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


Corporate Profile

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

First  Federal's  business  consists  primarily of attracting  deposits from the
general  public and using such  deposits,  together  with  borrowings  and other
funds, to make a variety of loans.  The Federal Deposit  Insurance  Corporation,
subject to applicable limits,  insures deposits with First Federal. At September
30, 2001, First Federal operated 11 retail-banking offices in Minnesota.

Stock Market Information

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

The number of  stockholders  of record of common  stock as of the record date of
November 30, 2001,  was  approximately  511. This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage  firms. At November 30, 2001,  there were 2,805,887  shares issued and
outstanding.

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

                                       1

<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OATHER DATA FOR FSF FINANCIAL CORP.
----------------------------------------------------------------------------------------------------------------------

Financial Condition  (dollars in thousands)

Year Ended September 30,                                    2001         2000         1999         1998          1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>          <C>          <C>           <C>
Total assets                                           $ 473,631    $ 466,515    $ 418,094    $ 416,232     $ 388,135
Loans held for sale                                       12,082        3,191        5,334        2,672           204
Loans receivable, net                                    340,484      341,813      278,290      280,603       260,390
Mortgage-backed securities                                25,731       26,986       27,587       36,418        38,539
Mortgage-backed securities available for sale             27,481       15,369       15,979       16,574        16,699
Debt securities                                           12,420       18,393       19,937       24,412        37,876
Debt securities available for sale                         3,055       12,728       12,794        3,010         1,000
Equity securities available for sale                      17,946       18,246       19,284       19,459        19,311
Cash and cash equivalents (1)                             12,594        8,482       19,265       22,597         6,135
Savings deposits                                         312,541      294,823      231,651      226,542       208,246
Other borrowings                                         113,500      127,500      140,967      144,177       133,817
Stockholders' equity                                      41,941       39,765       42,325       42,518        43,362

Summary of Operations  (dollars in thousands)

Year Ended September 30,                                    2001         2000         1999         1998          1997
----------------------------------------------------------------------------------------------------------------------

Interest income                                        $  35,310    $  32,877    $  29,420    $  29,981     $  27,315
Interest expense                                          21,900       19,753       18,198       18,499        16,346
Net interest income                                       13,410       13,124       11,222       11,482        10,969
Provision for loan losses                                  1,077          216          456          302           120
Non-interest income                                        6,599        4,825        5,259        2,269         1,510
Non-interest expense                                      12,815       11,979       11,826        8,395         7,130
Net income                                                 3,733        3,504        2,505        3,030         3,124

Other Selected Data

Year Ended September 30,                                    2001         2000         1999         1998          1997
----------------------------------------------------------------------------------------------------------------------

Return on average assets                                    0.80%        0.81%        0.59%        0.74%         0.84%
Return on average equity                                    9.09%        8.54%        5.74%        6.94%         6.87%
Average equity to average assets                            8.86%        9.49%       10.26%       10.70%        12.25%
Net interest rate spread (2)                                2.77%        2.93%        2.39%        2.44%         2.54%
Non-performing assets to total assets                       0.65%        0.28%        0.13%        0.19%         0.15%
Allowance for loan losses to net loans                      0.44%        0.44%        0.48%        0.36%         0.33%
Basic earnings per share                               $    1.68    $    1.46    $    0.94    $    1.14     $    1.13
Diluted earnings per share                             $    1.61    $    1.43    $    0.90    $    1.05     $    1.04
Cash dividends declared per share                      $    0.60    $    0.50    $    0.50    $    0.50     $    0.50
Dividend payout ratio                                      34.90%       34.40%       53.10%       44.80%        45.20%
</TABLE>

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

                                       2
<PAGE>

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

General

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

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

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

Asset/Liability Management

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

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

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

Management  attempts  to  reduce  the  Bank's  interest  rate risk by the way it
structures its assets and liabilities. The Bank sells all fixed rate residential
mortgages  and  retains  for its  portfolio  residential  mortgages  with either
adjustable  interest rates or balloon  provisions.  These loans provide the Bank
with a repricing time frame that is  substantially  shorter than the contractual
term. During the 2001 fiscal year, the Bank originated $532,000 of single family
mortgage  loans that have initial  fixed rates for terms of one

                                       4

<PAGE>
to ten years and then adjust annually off a treasury index thereafter.  The Bank
also originated $1.7 million of single family mortgage loans that have a balloon
payment  due in three to seven  years.  Originations  of  construction  and land
development loans,  which generally have a contractual  maturity of two years or
less,  totaled $164.5 million.  At September 30, 2001, the Bank had outstanding,
$135.2 million of real estate  mortgages that were adjustable  rate,  balloon or
construction and land  development  loans,  representing  38.3% of net loans and
28.5% of total assets.

