged  from $1.4  million to $5.5  million,  with an  average  committed
balance  outstanding  of $3.3  million.  All such  loans  are  current  and have
performed in accordance with their terms.

Agricultural  Lending.  The Bank  originates  loans to finance  the  purchase of
farmland,  livestock,  farm  machinery and equipment,  seed,  fertilizer and for
other farm related  products.  Agricultural  operating  loans are  originated at
either an  adjustable or fixed

                                       4
<PAGE>

rate of interest  for up to a one year term or, in the case of  livestock,  upon
sale.  Most  agricultural  operating  loans have terms on one year or less. Such
loans  provide for payments of principal  and interest at least  annually,  or a
lump sum payment upon maturity in the original term is less than one year. Loans
secured by agricultural  machinery are generally  originated as fixed-rate loans
with terms of up to five years.

Agricultural  real estate loans are frequently  originated with adjustable rates
of interest.  Generally, such loans provide for a fixed rate of interest for the
first three  years,  adjusting  annually  thereafter.  In  addition,  such loans
generally provide for a ten year term based on a 20 year amortization  schedule.
Adjustable-rate  agricultural  real estate loans are generally limited to 80% of
the value of the property securing the loan.

Agricultural lending affords the Bank the opportunity to earn yields higher than
those  obtainable  on one- to  four-family  residential  lending.  Nevertheless,
agricultural  lending involves a greater degree of risk than one- to four-family
residential  mortgage  loans  because of the  typically  larger loan amount.  In
addition,  payments  on loans  are  dependent  on the  successful  operation  or
management  of the farm  property  securing  the loans or for which an operating
loan is  utilized.  The success of the loan may also be affected by many factors
outside the control of the farm borrower.

Weather presents one of the greatest risks as hail,  drought,  floods,  or other
conditions,  can severely limit crop yields and thus impair loan  repayments and
the value of the underlying  collateral.  This risk can be reduced by the farmer
with  multi-peril  crop  insurance  which can  guarantee  set  yields to provide
certainty  of  repayment.   Unless  the  circumstances  of  the  borrower  merit
otherwise,  the Bank  generally  does  not  require  its  borrowers  to  procure
multi-peril  crop or hail  insurance.  However,  recent  changes  in  government
support  programs  generally  require  that  farmers  procure  multi-peril  crop
insurance to be eligible to participate in such programs.

Grain and  livestock  prices also present a risk as prices may decline  prior to
sale  resulting  in a failure  to cover  production  costs.  These  risks may be
reduced by the farmer with the use of futures  contracts or options to provide a
"floor"  below which prices will not fall.  The Bank does not monitor or require
the use by borrowers of future contracts or options.

Another risk is the  uncertainty of government  programs and other  regulations.
Some farmers rely on the income from  government  programs to make loan payments
and if these  programs are  discontinued  or  significantly  changed,  cash flow
problems or defaults could result.

Finally,  many farms are dependent on a limited number of key individuals  whose
injury or death may result in an inability to successfully  operate the farm. At
September 30, 1998, the five largest  agricultural loans ranged from $660,000 to
$4.6 million, with an average committed outstanding balance of $1.6 million. All
such loans are in the Bank's  market  area,  are current and have  performed  in
accordance with their terms.

Consumer and Other Loans.  The Bank offers  consumer and other loans in the form
of home equity and second mortgage loans,  automobile  loans and loans for other
purposes.  Federal regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of an institution's  assets.
The Bank originates consumer loans in order to provide a wide range of financial
services to its  customers  and because the shorter  terms and  normally  higher
interest  rates on such loans help  maintain a  profitable  spread  between  its
average loan yield and the Bank's cost of funds.

In connection with consumer loan applications,  the Bank verifies the borrower's
income and reviews credit bureau reports.  In addition,  the relationship of the
loan to the value of the collateral is considered. Consumer loans entail greater
risks than one-to- four family residential mortgage loans, particularly consumer
loans secured by rapidly  depreciable  assets such as  automobiles or loans that
are unsecured.  In such cases,  any repossessed  collateral for a defaulted loan
may not provide an adequate source of repayment of the outstanding loan balance,
since  there is a greater  likelihood  of damage,  loss or  depreciation  of the
underlying collateral.  Further,  consumer loan collections are dependent on the
borrower's  continuing financial stability,  and therefore are more likely to be
adversely  affected  by job  loss,  divorce,  illness  or  personal  bankruptcy.
Finally,  the application of various federal and state laws,  including  federal
and state  bankruptcy  and  insolvency  laws,  may limit the amount which can be
recovered  on such  loans in the event of a  default.  At  September  30,  1998,
consumer  loans  90 days or more  delinquent  totaled  $69,000  or 0.18% of such
loans.  Management believes that the Bank's level of consumer loan delinquencies
is relatively low in comparison to other  financial  institutions.  No assurance
can be given,  however,  that the Bank's delinquency rate on consumer loans will
continue to remain low in the future.

Loan Approval  Authority and  Underwriting.  First  Federal's  primary source of
mortgage loan  applications  is referrals from existing or past  customers.  The
Bank also  solicits  applications  from real estate  brokers,  contractors,  and
call-ins  and  walk-ins  to its  offices.  First  Federal  advertises  in  local
newspapers for first mortgage and home equity loans.

Upon  receipt of any loan  application  from a  prospective  borrower,  a credit
report is ordered and verifications of specific information relating to the loan
applicant's  employment,  income and credit standing are requested. An appraisal
or valuation  determination,  subject to  regulatory  requirements,  of the real
estate  intended  to secure  the  proposed  loan is  undertaken.  First

                                       5
<PAGE>

Federal  utilizes the services of Board  approved  appraisers and two authorized
appraisers on staff at the Bank. In connection  with the loan approval  process,
First  Federal's loan officers  analyze the loan  applications  and the property
involved.  All  residential,   home  equity,   multi-family,   construction  and
commercial real estate loans are  underwritten  and processed at First Federal's
main office by First  Federal's loan servicing  department,  subject to the loan
underwriting policies as approved by the Board of Directors. The Chief Executive
Officer,  President,  and the Directors of Lending are authorized to approve all
one-to-four  family  applications.  In general,  loans in excess of $1.0 million
must be approved by the Board of Directors.

Loan  applicants  are promptly  notified of the decision of the Bank by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest rate basis, amortization
term, a brief  description of real estate to be mortgaged to First Federal,  and
the notice of requirement of insurance  coverage to be maintained to protect the
Bank's  interest.  First Federal  requires title insurance or a title opinion on
first mortgage loans and fire and casualty insurance on all properties  securing
loans,  which  insurance must be maintained  during the entire term of the loan.
The Bank also requires  flood  insurance,  if  appropriate,  in order to protect
First Federal's interest in the property.

Loans-to-One  Borrower.  Under  federal law,  federally-chartered  savings banks
have,  subject to certain  exemptions,  aggregate lending limits to one borrower
equal  to  15%  of the  institution's  unimpaired  capital  and  surplus.  As of
September 30, 1998, First Federal's five largest lending relationships  included
$5.1 million in land development loans to a local developer, a $5.0 million line
of credit to an unaffiliated mortgage-banking company, a $5.5 million commercial
line of credit  participation  loan, a $4.7 million commercial real estate loan,
and a $4.6 million  agricultural  line of credit  participation  loan,  which is
approximately  15% of the total loan. At September 30, 1998,  all of these loans
were within the loans to one borrower limitations, performing in accordance with
their terms, and at market rates of interest.

Loan  Servicing.  The Bank  services  substantially  all of the  loans  which it
retains in its portfolio.  Loan servicing includes collecting and remitting loan
payments,  accounting  for  principal  and  interest,  making  advances to cover
delinquent  payments,  making  inspections  as required of  mortgaged  premises,
contacting  delinquent   mortgagors,   supervising   foreclosures  and  property
dispositions in the event of unremedied defaults and generally administering the
loans.   Funds  that  have  been  escrowed  by  borrowers  for  the  payment  of
mortgage-related  expenses,  such as  property  taxes and  hazard  and  mortgage
insurance premiums, are maintained in noninterest-bearing  accounts at the Bank.
At September 30, 1998,  the Bank had $274,000  deposited in escrow  accounts for
its loans serviced for others.

The following  table  presents  information  regarding the loans serviced by the
Bank for others at the dates indicated.