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

The table that  follows  sets forth the amounts of  interest-earning  assets and
interest  bearing  liabilities  at  September  30,  2001,  which are expected to
reprice or mature in each of the future time periods shown.

                        Analysis of Repricing Mechanisms
<TABLE>
<CAPTION>
                                                                 Over One     Over Five
                                                     Within       to Five       to Ten       Over Ten
                                                    One Year       Years        Years         Years         Total
                                                ------------- ------------ ------------- ------------- ------------
                                                                      (Dollars in Thousands)
<S>                                               <C>          <C>            <C>          <C>          <C>
Interest-earning assets:
     Mortgage loans                                 $143,023     $ 47,614       $ 3,662      $ 17,433     $211,732
     Other loans                                      89,519       50,648         2,564           418      143,149
     Investment securities                            63,456       12,286         2,010        18,648       96,400
                                                ------------- ------------ ------------- ------------- ------------
Total interest-earning assets                        295,998      110,548         8,236        36,499      451,281
                                                ------------- ------------ ------------- ------------- ------------

Interest bearing liabilities:
     Non-interest bearing deposits                    18,895            -             -             -       18,895
     NOW and Super NOW accounts                       20,417            -             -             -       20,417
     Savings accounts                                 93,428            -             -             -       93,428
     Money market deposits accounts                    1,409            -             -             -        1,409
     Certificates                                    131,871       39,147         7,374             -      178,392
     Other borrowed money                             25,500       26,000        62,000             -      113,500
                                                ------------- ------------ ------------- ------------- ------------
Total interest-bearing liabilities                   291,520       65,147        69,374             -      426,041
                                                ------------- ------------ ------------- ------------- ------------

Interest sensitivity gap                             $ 4,478     $ 45,401    $  (61,138)     $ 36,499     $ 25,240
                                                ============= ============ ============= ============= ============

Cumulative interest sensitivity gap                  $ 4,478     $ 49,879    $  (11,259)     $ 25,240
                                                ============= ============ ============= =============
Cumulative ratio of interest-earning assets
  to interest-bearing liabilities                       1.02%        1.14%         0.97%         1.06%
                                                ============= ============ ============= =============
Cumulative ratio of cumulative interest
  sensitivity gap to total assets                       0.95%       10.53%        -2.38%         5.33%
                                                ============= ============ ============= =============
</TABLE>
                                       5
<PAGE>
The previous  table above  indicates the time periods in which  interest-earning
assets and  interest-bearing  liabilities  will mature or reprice in  accordance
with  their  contractual  terms.  The  following  assumptions  have been used in
calculating  the values in the table:  adjustable  rate and balloon loans have a
constant prepayment rate of 6.0%, mortgages held for sale are all set to reprice
in three years or less, while remaining  mortgages have prepayment rates ranging
from 4.0% to 10.0%.  Consumer loans have a prepayment rate that is constant over
time at 19.0%,  NOW checking,  core savings  deposits and money market  deposits
have an increasing decay ranging from 6.0% to 30.0%. Management utilizes its own
assumptions and feels that these  assumptions  provide a reasonable  estimate of
actual experience.

Certain  shortcomings  are  inherent in the method of analysis  presented in the
previous table.  For example,  although  certain assets and liabilities may have
similar maturities or periods of repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Additionally,  certain  assets,  such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis over
the life of the assets.  Further,  in the event of a change in  interest  rates,
prepayment  levels and decay rates on core  deposits  may deviate  significantly
from those assumed in calculating the table.

Market Risk Management

Market risk is the risk of loss arising from  adverse  changes in market  prices
and rates.  The Bank's market risk is comprised  primarily of interest rate risk
resulting  from its core  banking  activities  of lending  and  deposit  taking.
Interest  rate risk is the risk that  changes  in market  interest  rates  might
adversely  affect the Bank's net interest  income or the  economic  value of its
portfolio of assets,  liabilities and off-balance  sheet  contracts.  Management
continually  develops and applies  strategies to mitigate this risk.  Management
does not believe that the Bank's  primary  market risk  exposures  and how those
exposures  are managed in fiscal 2001 have changed when compared to fiscal 2000.
Market risk limits have been  established by the Board of Directors based on the
Bank's tolerance for risk.

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

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

                                       6
<PAGE>
The  following  table  sets forth the  present  value  estimates  of the Bank at
September 30, 2001,  as calculated by the NPV Model.  The table shows the NPV of
the Bank under rate shock  scenarios of -300 to +300 basis points in  increments
of 100. As market rates increase, the market value of the Bank's large portfolio
of mortgage loans and securities  declines  significantly  and  prepayments  are
slow.  As rates  decrease,  the market  value of mortgage  loans and  securities
increase  only  modestly due to  prepayment  risk,  periodic rate caps and other
embedded  options.  Actual  changes in market  value will differ from  estimated
changes set forth in this table due to various risks and uncertainties.

<TABLE>
<CAPTION>
Changes in Interest                 Net Portfolio Change                       NPV as % of Assets
  Rates in Basis        ---------------------------------------------    -------------------------------
Points (Rate Shock)      $ Amount        $ Change         Change %        NPV Ratio          Change
                        ------------    ------------    -------------    ------------    ---------------
                           (Dollars in thousands)

<S>                      <C>              <C>                <C>               <C>            <C>
      +300 bp              $ 37,295         $(3,667)           (8.95) %          8.04 %         (65) bP
      +200 bp                38,469          (2,493)           (6.09)            8.24           (45) bp
      +100 bp                39,689          (1,273)           (3.11)            8.47           (22) bp
         0 bp                40,962               -                -             8.69             -  bp
      -100 bp                42,294           1,332             3.25             8.92            23  bp
      -200 bp                43,695           2,733             6.67             9.16            47  bp
      -300 bp                45,174           4,212            10.28             9.42            73  bp
</TABLE>

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

                                       7
<PAGE>
Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                 Increase (Decrease) Due To
                                         ------------------------------------------
                                                                Rate/
                                            Rate    Volume      Volume     Total
                                         ---------  -------    -------  -----------
<S>                                    <C>        <C>        <C>        <C>
Year Ended September 30, 2001 vs 2000:                 (In Thousands)
Interest income:
   Loans Receivable                      $   348    $ 3,147    $    44    $ 3,539
   Mortgage-backed securities               (356)        96        (13)      (273)
   Investment securities                    (506)      (393)        66       (833)
                                         -------    -------    -------    -------
      Total change in interest income       (514)     2,850         97      2,433

Interest expense:
   Savings accounts                          734      2,312        172      3,218
   FHLB Borrowings                           134     (1,198)        (7)    (1,071)
                                         -------    -------    -------    -------
      Total change in interest expense       868      1,114        165      2,147
                                         -------    -------    -------    -------
Net change in net interest income        $(1,382)   $ 1,736    $   (68)   $   286
                                         =======    =======    =======    =======

                                                                Rate/
                                            Rate    Volume      Volume     Total
                                         ---------  -------    -------  -----------
Year Ended September 30, 2000 vs 1999:               (In Thousands)
Interest income:
   Loans Receivable                      $ 1,228    $ 2,824    $   184    $ 4,236
   Mortgage-backed securities                545       (161)       (34)       350
   Investment securities                     519     (1,469)      (179)    (1,129)
                                         -------    -------    -------    -------
      Total change in interest income      2,292      1,194        (29)     3,457

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

                                       8
<PAGE>
Average Balances

The following table sets forth information relating to the Corporation's average
yield on assets and average cost of liabilities for the periods  indicated.  The
yields and costs are  computed  by  dividing  income or  expense by the  average
balance of  interest-earning  assets and  interest-bearing  liabilities  for the
periods indicated. Average balances are derived from daily balances.  Management
does not  believe  that the use of month end  balances  has caused any  material
difference in the information presented.