                                                      September 30,
                                        ----------------------------------------
Mortgage loan portfolios serviced for:     1998           1997           1996
                                        ----------------------------------------
                                                      (In Thousands)
          FHLMC                         $ 42,038       $ 38,137        $ 40,561
          Other Investors                  4,418          4,597             572
                                        ----------------------------------------
                                        $ 46,456       $ 42,734        $ 41,133
                                        ========================================

The Bank receives fees for servicing  mortgage loans,  which generally amount to
0.25% per annum on the declining  balance of mortgage loans.  Such fees serve to
compensate the Bank for the costs of performing the servicing  functions.  Other
sources of loan  servicing  revenues  include late charges.  For the years ended
September  30,  1998,  1997 and 1996,  the Bank earned  gross fees of  $234,000,
$204,000 and  $194,000,  respectively  from loan  servicing.  The Bank retains a
portion of funds  received from borrowers on the loans it services for others in
payment of its servicing fees received on loans serviced for others.

Non-Performing and Problem Assets

Loan Collections and Delinquent Loans. The Bank's collection  procedures provide
that when a loan is 30 days or more  delinquent,  the  borrower is  contacted by
mail and  telephone  and payment is  requested.  If the  delinquency  continues,
subsequent efforts will be made to contact the delinquent  borrower.  In certain
instances,  the Bank may modify the loan or grant a limited  moratorium  on loan
payments to enable the borrower to reorganize his financial affairs. Once a loan
delinquency  exceeds 60 days it is  classified  as special  mention and the Bank
attempts to work with the borrower to establish a repayment schedule to cure the
delinquency.  If the borrower is unable to cure the  delinquency,  the Bank will
institute  foreclosure actions. If a foreclosure action is taken and the loan is
not reinstated,  paid in full or refinanced,  the property is sold at a judicial
sale at which the Bank may be the buyer if there  are no offers to  satisfy  the
debt. Any property acquired as the result of a foreclosure or by deed in lieu of
foreclosure  is classified  as  foreclosed  real estate until such time as it is
sold or otherwise  disposed of by the Bank. At September 30, 1998,  the Bank had
$502,000  of  foreclosed  real  estate,  consisting  of two  one-to-four  family
residential loans and a commercial real estate loan. When foreclosed real estate
is acquired,  it is recorded at the lower of the unpaid principal balance of the
related  loan or its fair  market  value less  related  disposition  costs.  Any
writedown of the property is charged to the allowance for losses.
 
                                      6
<PAGE>

Non-performing  Assets.  Loans are reviewed on a regular basis and are placed on
non-accrual  status  when,  in the  opinion of  management,  the  collection  of
additional  interest  is  doubtful.  Residential  mortgage  loans are  placed on
non-accrual  status  when either  principal  or interest is 90 days or more past
due. Consumer loans are generally charged off when the loan becomes over 90 days
delinquent.  Commercial  business and real estate loans are generally  placed on
non-accrual  status when the loan is 90 days or more past due.  Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest  income.  Subsequent  payments  are either  applied to the  outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate  collectibility  of the loan. At September  30, 1998,  the Bank had
approximately $1.3 million of loans that were more than 60 days delinquent.

The  following  table  sets  forth   information  with  respect  to  the  Bank's
non-performing  assets for the periods  indicated.  During the periods indicated
the Bank had no restructured loans within the meaning of SFAS No. 15.

<TABLE>
<CAPTION>

                                                                              At September 30,
                                               ------------------------------------------------------------------------------------
                                                     1998              1997              1996              1995             1994
                                               ------------------------------------------------------------------------------------
                                                                           (Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S>                                                 <C>               <C>               <C>              <C>               <C>    
   Residential construction loans                   $     -           $   393           $     -          $   209           $     -
   Permanent loans secured by one-to
      four-family units                                 240                25               129              138                26
   Permanent loans secured by non-
      residential real estate                             -                 -                 -                -                 -
   Other                                                  -                 -                 -                -               293
Non-mortgage loans:
   Commercial and agricultural                            -                 -                 -                -                 -
   Consumer                                              69                82                90               33                21
                                               ------------------------------------------------------------------------------------
Total non-accrual loans                                 309               500               219              380               340
Foreclosed real estate and real estate
   held for investment                                  502                72                 -                -               247
                                               ------------------------------------------------------------------------------------
Total non-performing assets                         $   811           $   572           $   219          $   380           $   587
                                               ====================================================================================
Total non-performing loans to net loans               0.11%             0.19%             0.10%            0.22%             0.27%
                                               ====================================================================================
Total non-performing loans to total assets            0.07%             0.13%             0.06%            0.12%             0.11%
                                               ====================================================================================
Total non-performing assets to total assets           0.19%             0.15%             0.06%            0.12%             0.20%
                                               ====================================================================================
</TABLE>

During  the  years  ended  September  30,  1998,  1997,  1996,  1995  and  1994,
approximately $35,317, $22,833, $11,812, $11,593, and $6,109, respectively would
have been recorded on loans  accounted for on a non-accrual  basis if such loans
had been  current  according  to the  original  loan  agreements  for the entire
period.  These amounts were not included in the Bank's  interest  income for the
respective  periods.  No interest income on loans accounted for on a non-accrual
basis was included in income during any of these periods.

Classified Assets.  Management,  in compliance with regulatory  guidelines,  has
instituted an internal  loan review  program,  whereby  loans are  classified as
special  mention,  substandard,  doubtful or loss.  When a loan is classified as
substandard or doubtful, management is required to establish a general valuation
reserve for loan losses in an amount that is deemed prudent.  General allowances
represent  allowances  which have been  established  to recognize  inherent risk
associated with lending activities, but which, unlike specific allowances,  have
not been allocated to particular  problem assets.  When management  classifies a
loan as "loss",  a reserve equal to 100% of the loan balance may be  established
or the loan is charged-off.

An asset is  considered  "substandard"  if it is  inadequately  protected by the
paying capacity and net worth of the obligor or the collateral  pledged, if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the  institution  will  sustain  "some  loss" if the  deficiencies  are not
corrected.  Assets classified as "doubtful" have all of the weaknesses  inherent
in  those  classified  substandard,  with  the  added  characteristic  that  the
weaknesses   present  make   "collection   or   liquidation  in  full,"  "highly
questionable  and  improbable,"  on  the  basis  of  currently  existing  facts,
conditions,  and  values.  Assets  classified  as "loss"  are  those  considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
which do not currently expose the insured  institution to a sufficient degree of
risk to  warrant  classification  in one of the  aforementioned  categories  but
possess credit deficiencies or potential weaknesses, including all loans over 60
days delinquent,  are required to be designated "special mention" by management.
The OTS has  promulgated  regulations  that  discontinue the  classification  of
assets as special mention. However, the Bank continues to utilize this category.

Management's  evaluation of the classification of assets and the adequacy of the
reserve  for loan losses is  reviewed  by  regulatory  agencies as part of their
periodic examinations. At September 30, 1998, First Federal had total classified
assets of $1.7 million of which  $789,000 were  considered  substandard,  and no
assets were  classified  as doubtful or loss.  Special  mention  assets  totaled
$925,000 at September 30, 1998.

                                       7

<PAGE>

Allowance for Loan and Lease Losses and Foreclosed Real Estate. In making loans,
First Federal  recognizes  that credit losses will be  experienced  and that the
risk of loss will vary with,  among other  things,  the type of loan being made,
the  creditworthiness of the borrower over the term of the loan, and in the case
of a secured loan, the quality of the collateral for the loan.  First  Federal's
management  evaluates the need to establish reserves against losses on loans and
other assets each quarter based on estimated losses on specific loans and on any
real  estate held for sale or  investment  when a finding is made that a loss is
estimable and probable. Such evaluation includes a review of all loans for which
full  collectibility  may not be reasonably  assured and considers,  among other
matters,  the  estimated  market value of the  underlying  collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
While  management  recognizes and charges  against the allowance for loan losses
accounts which are determined to be uncollectible,  experience indicates that at
any point in time, possible losses may exist in the loan portfolio which are not
specifically  identifiable.  Therefore,  based upon  management's best estimate,
each year an amount may be charged to  earnings to maintain  the  allowance  for
loan losses at a level sufficient to recognize potential risk.

Impaired  loans,  including all loans that are  restructured  in a troubled debt
restructuring  involving a  modification  of terms,  are measured at the present
value of expected future cash flows  discounted at the loan's initial  effective
interest   rate.   The   fair   value   of  the   collateral   of  an   impaired
collateral-dependent  loan or an observable market price, if one exists,  may be
used as an  alternative to  discounting.  If the measure of the impaired loan is
less than the recorded investment in the loan,  impairment is recognized through
the allowance  for loan losses.  A loan is considered  impaired  when,  based on
current  information and events,  it is probable that the Bank will be unable to
collect  all  amounts  due  according  to the  contractual  terms  of  the  loan
agreement.