<TABLE>
<CAPTION>
                                             2001                         2000                           1999
                                          --------------------------------------------------------------------------------
                                                               Average                        Average                      Average
                                            Average    Income/  Yield/   Average    Income/   Yield/    Average   Income/  Yield/
                                            Balance    Expense   Cost    Balance    Expense    Cost     Balance   Expense   Cost
                                          ------------------------------------------------------------------------------------------
<S>                                     <C>        <C>         <C>   <C>        <C>          <C>    <C>       <C>         <C>

Interest Earning Assets                      (in thousands)                  (in thousands)                    (In thousands)
   Loans receivable (1)                   $ 344,470  $  30,636   8.89% $ 308,721  $  27,097    8.78%  $ 274,676 $  22,861   8.32%
   Mortgage-backed securities                44,791      2,395   5.35%    43,224      2,668    6.17%     46,398     2,318   5.00%
   Investment securities (2)                 50,262      2,279   4.53%    57,508      3,112    5.41%     87,987     4,241   4.82%
                                          ---------------------        ---------------------         ---------------------
      Total interest earning assets         439,523     35,310   8.03%   409,453     32,877    8.03%    409,061    29,420   7.19%
                                          ---------------------        ---------------------         ---------------------

Interest Bearing Liabilities
   NOW and money market accounts          $  35,305        266   0.75%    33,727        259    0.77%  $  31,670       289   0.91%
   Passbook savings                          87,064      3,491   4.01%    73,422      3,110    4.24%     58,463     1,896   3.24%
   Certificates of deposit                  176,336     11,069   6.28%   141,686      8,239    5.81%    142,811     8,048   5.64%
                                          ---------------------        ---------------------         ---------------------
      Total deposits                        298,705     14,826   4.96%   248,835     11,608    4.66%    232,944    10,233   4.39%
   FHLB advances and other borrowed funds   117,957      7,074   5.99%   138,213      8,145    5.89%    145,690     7,965   5.47%
                                          ---------------------        ---------------------         ---------------------
      Total interest bearing liabilities    416,662     21,900   5.26%   387,048     19,753    5.10%    378,634    18,198   4.81%
                                          ---------------------        ---------------------         ---------------------
Net Interest Income                                  $  13,410                    $  13,124                     $  11,222
                                                    ===========                  ===========                    ==========
Net Interest Rate Spread  (3)                                    2.77%                         2.93%                        2.39%
Net Interest Rate Margin  (4)                                    3.05%                         3.21%                        2.74%
Ratio of average interest earning assets
  to average interest bearing liabilities     1.05x                        1.06x                          1.10x
                                          ==========                   ==========                    ===========
</TABLE>
1.   Average balances include non-accrual loans and loans held for sale.
2.   Includes interest-bearing deposits in other financial institutions.
3.   Net interest  rate spread  represents  the  difference  between the average
     yield on  interest-earning  assets and the average cost of interest-bearing
     liabilities.
4.   Net interest rate margin  represents net interest income as a percentage of
     average interest-earning assets.

                                       9
<PAGE>
Changes in Financial Condition

General
Total assets  increased  from $466.5  million at September  30, 2000,  to $473.7
million at September 30, 2001, an increase of $7.2 million or 1.5%. The Bank and
HMC continued to experience good demand for loans and  supplemented the internal
loan origination  ($348.1 million) with purchases of other loans ($27.3 million)
that met the  interest  rate  risk  and  credit  risk  criteria  established  by
management.

Securities Available for Sale
Equity securities decreased by $300,000 due to the sale of excess FHLB stock and
an increase in the market value of fund investments. Mortgage-backed and related
securities  available for sale increased by $12.1 million during the 2001 fiscal
year as a result of  additional  security  purchases  and an  increase in market
value.  Debt  securities  available  for  sale  decreased  $9.7  million  due to
maturities  and call  options  being  exercised.  The net  unrealized  losses on
securities  available for sale decreased from $2.5 million at September 30, 2000
to $567,000 at September 30, 2001. This decrease was primarily due to the market
rate of interest decreasing as compared to the contractual rate of interest.

Securities Held to Maturity
Debt securities  held to maturity  decreased from $18.4 million to $12.4 million
at September  30, 2001,  due to  maturities  and call options  being  exercised.
Mortgage-backed  securities  held to maturity  decreased  from $27.0  million to
$25.7  million  during  fiscal  2001,  due  to  principal  repayments.  The  net
unrealized  loss on securities  held to maturity  decreased from $3.3 million at
September  30, 2000 to $75,000 at  September  30,  2001.  These  decreases  were
primarily  due to the market  rate of  interest  declining  as  compared  to the
contractual rate of interest.

Loans Held for Sale
Net loans held for sale  increased  from $3.2 million at  September  30, 2000 to
$12.1 million at September 30, 2001.  The Bank and HMC had firm  commitments  to
sell these loans held for sale that were closed by September 30, 2001.

Loans Receivable
Net loans  receivable  decreased  from $341.8  million at September  30, 2000 to
$340.5  million at  September  30,  2001.  This  decrease  of $1.3  million  was
comprised of a decline in one-to-four family loans of $28.1 million and consumer
and commercial loans of $9.8 million.  This was partially offset by increases in
other real estate  mortgages  ($5.1  million),  net  construction  loans  ($27.1
million) and agricultural loans ($6.1 million).

The  compositions  of the loans  originated were indicative of the change in the
Corporation's  loan portfolio.  During the last five years,  one-to-four  family
residential  mortgages  decreased from 60.3% of all loans to 19.1%. The interest
rate risk profile of residential  mortgages causes the Bank to sell the majority
of such loans in the secondary market. The diversification of the loan portfolio
had a positive  impact on the average  yield,  which  increased to 8.89% for the
year ended  September  30,  2001,  as compared  to 8.78% in the prior year.  See
"Average Balances" on page 9.

Deposits
Total deposits increased by $17.7 million,  or 6.0% during the 2001 fiscal year.
The increase in deposits can be  attributed  to an increase in savings  accounts
($13.3  million),  an increase in demand deposits ($4.0 million) and an increase
in  certificates  of deposit  ($620,000).  The  increase in total  deposits  was
accompanied  by an increase in the weighted  average cost of funds from 4.66% to
4.96%  for the years  ended  September  30,  2000 and  2001,  respectively.  The
increase in cost is primarily  due to an increase in rates paid on  certificates
of deposit.

Borrowings
In addition to growth in deposits, borrowings may be utilized to fund the growth
in assets.  Management  utilizes a least  cost,  at the margin  approach to fund
assets.  As a  result,  borrowings  are  utilized  as a funding  source  when it
provides  the least cost at the margin.  FHLB  advances are used to fund lending
and investment activities,  withdrawals from deposit accounts and other ordinary
business activity.  Borrowings  decreased by $14.0 million dollars during fiscal
2001  due to  principal  payments.  The  Bank  was  able  to  fund  lending  and
investments with loan repayments and deposit growth.

                                       10
<PAGE>
Stockholders' Equity
At September 30, 2001,  total  stockholders'  equity  increased  $2.2 million to
$42.0  million from $39.8  million at  September  30,  2000.  This  increase was
primarily  due to  stock  repurchases  of  approximately  190,000  shares  at an
aggregate  cost of $2.9 million  ($15.32  average price per share) and dividends
paid of $1.3 million  offset by net income of $3.7 million for the period and an
increase in accumulated other comprehensive income of $1.2 million.

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

Comparison of Years Ended September 30, 2001 and 2000

Net Income
Net income increased to $3.7 million for the year ended September 30, 2001, from
$3.5 million for the year ended  September 30, 2000.  The increase was primarily
due to an increase in non-interest income of $1.8 million.

Interest Income
Total interest income increased $2.4 million to $35.3 million for the year ended
September 30, 2001,  from $32.9  million for the year ended  September 30, 2000.
Interest  income on loans  increased by $3.5 million from $27.1  million for the
year ended September 30, 2000, to $30.6 million for the year ended September 30,
2001.  This was a result of a $35.7 million  increase in the average  balance of
loans receivable from $308.7 million at September 30, 2000, to $344.4 million at
September  30, 2001.  Furthermore,  the average  yield  increased  from 8.78% at
September  30,  2000,  to  8.89% at  September  30,  2001.  Interest  income  on
mortgage-backed  securities  decreased  from  $2.7  million  for the year  ended
September 30, 2000, to $2.4 million for the year ended  September 30, 2001.  The
decrease was  primarily  the result of a decrease in average rate from 6.17% for
the 2000 fiscal year to 5.35% for the 2001 fiscal year.  The average  balance of
investment  securities  decreased by $7.2 million during the fiscal year and the
yield  decreased  from  5.41% to  4.53%.  The yield on  interest-earning  assets
remained the same at 8.03% for the years compared.  Interest income increased by
$2.9 million as a result of increased  volume  during the year while the changes
in rates  caused  interest  income to decrease by $514,000  and the  rate/volume
change increased interest income by $97,000. Details are contained in the tables
at pages 8 and 9.