First Federal believes it has established its existing allowance for loan losses
in  accordance  with  GAAP.  However,  there can be no  assurance  that  banking
regulators,  in  reviewing  the Bank's loan  portfolio,  will not request  First
Federal to  significantly  increase its  allowance  for loan  losses,  or that a
deteriorating real estate market or other unforeseen economic changes, may cause
First Federal to significantly increase its allowance for loan losses, therefore
negatively affecting First Federal's financial condition and earnings.

                                       8
<PAGE>

The following table sets forth  information with respect to the Bank's allowance
for loan losses at the dates indicated:

<TABLE>
<CAPTION>

                                                                               At September 30,
                                              -----------------------------------------------------------------------------------
                                                   1998             1997              1996              1995             1994
                                              -----------------------------------------------------------------------------------
                                                                            (Dollars in Thousands)
<S>                                             <C>                <C>              <C>              <C>               <C>      
Total loans outstanding                         $ 301,609          $282,513         $ 232,104        $ 187,449         $ 122,365
                                              ===================================================================================
Average loans outstanding                       $ 276,730          $237,475         $ 193,202        $ 142,711         $ 119,133
                                              ===================================================================================
Allowance balance (beginning of period)         $     852          $    776         $     764        $     748         $     721
                                              -----------------------------------------------------------------------------------
Provision (credit):
   Residential                                          -                 -                 -                -                27
   Commercial real estate                               2                40                 -                -                 -
   Land and commercial/agricultural business          293                 -                 -                -                 -
   Consumer                                             7                80                42               24                 6
                                              -----------------------------------------------------------------------------------
       Total provision                                302               120                42               24                33
Charge-off:
   Residential                                         45                13                 -                -                 -
   Commercial real estate                               -                 -                 -                -                 -
   Consumer                                            87                37                34               20                 6
                                              -----------------------------------------------------------------------------------
       Total charge-offs                              132                                                       
                                                                         50                34               20                 6
Recoveries:
   Residential                                          -                 -                 -                -                 -
   Commercial real estate                               -                 -                 -                -                 -
   Consumer                                            13                 6                 4               12                 -
                                              -----------------------------------------------------------------------------------
       Total recoveries                                13                 6                 4               12                 -
                                              -----------------------------------------------------------------------------------
Net charge-offs                                       119                44                30                8                 6
                                              -----------------------------------------------------------------------------------
Allowance balance (at end of period)             $  1,035          $    852         $     776        $     764         $     748
                                              ===================================================================================
Allowance as percent of total loans                 0.34%             0.30%             0.33%            0.41%             0.61%
Net loans charged off as a percent of
   average loans                                    0.04%             0.02%             0.02%            0.01%             0.01%

</TABLE>

To further  monitor and assess the risk  characteristics  of the loan portfolio,
loan delinquencies are reviewed to consider any developing loan problems.  Based
upon the procedures in place, First Federal's experience  regarding  charge-offs
and  recoveries  and the  current  risk  elements in the  portfolio,  management
believes  the  allowance  for loan losses at September  30,  1998,  is adequate.
However,  assessment of the adequacy of the  allowance for loan losses  involves
subjective  judgments regarding future events and thus there can be no assurance
that  additional  provisions  for loan  losses  will not be  required  in future
periods.

The  following  table sets forth the breakdown by loan category of the allowance
for loan losses.

<TABLE>
<CAPTION>

                                                                              September 30,
                                        --------------------------------------------------------------------------------------------
                                               1998              1997             1996              1995             1994
                                        --------------------------------------------------------------------------------------------
                                                   Percent          Percent           Percent          Percent           Percent
                                                  of Total         of Total          of Total         of Total          of Total
                                         Amount    Loans   Amount   Loans    Amount   Loans    Amount  Loans    Amount   Loans
                                        --------------------------------------------------------------------------------------------
                                                                           (Dollars in Thousands)
<S>                                    <C>         <C>     <C>     <C>       <C>      <C>      <C>     <C>     <C>      <C>   
Real estate loans                       $  368      60.4%  $ 413    68.9%    $ 426     74.8%   $ 675    77.5%   $ 675     79.1%
Consumer and commercial business, land,
commercial real estate and agricultural    667      39.6%    439    31.1%      350     25.2%      89    22.5%      73     20.9%
                                        --------------------------------------------------------------------------------------------
                                        $1,035     100.0%  $ 852   100.0%    $ 776    100.0%   $ 764   100.0%   $ 748    100.0%
                                        ============================================================================================
</TABLE>

Investment and Mortgage-backed Securities Activities

General. Federally-chartered thrift institutions have the authority to invest in
various types of liquid assets,  including  United States Treasury  obligations,
securities  of various  Federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements,  and loans on  Federal  Funds.  To  supplement  lending  activities,
subject to various  restrictions,  First Federal invests a portion of its assets
in commercial  paper,  corporate  debt

                                       9

<PAGE>

securities and asset-backed  securities (e.g.,  mortgage-backed  securities).  A
significant  portion of First  Federal's  income  during  recent  years has been
attributable to interest  income on such  securities.  The Corporation  does not
have the same investment limitations as the Bank.

Mortgage-backed  and Related  Securities.  First Federal  invests in residential
mortgage-backed  securities  guaranteed by participation  certificates issues by
FHLMC and Government National Mortgage Association ("GNMA"). The mortgage-backed
securities  portfolio as of  September  30,  1998,  consisted  primarily of Real
Estate Mortgage Investment Conduits ("REMICs") ($53.3 million).

At  September  30,  1998,  the  carrying  value of  mortgage-backed  and related
securities held to maturity totaled $36.4 million,  or 8.7% of total assets. The
market value of such securities totaled approximately $35.4 million at September
30, 1998. First Federal also held $16.6 million of  mortgage-backed  and related
securities that were classified available for sale.

Mortgage-backed  securities  represent  a  participation  interest  in a pool of
single-family or multi-family mortgages,  the principal and interest payments on
which  are  passed  from  the  mortgage  originators,   through   intermediaries
(generally   quasi-governmental   agencies)   that   pool  and   repackage   the
participation  interest in the form of securities to investors such as the Bank.
Such quasi-governmental  agencies,  which guarantee the payment of principal and
interest to investors, primarily include FHLMC, FNMA, and GNMA.

Mortgage-backed  securities  typically are issued with stated principal amounts,
and the  securities  are  backed  by pools of  mortgages  that have  loans  with
interest  rates  that  are  within  a range  and have  varying  maturities.  The
underlying  pool  of  mortgages  is  primarily  composed  of  either  fixed-rate
mortgages or ARM loans.  Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through  certificates.  As a result,
the interest  rate risk  characteristics  of the  underlying  pool of mortgages,
(i.e. fixed rate or  adjustable-rate)  as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed  pass-through  security
is equal to the life of the  underlying  mortgages.  Mortgage-backed  securities
issued by FHLMC, FNMA, and GNMA make up a majority of the pass-through market.

Mortgage-backed  securities  provide  for  monthly  payments  of  principal  and
interest and generally have contractual  maturities  ranging from five to thirty
years.  In periods of declining  interest  rates,  payments on many mortgages is
received  faster than the  contractual  amount  required,  causing the estimated
lives of mortgage-related securities to be significantly shorter than expected.

REMICs are typically issued by a  special-purpose  entity (the "issuer"),  which
may be organized in a variety of legal forms, such as a trust, a corporation, or
a partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage related securities.  Once combined,  the cash
flows can be divided into  "tranches"  or "classes"  of  individual  securities,
thereby  creating more  predictable  average duration for each security than the
underlying  pass-through pools.  Accordingly,  under this security structure all
principal  pay  downs  from  the  various  mortgage  pools  are  allocated  to a
mortgage-related  class or classes structured to have priority until it has been
paid off.  Thus,  these  securities  are  intended to address  the  reinvestment
concerns associated with mortgage-backed  securities  pass-through,  namely that
(i)  they  tend to pay off  when  interest  rates  fall,  thereby  taking  their
relatively high coupon with them, and (ii) their expected  average life may vary
significantly among the different tranches.

Some REMIC  instruments are more like traditional debt instruments  because they
have stated  principal  amounts and  traditionally  defined interest rate terms.
Purchasers of certain other REMIC securities are entitled to the excess, if any,
of the issuer's cash inflows,  including  reinvestment  earnings,  over the cash
outflows for debt service and  administrative  expenses.  These mortgage related
instruments may include instruments  designated as residual  interests,  and are
riskier  in that they  could  result in the loss of a  portion  of the  original
investment. Cash flows from residual interests are very sensitive to prepayments
and,  thus,  contain a high degree of  interest-rate  risk.  Residual  interests
represent an ownership  interest in the  underlying  collateral,  subject to the
first lien of the REMICs investors.