Interest Expense
Total interest expense  increased to $21.9 million for the 2001 fiscal year from
$19.8  million  for the  2000  fiscal  year,  as the  average  balance  of total
interest-bearing  liabilities  and the  average  cost of  funds  increased.  The
increased cost of deposits attendant to the growth of balances was approximately
$2.3 million,  while the increase associated with a change in interest rates was
approximately  $734,000.  The cost  associated  with  interest-bearing  deposits
increased from 4.66% for the year ended September 30, 2000 to 4.96% for the same
period ended  September  30,  2001.  The cost  associated  with  borrowed  funds
increased  to 5.99%  for  fiscal  2001 as  compared  to 5.89% for  fiscal  2000.
$134,000 of the increase in the cost of borrowed funds was a result of increases
in rates,  while decreased  volumes reduced interest expense by $1.2 million and
$7,000 of the decrease was  rate/volume  related.  Details are  contained in the
tables at pages 8 and 9.

Net Interest Income
Net interest income increased  $286,000 during the 2001 fiscal year.  Changes in
interest rates caused a decrease in net interest income of $1.4 million, volumes
accounted for an increase in net interest income of $1.7 million and rate/volume
differences decreased $68,000.

Provision For Loan Losses
The  allowance  for losses on loans is maintained at a level which is considered
by management to be adequate to absorb  inherent  losses on existing  loans that
may become  uncollectible  based on an evaluation of the  collectibility,  prior
loss experience and market  conditions.  The evaluation takes into consideration
such factors as changes in the nature and volume of the loan portfolio,  overall
portfolio

                                       11
<PAGE>

quality,  review of specific problem loans and current economic  conditions that
may affect the  borrower's  ability to pay.  The  allowance  for loan  losses is
established through a provision for loan losses charged to expense.

The  Bank's  loan loss  provision  increased  from  $216,000  for the year ended
September 30, 2000 to $1.1 million for the year ended  September  30, 2001.  The
Bank's  allowance  for loan losses was $1.5 million at September  30, 2001.  The
allowance for loan losses represents 0.44% of net loans outstanding and 50.0% of
total non-performing assets. During the fiscal year ended September 30, 2001, an
agricultural  loan in the Bank's loan  portfolio  experienced  deterioration.  A
large portion of the loan was  collateralized  by stored corn,  which due to the
weather conditions caused spoilage to the corn.  Management  determined that the
loan was impaired and recognized a $716,000 charge to earnings.

A loan is impaired when, based on current  information and events, the Bank will
be unable to collect all amounts contractually due under a loan agreement.  When
a loan is determined to be impaired,  a valuation allowance is established based
upon the  difference  between  investment  in the loan and the fair value of the
collateral  securing the loan.  While the Bank  maintains its allowance for loan
losses at a level which it considers  to be adequate,  there can be no assurance
that  further  additions  will not be made to the loss  allowances  or that such
losses will not exceed the estimated amounts.

Non-interest Income
Total non-interest income increased by $1.8 million to $6.6 million for the year
ended  September  30, 2001 from $4.8  million for the year ended  September  30,
2000.  Gains on loans sold  increased  from $1.2 million for fiscal year 2000 to
$2.5 million for fiscal year 2001 and other service  charges and fees  increased
from  $765,000  for the year ended  September  20, 2000 to $979,000 for the year
ended September 30, 2001,  primarily due to declining interest rates that helped
boost the purchase and refinance  markets.  Service charges on deposit  accounts
increased  $289,000  during the  periods  compared  due to a  combination  of an
increase  in the  number  of  accounts  affected  and an  increase  in the  fees
associated with deposit accounts.

Non-interest Expense
Total  non-interest  expense  increased 6.7% to $12.8 million for the year ended
September 30, 2001,  from $12.0  million for the year ended  September 30, 2000.
Compensation and benefits  increased  $473,000 from $7.2 million for fiscal 2000
to $7.7 million for fiscal  2001.  Occupancy  and  equipment  expense  increased
$109,000, while deposit insurance premiums decreased $14,000.  Professional fees
increased  from  $378,000 for fiscal year 2000 to $401,000 for fiscal year 2001.
Data processing increased $65,000 to $754,000 for the period ended September 30,
2001. Goodwill  amortization during the year was $91,000 for HMC and $27,000 for
the Agency.

Income Tax Expense
Income tax expense  increased  $134,000 for the year ended September 30, 2001 to
$2.4 million for the year ended  September 30, 2000.  The increase was primarily
due to a gain in pre-tax income of $363,000.