The  REMICs  held  by  First  Federal  at  September  30,  1998,   consisted  of
floating-rate  tranches.  The interest  rate of all of the Bank's  floating-rate
securities adjusts monthly and provides the institution with net interest margin
protection in an increasing market rate  environment.  The securities are backed
by mortgages on one- to four-family residential real estate and have contractual
maturities up to 30 years.  None of the  securities are deemed to be "High Risk"
according to OTS guidelines.  The securities are primarily companion tranches to
"PACs" and "TACs". PACs and TACs (Planned and Targeted Amortization Classes) are
designed  to provide a specific  principal  and  interest  cash-flow.  Principal
payments  that are received in excess of the amount needed for the PACs and TACs
are  allocated to the companion  tranches.  When the PACs and TACs are repaid in
full,  all  principal is then used to pay the companion  tranches.  Although the
timing of principal  payments may be impacted by the amount of prepayments  (the
higher the level of prepayments, the sooner the principal will be received), all
of the principal and interest payments are guaranteed.

Investment  Securities.  First Federal is required under federal  regulations to
maintain a minimum  amount of liquid  assets  which may be invested in specified
short-term  securities and certain other  investments.  Liquidity  levels may be
increased or

                                       10

<PAGE>

decreased  depending  upon  the  yields  on  investment  alternatives  and  upon
management's  judgment as to the  attractiveness of the yields then available in
relation to other  opportunities and its expectations of future yield levels, as
well as  management's  projections as to the  short-term  demand for funds to be
used in First Federal's loan origination and other activities.  At September 30,
1998,  the carrying  value of debt  securities  held to maturity  totaled  $24.4
million,  or 5.9% of total assets.  The market value of such securities  totaled
$24.0 million at September 30, 1998. These  securities  consisted mainly of U.S.
Government Securities and U.S. government agency obligations. The Bank also held
available  for  sale  debt and  equity  securities  with a market  value of $3.0
million and $19.5 million respectively, at September 30, 1998.

The  Investment  Policy of First  Federal,  which is established by the Board of
Directors,  is designed to provide and maintain liquidity, to generate favorable
return on investments without incurring undue interest rate and credit risk, and
to compliment First Federal's  lending activity.  The policy currently  provides
for investments held to maturity and investments available for sale.

The  amount  of  short-term  securities  in excess  of  regulatory  requirements
reflects   management's  strategy  to  provide  interest  rate  adjustments  for
securities  that  are  shorter  than  their  maturity.  It is the  intention  of
management to maintain a repricing structure in the Bank's investment  portfolio
that  better  matches  the  interest  rate   sensitivities  of  its  assets  and
liabilities.  However,  during periods of rapidly declining interest rates, such
investments  also  decline  at a faster  rate  than  the  yields  on  fixed-rate
investments.  Investment decisions are made within policy guidelines established
by the Board of  Directors.  Unless loan demand  increases,  the Bank intends to
maintain its investments at current levels.

Investment and Mortgage-backed  Securities  Portfolio.  The following table sets
forth the carrying value of First  Federal's  investment  securities  portfolio,
short-term  investments,  FHLB stock, and mortgage-backed and related securities
at the dates indicated.  At September 30, 1998, the market value of the debt and
equity  securities  portfolio  (including  securities  available  for  sale) and
mortgage-backed  and related  securities  portfolio  (including  mortgage-backed
securities available for sale) was $46.4 and $51.9 million, respectively.

<TABLE>
<CAPTION>
                                                                         September 30,
                                                      ---------------------------------------------------
                                                           1998               1997              1996
                                                      ------------       -------------       ------------
                                                                         (In Thousands)
Investment securities:
<S>                                                    <C>              <C>                  <C>      
   Debt securities                                     $  24,412         $   37,876           $  44,349
   Debt securities available for sale                      3,010              1,000                   -
   FHLB Stock                                              7,363              6,692               5,736
   Equity securities available for sale                   12,096             12,619              12,495
                                                      -----------        -----------         -----------
Total investment securities                               46,881             58,187              62,580
Interest-bearing deposits                                 17,370              3,645               9,392
Federal funds sold                                                                         
                                                               -                  -                   -
Mortgage-backed and related securities:
   Mortgage-backed and related securities                 36,418             38,539              38,557
   Mortgage-backed and related securities         
       available for sale                                 16,574             16,699              16,336
                                                      -----------        -----------         -----------
Total mortgage-backed and related securities              52,992             55,238              54,893
                                                      -----------        -----------         -----------
Total investments                                      $ 117,243         $  117,070           $ 126,865
                                                      ===========        ===========        ============
</TABLE>

                                       11
<PAGE>

The  following  table sets forth  certain  information  regarding  the  carrying
values,  weighted  average  yields  and  maturities  of  the  Bank's  investment
portfolio at September 30, 1998.
<TABLE>
<CAPTION>

                                                                    September 30, 1998
                        ------------------------------------------------------------------------------------------------------------
                                            One Year        One to         Five to        More than
                          Adjustable        or Less       Five Years      Ten Years       Ten Years      Total Investment Securities
                        --------------  --------------- -------------   --------------  --------------   ---------------------------
                        Carry-           Carry-          Carry-          Carry-          Carry-            Carry-              
                          ing   Average   ing   Average   ing   Average   ing   Average   ing   Average     ing     Average   Market
                         Value   Yield   Value   Yield   Value   Yield   Value   Yield   Value   Yield     Value     Yield     Value
                         -----   -----   -----   -----   -----   -----   -----   -----   -----   -----     -----     -----     -----
                                                                  (Dollars in Thousands)
<S>                    <C>       <C>    <C>     <C>    <C>      <C>    <C>     <C>     <C>      <C>     <C>        <C>     <C>     
U.S. Government
 and Federal
 Agency Obligations
 held to maturity       $   --     -- %  $3,502  2.89%  $ 7,628  5.26% $7,065   3.69%   $6,217   7.48%   $ 24,412   4.97%   $ 23,953
Federal Agency                                                                                                    
 Obligations                                                                                                      
 available for sale         --     --        --    --     3,010  6.30      --     --        --      --      3,010   6.30       3,010
Equity Securities                                                                                                 
 available for sale      12,096   5.52       --    --        --    --      --     --        --      --     12,096   5.52      12,096
FHLB Stock                 N/A     N/A      N/A   N/A       N/A   N/A     N/A    N/A       N/A     N/A      7,363   7.00       7,363
Mortgage-backed                                                                                                   
 and related securities                                                                                           
 held to maturity        36,369   5.33       --    --         3  6.50      23   7.60        23   17.00     36,418   5.33      35,369
Mortgage-backed and                                                                                               
 related securities                                                                                               
 available for sale      16,574   5.15       --    --        --    --      --     --        --      --     16,574   5.15      16,574
Interest-bearing                                                                                                  
 deposits                17,370   5.08       --    --        --    --      --     --        --      --     17,370   5.80      17,370
                        -------          ------         -------         ------          ------   -----   --------           --------
       Total            $82,409   5.26%  $3,502  2.89%  $10,641  5.55%  $7,088  3.70%   $6,240   7.49%   $117,243   5.40%   $115,735
                        =======          ======         =======         ======          ======           ========           ========
</TABLE>

                                       12

<PAGE>
                                                              
Deposits and Other Sources of Funds

General.  Deposits are the major source of First Federal's funds for lending and
other investment purposes. In addition to deposits,  the Bank derives funds from
loan and mortgage-backed  securities principal payments,  interest on investment
securities,  proceeds  from  the  maturity  of  mortgage-backed  securities  and
investment  securities  and  borrowings.  Loan  and  mortgage-backed  securities
payments are a relatively  stable  source of funds,  while  deposit  inflows are
significantly  influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They also may be used on a longer-term
basis for general business purposes.

Deposits. First Federal offers a wide variety of deposit accounts. It constantly
strives to meet consumers' needs by offering new products.  This, in addition to
interest  rate  risk  management  and  asset/liability  ratios,  is  taken  into
consideration  prior to  offering  new  products.  Deposit  account  terms vary,
primarily as to the required minimum balance amount, the amount of time that the
funds must remain on deposit and the applicable interest rate.

First  Federal's  current  deposit  products  include  regular  savings,  demand
deposits,  NOW, money market and  certificates  of deposit  accounts  ranging in
terms from ninety-one days to five years including  certificates of deposit with
negotiable   interest   rates  and   balances  in  excess  of  $100,000   (jumbo
certificates),  and  Individual  Retirement  Accounts  (IRAs).  All checking and
savings  accounts are eligible for an Express Teller ATM card.  This card can be
used at any Express  Teller,  Fastbank,  or Instant  Cash ATM in  Minnesota  and
surrounding  states.  With the addition of the Plus and Cirrus network automated
banking system, First Federal's Express Teller ATM card can be used at thousands
of ATM locations throughout the United States and the world.

Deposits are obtained  primarily  from  residents in the  Minnesota  counties of
McLeod, Dakota, Meeker, Sibley, Carver, Wright, Benton,  Sherburne,  Stearns and
Washington.  First Federal  attracts deposit accounts by offering a wide variety
of products,  competitive  interest rates, and convenient  locations and service
hours. The Bank uses traditional methods of advertising to attract new customers
and deposits, including radio and print media advertising.

First Federal pays interest on its deposits which are competitive in its market.
Interest  rates on  deposits  are set  weekly,  based on a  number  of  factors,
including:  (1) the previous  week's  deposit  flow;  (2) a current  survey of a
selected group of  competitors'  rates for similar  products;  (3) external data
which may  influence  interest  rates;  (4)  investment  opportunities  and loan
demand; and (5) scheduled maturities.

The  following  table shows the amounts of First  Federal's  deposits by type of
account at the dates indicated.


                                            September 30,
                               -----------------------------------------------
                                    1998              1997             1996
                               -----------------------------------------------
                                            (In Thousands)
NOW Accounts                      $ 22,136        $  24,740          $ 22,416
Commercial Demand                    8,163            3,319             5,185
Savings Accounts                    53,984           47,847            48,334
                               -----------------------------------------------
                                    84,283           75,906            75,935
                               -----------------------------------------------
Certificates of Deposit:
   3.00 to 4.00%                     3,744            4,204               422
   4.01 to 5.00%                    17,925           14,796            28,155
   5.01 to 6.00%                    52,303           50,460            64,367
   6.01 to 7.00%                    62,462           56,604            13,693
   7.01 to 8.00%                     3,143                -             6,502
   8.01% and over                    2,682            6,276                 -
                               -----------------------------------------------
                                   142,259          132,340           113,139
                               -----------------------------------------------
         Total deposits          $ 226,542        $ 208,246         $ 189,074
                               ===============================================



                                 13

<PAGE>
The  following  table sets forth the amount and  maturities  of time deposits at
September 30, 1998.

<TABLE>
<CAPTION>

                                                         Amount Due
                  --------------------------------------------------------------------------------
                   Less than           1 - 2             2 - 3        Greater than
                    One Year           Years             Years           3 years            Total
                  --------------------------------------------------------------------------------
Interest Rate                                         (In Thousands)
<S>                <C>                <C>              <C>             <C>              <C>     
2.01 - 4.00%       $  3,681           $    38          $     25          $     -         $   3,744
4.01 - 6.00%         52,035            13,350             2,299            2,544            70,228
6.01 - 8.00%         23,886            29,699             9,880            2,140            65,605
Over 8.00%            2,143               539                 -                -             2,682      
               ----------------------------------------------------------------------------------- 
                   $ 81,745           $43,626          $ 12,204          $ 4,684         $ 142,259
                  ================================================================================ 
</TABLE>
The following table  indicates the amount of the Bank's  certificates of deposit
of $100,000 or more by time remaining until maturity as of September 30, 1998.

                                                  Certificates
                                                        of
Maturity Period                                      Deposits
---------------------                           ------------------
                                                   (In Thousands)
Within three months                                  $  2,850
Three through six months                                4,410
Six through twelve months                              11,179
Over twelve months                                      5,872
                                                 ------------------
                                                     $ 24,311
                                                 ==================

Borrowings. Savings deposits are the primary source of funds for First Federal's
lending and investment  activities and for its general  business  purposes.  The
Bank, if the need arises,  may rely upon advances from the FHLB of Des Moines to
supplement  its  supply  of  lendable  funds  and  to  meet  deposit  withdrawal
requirements.  Advances  from the FHLB of Des  Moines are  typically  secured by
First Federal's  stock in the FHLB and a portion of First Federal's  residential
mortgage loans and other assets (principally securities which are obligations of
or guaranteed by the U.S. Government).  First Federal has an Open Line of Credit
("LOC") in the amount of $12.5 million with the FHLB,  which had an  outstanding
balance of $12.5 million. The LOC requires an annual review and a commitment fee
of 0.05%.  The LOC is reviewed for renewal  annually.  The LOC is  maintained in
order to help meet on-going liquidity and cash flow needs of First Federal.

Advances have been  utilized when adequate  spreads can be obtained and the risk
(credit risk, interest rate risk, and market risk) in the transaction minimized.
Advances have been used to purchased  mortgage-backed and related securities and
to purchase single family  residential  mortgages  originated by other financial
institutions within the state of Minnesota.

The  following  table  sets forth  certain  information  as to the  Bank's  FHLB
advances at the date indicated.

                                 As of and for the Years Ended
                                          September 30,
                           -------------------------------------------------
                                 1998             1997              1996
                           -------------------------------------------------
                                      (Dollars in Thousands)
Maximum balance               $ 147,234          $113,839         $ 114,693
Average balance                 145,459           120,093            90,408
Balance at end of period        144,177           133,817           114,693
Weighted average rate:
  at end of period                 5.42%             5.83%             5.88%
  during the period                5.79%             5.83%             5.91%

It is First  Federal's  policy to fund loan demand and investment  opportunities
out of  current  loan  and  mortgage-backed  securities  repayments,  investment
maturities and new deposits. However, the Bank has, in recent periods, increased
its  utilization of FHLB advances to supplement  these sources.  This policy may
change in the future as  investment  opportunities  are presented or loan demand
increases.

Subsidiary Activity

As of September 30, 1998, the Company had two directly owned  subsidiaries:  the
Bank and the Agency.

                                       14
<PAGE>

First Federal is permitted to invest up to 2% of its assets in the capital stock
of,  in  secured  or  unsecured  loans  to,  subsidiary  corporations,  with  an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community development  purposes.  Under such limitations,
as of  September  30,  1998,  First  Federal  was  authorized  to  invest  up to
approximately $8.3 million in the stock of service  corporations (based upon the
2%  limitation).  First  Federal  has  one  wholly-owned  subsidiary,   Firstate
Services,  Inc.  ("FSI").  FSI was  incorporated  in the State of  Minnesota  in
August,  1983, and is engaged in the sale, on an agency basis,  of mutual funds,
annuities  and  life,  credit  life and  disability  insurance  products.  As of
September 30, 1998, the net book value of First  Federal's  investment in stock,
unsecured loans,  and conforming  loans in its subsidiary was $196,587.  For the
fiscal year ended September 30, 1998, FSI had net income of $44,610.

Insurance  Planners ("the Agency") was incorporated in the state of Minnesota in
August,  1983,  and is engaged in the sale, on an agency basis,  of property and
casualty  insurance  products.  As of September 30, 1998,  the net book value of
First Federal's  investment in stock , unsecured  loans, and conforming loans in
its subsidiary was $660,703. For the four month period ended September 30, 1998,
the Agency had net income of $19,234.

On  November  17,  1998,  the  Company  acquired,  in a  transaction  that was a
combination  of stock  and cash,  all of the  outstanding  shares of  Homeowners
Mortgage  Corporation  ("Homeowners").  Homeowners  was  organized in 1988,  and
originates residential mortgage loans from three locations in Minnesota.

Personnel

As of  September  30,1998,  First  Federal  had 85  full-time  employees  and 44
part-time employees,  representing a total of 102.0 full-time  equivalents.  The
employees  are not  represented  by a  collective  bargaining  agreement.  First
Federal believes its relationship with its employees is satisfactory.

Competition

First Federal faces strong  competition in its  attraction of savings  deposits,
which are its primary source of funding for lending,  and in the  origination of
real  estate  loans.  The Bank's  competition  for  savings  deposits  and loans
historically  has come from other  savings  institutions  and  commercial  banks
located in First  Federal's  market area.  However,  in recent  years,  mortgage
bankers have captured a larger share of the mortgage market. The size and number
of mortgage  bankers,  as well as their  decreased  costs due to less regulatory
oversight, has contributed to their growth. First Federal also faces competition
for investor funds from credit unions, investment firms and insurance companies.

First Federal competes for loans and deposits by charging  competitive  interest
rates and loan fees, remaining efficient, marketing aggressively and providing a
wide range of services  to its  customers.  First  Federal  offers all  consumer
banking services such as checking accounts, certificates of deposits, retirement
accounts,  consumer and mortgage loans and ancillary services such as convenient
offices  and  drive-up  facilities,  automated  teller  machines  and  overdraft
protection.

Bank Regulation

General
First Federal is a federally  chartered savings bank and a member of the FHLB of
Des Moines.  First Federal's  deposits are insured by the FDIC through the SAIF.
First Federal is subject to  examination  and regulation by the OTS and the FDIC
with  respect  to most of its  business  activities,  including,  among  others,
lending activities,  capital standards,  general investment  authority,  deposit
taking  and  borrowing  authority,  mergers  and  other  business  combinations,
establishment  of branch  offices,  and  permitted  subsidiary  investments  and
activities.  The OTS's operations,  including examination activities, are funded
by assessments levied on its regulated institutions.

First Federal is further subject to regulations of the Board of Governors of the
Federal  Reserve  System  (the  "Federal  Reserve  Board")  concerning  reserves
required to be maintained against deposits and certain other matters.  Financial
institutions,   including  the  Bank,   may  also  be  subject,   under  certain
circumstances,  to potential  liability  under various  statutes and regulations
applicable to property  owners  generally,  including  statutes and  regulations
relating to the  environmental  condition of real  property and the  remediation
thereof.

The  descriptions of the statutes and regulations  applicable to the Company and
First Federal set forth below and elsewhere herein do not purport to be complete
descriptions  of such statutes and  regulations and their effects on the Company
and First  Federal.  Such  descriptions  also do not purport to  identify  every
statute and regulation that may apply to the Company or the Bank.

The  FDIC  may  terminate  the  deposit  insurance  of  any  insured  depository
institution if the FDIC  determines,  after a hearing,  that the institution has
engaged  or is  engaging  in unsafe  or  unsound  practices,  is in an unsafe or
unsound  condition to continue

                                       15
<PAGE>
operations  or has  violated  any  applicable  law,  regulation  or order or any
condition imposed in writing by the FDIC. In addition,  FDIC regulations provide
that any insured  institution  that falls below a 2% minimum leverage ratio will
be subject  to FDIC  deposit  insurance  termination  proceedings  unless it has
submitted,  and is in compliance  with, a capital plan with its primary  federal
regulator and the FDIC. The FDIC may also suspend deposit insurance  temporarily
during the hearing process if the institution has no tangible capital.

Federal Home Loan Bank System
As a member of the FHLB System,  First  Federal is required to own capital stock
in its regional FHLB, the FHLB of Des Moines, in an amount at least equal to the
greater  of 1% of the  aggregate  principal  amount  of its  unpaid  residential
mortgage loans,  home purchase  contracts and similar  obligations at the end of
each year,  or 5% of its  outstanding  borrowings  from the FHLB of Des  Moines.
First Federal was in  compliance  with this  requirement,  with an investment of
$7.4 million in FHLB of Des Moines stock at September 30, 1998.  The FHLB of Des
Moines  serves as a reserve or central bank for the member  institutions  within
its assigned  region,  the Eighth FHLB  District.  It is funded  primarily  from
proceeds  derived from the sale of consolidated  obligations of the FHLB System.
It makes  advances  to  members  in  accordance  with  policies  and  procedures
established by the Federal  Housing  Finance Board and the Board of Directors of
the FHLB of Des Moines.

Current law requires each FHLB to transfer a certain portion of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"),  the entity
established  to raise  funds  to  resolve  troubled  thrift  cases,  to fund the
principal  and a portion of the  interest  on bonds  issued by the  REFCORP  and
certain other obligations.  In addition, each FHLB is required to transfer 5% of
its annual net earnings to fund certain affordable housing programs. That amount
is  scheduled  to  increase to at least 10% of its annual net income in 1997 and
subsequent years. As a result of these requirements and other factors,  the FHLB
of Des Moines has experienced  reduced  earnings since these  provisions  became
effective  in 1989.  It is  anticipated  that this may  continue  and that First
Federal will continue to receive a reduced level of dividends on its FHLB of Des
Moines stock in future  periods.  During 1998,  1997,  and 1996,  First  Federal
recorded dividend income of $491,888, $417,929, and $328,853,  respectively,  on
its FHLB of Des Moines stock.

Insurance of Accounts
The FDIC administers two separate deposit insurance funds.  Generally,  the Bank
Insurance Fund (the "BIF") insures the deposits of commercial banks and the SAIF
insures the deposits of savings institutions. The FDIC is authorized to increase
deposit  insurance  premiums if it determines  such increases are appropriate to
maintain the reserves of either the SAIF or BIF or to fund the administration of
the  FDIC.  In  addition,  the  FDIC is  authorized  to levy  emergency  special
assessments on BIF and SAIF members.

Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires each
savings  institution,  as well as commercial banks and certain other lenders, to
identify the  communities  served by the institution and assess the credit needs
of those  communities.  The CRA also requires the OTS to assess an institution's
performance in meeting the credit needs of its identified communities as part of
its  examination  of  the  institution,   and  to  take  such  assessments  into
consideration in reviewing  applications  with respect to branches,  mergers and
other business combinations,  and savings and loan holding company acquisitions.
An  unsatisfactory  CRA rating may be the basis for denying such an  application
and community groups have  successfully  protested  applications on CRA grounds.
The OTS assigns CRA ratings of "outstanding,  satisfactory,  need to improve, or
substantial  noncompliance".  First Federal was rated "satisfactory" in its last
CRA examination in May, 1998.

Regulatory Capital  Requirement.  The following table reflects,  in both dollars
and ratios,  First  Federal's  regulatory  capital  position as of September 30,
1998, as well as the requirements at that date.
<TABLE>
<CAPTION>
                                                                                Required
                                          First Federal fsb                     minimum              Excess
                                          regulatory capital                   regulatory          regulatory
                             ---------------------------------------------
                                   Amount              Percent (1)              capital              capital
                             --------------------------------------------------------------------------------------
                                                            (Dollars in Thousands)
<S>                            <C>                          <C>              <C>                 <C>      
Tangible equity                $  37,456                      9.1%            $   6,168           $  31,288
Tier 1 (Core) capital             37,456                      9.1%               16,457           $  20,999
Tier 1 risk-based capital         37,456                     15.5%                9,645           $  27,811
Total risk-based capital          38,491                     16.0%               19,290           $  19,201
</TABLE>
----------------------------- 
(1)Based upon a  percentage  of  adjusted  total  assets for  tangible  and core
   capital and a percentage of risk-adjusted assets for risk-based capital.

OTS  regulated  institutions  are  required  to maintain  additional  risk-based
capital  equal to  one-half  of the  amount  by which  the  decline  in its "net
portfolio  value" that would result from a  hypothetical  200 basis point change
(up or down, depending on which
                                       16
<PAGE>

would result in the greater  reduction in net portfolio value) in interest rates
on its assets and liabilities  exceeds 2% of the estimated  "economic  value" of
its assets.  The one  exception  to this general rule is that if the three month
Treasury bond equivalent yield falls below 4%, an institution  would measure the
hypothetical   downward   change  at  one-half  of  that  Treasury   yield.   An
institution's  "net  portfolio  value"  is  defined  for  this  purpose  as  the
difference   between  the  aggregate   expected  future  cash  inflows  from  an
institution's   assets  and  the   aggregate   expected  cash  outflows  on  its
liabilities,  plus the net expected cash flows from existing  off-balance  sheet
contract, each discounted to present value. The estimated "economic value" of an
institution's assets is defined as the discounted present value of the estimated
future  cash  flows  from its  assets.  Both the "net  portfolio  value" and the
"economic  value"  include,  as specified in the  regulation,  the book value of
assets and liabilities that are not interest rate sensitive.  The OTS has stated
that implementation of this amendment to its regulations will require additional
capital to be maintained  only by  institutions  having "above normal"  interest
rate risk.  Based on the  assets  and  liabilities  comprising  First  Federal's
statement  of  financial  condition  as of  September  30,  1998,  there  was no
additional increase required in First Federal's minimum capital requirement.

Prompt Corrective Action. The Federal Deposit Insurance Corporation  Improvement
Act of 1989  ("FDICIA"),  among  other  things,  established  a system of prompt
corrective action to resolve problems of  undercapitalized  institutions.  Under
this system,  the banking  regulators  are required to take certain  supervisory
actions  against  undercapitalized  institutions,  the severity of which depends
upon the  institution's  degree of  capitalization.  Under  the OTS  final  rule
implementing the prompt  corrective action  provisions,  an institution shall be
deemed to be (i) "well  capitalized"  if it has total  (risk-based)  capital  of
10.0% or more, has a Tier I (risk-based) capital ratio of 6.0% or more, has Tier
1  (core)  capital  of 5.0% or more  and is not  subject  to any  order or final
capital  directive to meet and maintain a specific capital level for any capital
measure,  (ii) "adequately  capitalized" if it has a total (risk-based)  capital
ratio of 8.0% or more,  Tier I  (risk-based)  ratio of 4.0% or more and a Tier 1
(core) capital ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of well capitalized,  (iii) "undercapitalized" if it has
a total (risk-based) capital ratio that is less than 6.0%, a Tier I (risk-based)
capital  ratio that is less than 4.0% or a Tier 1 (core)  capital  ratio that is
less  than  4.0%   (3.0%  in   certain   circumstances),   (iv)   "significantly
undercapitalized" if it has a total (risk-based) capital ratio that is less than
6.0%,  a Tier I  (risk-based)  capital  ratio that is less than 3.0% or a Tier 1
(core)   capital   ratio   that  is  less   than   3.0%   and  (v)   "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances,  a federal
banking  agency may  reclassify a well  capitalized  institution  as  adequately
capitalized  and  may  require  an  adequately  capitalized  institution  or  an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category  (except that the OTS may not reclassify a significantly
undercapitalized institution as critically  undercapitalized).  At September 30,
1998 First Federal was a "well capitalized institution" as defined in the prompt
corrective  action  regulations  and as  such  is  not  subject  to  any  prompt
corrective action measures.

Dividend and Other Capital Distribution Limitations. OTS regulations require the
Bank to give the OTS 30 days  advance  notice  of any  proposed  declaration  of
dividends  to the  Holding  Company,  and the OTS has the  authority  under  its
supervisory  powers to prohibit the payment of dividends to the Holding Company.
In  addition,  the Bank may not  declare or pay a cash  dividend  on its capital
stock if the effect  thereof  would be to reduce the  regulatory  capital of the
Bank  below the amount  required  for the  liquidation  account  established  in
connection with its Conversion.

OTS regulations  impose  limitations  upon all capital  distributions by savings
institutions,  such as cash  dividends,  payments  to  repurchase  or  otherwise
acquire  its  shares,  payments  to  shareholders  of another  institution  in a
cash-out  merger  and other  distributions  charged  against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without approval of the
OTS, make capital  distributions  during a calendar year equal to the greater of
(i) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus  capital  ratio" (the excess  capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net income  over the most  recent four  quarter  period.  Any
additional  capital   distributions   require  prior  regulatory  approval.   An
institution  is further  limited in its ability to pay  dividends as its capital
levels  decrease  below its  regulatory  requirement.  As of September 30, 1998,
First Federal was a Tier 1 institution.

The OTS retains the  authority  to prohibit any capital  distribution  otherwise
authorized  under  the  regulation  if  the  OTS  determines  that  the  capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital  distribution  limitations  apply to direct and indirect
distributions  to  affiliates,  including  those  occurring in  connection  with
corporate reorganizations.

Qualified  Thrift Lender Test.  The Home Owners' Loan Act, as amended  ("HOLA"),
requires savings institutions to meet a Qualified Thrift Lender ("QTL") test. If
an institution  maintains an appropriate  level of Qualified Thrift  Investments
(primarily   residential   mortgages   and   related   investments,    including
mortgage-backed  securities) ("QTIs") on a monthly basis in nine out of every 12
months  and  otherwise  qualifies  as a QTL,  it will  continue  to  enjoy  full
borrowing  privileges  from the FHLB of Des Moines.  The required  percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible  assets,
property used by the  institution  in conducting  its business and liquid assets
equal to 10% of total  assets).  Certain  assets  are  subject  to a

                                       17

<PAGE>
percentage  limitation  of  20%  of  portfolio  assets.  In  addition,   savings
associations  may  include  shares  of stock  of the  FHLBs,  FNMA and  FHLMC as
qualifying  QTIs. As of September 30, 1998, First Federal was in compliance with
its QTL requirement with 81.0% of assets invested in QTIs.

Loans-to-One Borrower.  See "Lending Activities -- Loans-to-One Borrower."

Transactions  with  Affiliates.  Generally,  restrictions on  transactions  with
affiliates  require  that  transactions  between  a savings  association  or its
subsidiaries  and  its  affiliates  be on  terms  as  favorable  to the  Bank as
comparable  transactions  with  non-affiliates.  In  addition,  certain of these
transactions  are restricted to an aggregate  percentage of the Bank's  capital;
collateral  in  specified  amounts  must  usually be provided by  affiliates  to
receive loans from the Bank.  Affiliates of the Bank include the Company and any
company  which would be under  common  control  with the Bank.  In  addition,  a
savings  association  may not lend to any affiliate  engaged in  activities  not
permissible  for a  bank  holding  company  or  acquire  the  securities  of any
affiliate  which  is not a  subsidiary.  The  OTS has the  discretion  to  treat
subsidiaries of savings associations as affiliates on a case-by-case basis.

Branching by Federal  Associations.  Effective May 11, 1992, the OTS amended its
Policy  Statement  on  Branching  by  Federal  Savings  Associations  to  permit
interstate  branching  to  the  full  extent  permitted  by  statute  (which  is
essentially  unlimited).  This  permits  savings  associations  with  interstate
networks to  diversify  their loan  portfolios  and lines of  business.  The OTS
authority  preempts any state law  purporting  to regulate  branching by federal
associations.  However,  the OTS will  evaluate a branch's  record of compliance
with the CRA.  A poor CRA  record  may be the  basis for  denial of a  branching
application.

Federal  Reserve  System.  The Federal  Reserve  Board  requires all  depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements that are imposed by the OTS. At September
30, 1998, the Bank was in compliance with all applicable requirements.

Savings  associations  have  authority  to borrow from the Federal  Reserve Bank
"discount  window,"  but  Federal  Reserve  policy  generally  requires  savings
associations  to exhaust all other  sources  before  borrowing  from the Federal
Reserve System.

Holding Company Regulation

General.  The Company is registered  with the OTS as a unitary  savings and loan
holding  company.  As such, the Company is required to register and file reports
with the OTS and is  subject  to  regulation  and  examination  by the  OTS.  In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries, should such subsidiaries be formed, which also permits
the OTS to restrict or prohibit  activities  that are determined to be a serious
risk to the subsidiary  savings  association.  This  regulation and oversight is
intended  primarily for the protection of the depositors of the Bank and not for
the benefit of stockholders of the Company. The Company also is required to file
certain  reports with, and otherwise  comply with, the rules and  regulations of
the Securities and Exchange Commission ("SEC").

QTL Test. As a unitary savings and loan holding company,  the Company  generally
is not subject to activity  restrictions,  provided the Bank  satisfies  the QTL
test.  If the  Company  acquires  control of another  savings  association  as a
separate  subsidiary,  it  would  become a  multiple  savings  and loan  holding
company,  and the activities of the Company and any subsidiaries (other than the
Bank or any other  SAIF-insured  savings  association)  would become  subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL and were acquired in a supervisory acquisition.

Restrictions  on  Acquisitions.  The Company must obtain  approval  from the OTS
before acquiring control of any SAIF-insured association.  Such acquisitions are
generally  prohibited  if they  result in a multiple  savings  and loan  holding
company controlling savings associations in more than one state.  However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

Federal law generally  provides that no "person,"  acting directly or indirectly
or through or in concert with one or more other persons,  may acquire "control,"
as that term is defined  in OTS  regulations,  of a  federally  insured  savings
institution  without  giving  at least 60 days'  written  notice  to the OTS and
providing the OTS an opportunity to disapprove  the proposed  acquisition.  Such
acquisitions  of control may be  disapproved  if it is  determined,  among other
things, that (a) the acquisition would substantially lessen competition; (b) the
financial  condition of the  acquiring  person might  jeopardize  the  financial
stability  of  the  savings   institution  or  prejudice  the  interest  of  its
depositors;  or (c) the  competency,  experience  or integrity of the  acquiring
person or the proposed  management  personnel  indicates that it would not be in
the  interest  of the  depositors  or the public to permit the  acquisitions  of
control by such person.
                                       18
<PAGE>

Subject to appropriate  regulatory approvals, a bank holding company can acquire
control of a savings association,  and it controls a savings association,  merge
or consolidate  the assets and liabilities of the savings  association  with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate  federal banking agency and the Federal
Reserve  Board.  Generally,  federal  savings  associations  can  acquire  or be
acquired by any insured depository institution.

Federal  Securities  Law. The Company's stock held by persons who are affiliates
(generally officers,  directors,  and principal shareholders) of the Company may
not be resold  without  registration  or unless sold in accordance  with certain
sale  restrictions.  If the Company meets specified  current public  information
requirements,  each  affiliate  of the  Company  is able  to sell in the  public
market,  without  registration,  a limited  number of shares in any  three-month
period.

                                       19

<PAGE>

ITEM 2.  PROPERTIES

The Bank  operates  from its  main  office  located  at 201 Main  Street  South,
Hutchinson,  Minnesota.  The Bank owns this 20,000  square feet office  facility
which it built in 1985/86. The total investment in property and equipment at 201
Main Street South had a net book value of $1.4 million at September 30, 1998.

Additional offices, either owned or leased by the Bank, are set forth below with
information  regarding  net book value of the  premises  and  equipment  at such
facilities at September 30, 1998.

                                        Year
                                     Acquired or      Net Book
                                     Date Lease       Value at           Square
Location                               Expires    September 30, 1998    Footage
-------------------------------     --------------------------------------------
                                                (Dollars in thousands)
14994 Glazier Avenue               
Apple Valley, MN  55124                 1989           $294               3,000
                                                  
19 Central Avenue                                 
Buffalo, MN  55313                      1973             95               1,800
                                                  
1002 Greeley Avenue                               
Glencoe, MN  55336                      1999 (1)         36               1,100
                                                  
1320 South Frontage Road                          
Hastings, MN  55033                     1984            826              15,000
                                                  
905 Highway 15 South,                             
Frontage Road                                     
Hutchinson, MN  55350                   1980            204               1,400
                                                  
6505 Cahill Avenue                                
Inver Grove Heights, MN  55075          1979            310               3,000
                                                  
501 North Sibley Avenue                           
Litchfield, MN  55355                   1978            180               2,400
                                                  
200 East Frontage Road,                           
Highway 5                                         
Waconia, MN  55387                      1985            257               2,400
                                                  
122 East Second Street                            
Winthrop, MN  55396                     1999 (2)         10                 950
                                                  
113 Waite Avenue South                            
Waite Park, MN  56387                   2003 (3)         37                 550
                                               
(1)  One year  lease  expires in April,  1999 with  option to renew for one year
     terms thereafter. The Bank expects to renew the lease.

(2)  Lease  expires in July,  1999 with option to renew for one year terms.  The
     Bank expects to renew the lease.


(3)  Lease expires in September,  2003 with options to renew for two  additional
     five year terms

The Bank leases  approximately  5,713  square feet of the  property in Hastings,
Minnesota to various  tenants under three year  operating  leases.  These leases
expire  April 14, 2000 and April 30,  1999.  The annual  rents total  $25,345 in
addition to each tenant's proportionate share of the operating expenses.

The Agency  operates from its main office  located at 135 3rd Avenue  Southeast,
Hutchinson, Minnesota. The Agency leases this 1,200 square feet office facility.
The lease expires in September, 2001.

                                       20

<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

First  Federal,  from  time to  time,  is a party to  legal  proceedings  in the
ordinary course of business when it enforces security interests in loans made by
it. The Bank is not engaged in any legal proceedings of a material nature at the
present time.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
                                     PART II

ITEM 5.  MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

In connection with the acquisitions of the Agency and HMC, the Company issued an
additional  116,800  shares of common  stock.  These  shares  were  exempt  from
registration under the Securities Act of 1933, as amended, pursuant to section 3
(a)  (11) of the  Securities  Act  (intra-state  offerings).  Such  shares  bear
restrictive legends as to transfer.

For additional information relating to the market for Registrant's common equity
and  related  stockholder  matters,  see  "Corporate  Profile  and Stock  Market
Information" in the  Registrant's  1998 Annual Report to Stockholders on page 1,
and is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

The  above-captioned  information appears under "Selected Financial Data" in the
Registrant's  1998 Annual Report to  Stockholders  on page 2 and is incorporated
herein by reference.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The  above-captioned  information  appears  under  Management's  Discussion  and
Analysis of Financial  Condition and Results of  Operations in the  Registrant's
1998 Annual  Report to  Stockholders  on Pages 4 through 15 and is  incorporated
herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The above  information  appears under  Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations in the  Registrant's  1998 Annual
Report  to  Stockholders  on pages 4  through  7 and is  incorporated  herein by
reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  Consolidated  Financial  Statements  of the  Company  and  its  subsidiary,
together  with the report  thereon by Bertram  Cooper & Co.,  LLP appears in the
Bank's  1998  Annual  Report  to  Stockholders  on pages 16  through  40 and are
incorporated herein by reference.

Quarterly  Results  of  Operations  on  page 41 of the  1998  Annual  Report  to
Stockholders is incorporated herein by reference.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURES

None.
                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

The information contained under the section captioned  "Information with Respect
to  Nominees  for  Director,  Directors  Continuing  in  Office,  and  Executive
Officers" at pages 3 to 8 the  Registrant's  definitive  proxy statement for the
Company's  Annual  Meeting of  Stockholders  to be held on January 20, 1999 (the
"Proxy Statement"), which was filed with the Commission on December 8, 1998, and
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The information  relating to executive  compensation  is incorporated  herein by
reference to the Registrant's Proxy Statement at pages 8 through 14.

                                       21

<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information  relating to security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  to the  Registrant's  Proxy
Statement at pages 2 through 5.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  relating to certain  relationships and related  transactions is
incorporated herein by reference to the Registrant's Proxy Statement at page 15.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)         The following documents are filed as a part of this report:

     (1)  Consolidated  Financial  Statements  of the Bank are  incorporated  by
reference  to the  following  indicated  pages  of the  1998  Annual  Report  to
Stockholders. 

                                                                            PAGE

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . .    16
Consolidated Statements of Financial Condition as of
     September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . .    17
Consolidated Statements of Income for the Years
     Ended September 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . .    18
Consolidated Statements of Changes in Stockholders' Equity for the
     Years Ended September 30, 1998, 1997 and 1996 . . . . . . . . . . . .    19
Consolidated Statements of Cash Flows for the Years Ended
     September 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . .    20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . .    22

     The remaining information appearing in the Annual Report to Stockholders is
not  deemed to be filed as part of this  report,  except as  expressly  provided
herein.

     (2) All schedules are omitted  because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
the notes thereto.

     (3)  Exhibits

          (a) The following exhibits are filed as part of this report.

     2.1  Plan of Conversion Merger of Hutchinson and Hastings *
     2.2  Agreement of Merger *
     3.1  Articles of Incorporation of FSF Financial Corp. *
     3.2  Bylaws of FSF Financial Corp. *
     4.0  Stock Certificate of FSF Financial Corp. *
    10.1  Form of Employment Agreement with  Donald A. Glas, George B. Loban and
          Richard H. Burgart *
    10.2  First Federal fsb Management Stock Plan**
    10.3  FSF Financial Corp. 1996 Stock Option Plan**
    10.4  FSF Financial Corp. 1998 Stock Compensation Plan***
    11.0  Statement regarding computation of earnings per share
    13.0  1998 Annual Report to Stockholders
    21.0  Subsidiary Information
    23.0  Consent of Accountant
    27.0  Financial Data Schedule ****

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


*    Incorporated  herein by reference  into this  document from the Exhibits to
     Form S-1, Registration Statement,  initially filed with the Commission,  on
     June 1, 1994, Registration No. 33-79570.
**   Incorporated  herein by reference into this document from the  Registrant's
     proxy statement for the Annual Meeting of Stockholders  held on January 17,
     1996, and filed with the Commission on December 13, 1994.
***  Incorporated  herein by reference into this document from the  Registrant's
     proxy statement for the Annual Meeting of Stockholders  held on January 20,
     1998, and filed with the Commission on December 10, 1997.
**** Included with electronic filing only.

                                       22

<PAGE>

SIGNATURES

     Pursuant  to the  requirements  of  Section  13 o4 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      FSF Financial Corp.

Dated:  December 11, 1998             By:      /s/ Donald A. Glas
                                               ------------------
                                                Donald A. Glas
                                                Co-Chair of the Board and Chief
                                                Executive Officer
                                                (Duly Authorized Representative)

     Pursuant to the  requirement of the Securities  Exchange Act of 1934,  this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated,



By:    /s/ Donald A. Glas                    By:    /s/ Richard H. Burgart
       ------------------                           ----------------------
        Donald A. Glas                              Richard H. Burgart
        Co-Chair of the Board and                   Chief Financial Officer  
        Chief Executive Officer                     and Treasurer
        (Principal Executive Officer)               Principal Financial and
                                                    Accounting Officer)
                                                    Director

Date:   December 11, 1998                    Date:  December 11, 1998



By:    /s/ George B. Loban                   
       -------------------                   
        George B. Loban                      
        Co-Chair of the Board and            
        President

Date:   December 11, 1998                  



By:    /s/ Sever B. Knutson                  By:    /s/ Roger R. Stearns
       --------------------                         --------------------
        Sever B. Knutson                            Roger R. Stearns
        Director                                    Director

Date:   December 11, 1998                    Date:  December 11, 1998



By:    /s/ James J. Caturia                  By:    /s/ Jerome R. Dempsey
       --------------------                         ---------------------
        James J. Caturia                            Jerome R. Dempsey
        Director                                    Director

Date:   December 11, 1998                    Date: 
 December 11, 1998


                                       23