Comparison of Years Ended September 30, 2000 and 1999

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

Interest Income
Total interest income increased $3.5 million to $32.9 million for the year ended
September 30, 2000,  from $29.4  million for the year ended  September 30, 1999.
Interest  income on loans  increased by $4.2 million from $22.9  million for the
year ended  September 30, 1999 to $27.1 million for the year ended September 30,
2000.  This was a result of a $34.0 million  increase in the average  balance of
loans  receivable from $274.7 million at September 30, 1999 to $308.7 million at
September  30, 2000.  Furthermore,  the average  yield  increased  from 8.32% at
September  30,  1999,  to  8.78% at  September  30,  2000.  Interest  income  on
mortgage-backed  securities  increased  from  $2.3  million  for the year  ended
September 30, 1999 to $2.7 million for the year ended  September  30, 2000.  The
increase was  primarily the result of an increase in average rate from 5.00% for
the 1999 fiscal year to 6.17% for the 2000 fiscal year.  The average  balance of
investment  securities decreased by $30.5 million during the fiscal year and the
yield

                                       12
<PAGE>

increased from 4.82% to 5.41%.  The yield on  interest-earning  assets increased
from 7.19% for the year  ended  September  30,  1999 to 8.03% for the year ended
September  30, 2000.  Interest  income  increased by $1.2 million as a result of
increased  volume  during the year while the  changes in rates  caused  interest
income to increase by $2.3 million and the rate/volume change decreased interest
income by $29,000. Details are contained in the tables at pages 8 and 9.

Interest Expense
Total interest expense  increased to $19.8 million for the 2000 fiscal year from
$18.2  million  for the  1999  fiscal  year,  as the  average  balance  of total
interest-bearing  liabilities  and the  average  cost of  funds  increased.  The
increased cost of deposits attendant to the growth of balances was approximately
$691,000,  while the  increase  associated  with a change in interest  rates was
approximately  $622,000.  The cost  associated  with  interest-bearing  deposits
increased  from 4.39% for the year ended  September  30, 1999,  to 4.66% for the
same period ended  September 30, 2000. The cost  associated  with borrowed funds
increased  to 5.89%  for  fiscal  2000 as  compared  to 5.47% for  fiscal  1999.
$616,000 of the increase in the cost of borrowed funds was a result of increases
in rates,  while  increased  volumes  reduced  interest  expense by $405,000 and
$31,000 of the decrease was  rate/volume  related.  Details are contained in the
tables at pages 8 and 9.

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

Provision For Loan Losses
The  Bank's  loan loss  provision  decreased  from  $456,000  for the year ended
September 30, 1999 to $216,000 for the year ended September 30, 2000. The Bank's
allowance for loan losses was $1.5 million at September 30, 2000.  The allowance
for loan losses  represents  .40% of total loans  outstanding and 1.17% of total
non-performing assets.

Non-interest Income
Total  non-interest  income  decreased  by $434,000 to $4.8 million for the year
ended  September  30, 2000 from $5.3  million for the year ended  September  30,
1999. HMC was acquired on November 17, 1998, and as a result,  the  consolidated
statements of income reflect twelve full months of income and expense for HMC in
fiscal  2000 but only ten and a half  months of income  and  expense  for fiscal
1999.  Gains on loans sold  decreased  from $2.3 million for fiscal year 1999 to
$1.2 million for fiscal year 2000 and other service  charges and fees  decreased
from  $801,000 for the year ended  September  20, 1999, to $765,000 for the year
ended  September 30, 2000,  primarily due to rising  interest  rates that slowed
down the purchase and refinance markets.  Continued  increases in interest rates
could  affect the  ability to  generate  new loans.  Service  charges on deposit
accounts  increased $294,000 during the periods compared due to a combination of
an  increase  in the number of  accounts  affected  and an  increase in the fees
associated with deposit accounts.

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

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

                                       13
<PAGE>
Liquidity and Capital Resources

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

Operating  activities  used cash of $3.0 million during the year ended September
30, 2001 and provided  cash of $6.9  million and $7.0  million  during the years
ended September 30, 2000 and 1999,  respectively.  In fiscal 2001, the cash flow
in operating activities was influenced primarily by the change in loans held for
sale and other assets and liabilities.

Investing  activities  provided $6.9 million during the year ended September 30,
2001 and used $61.0  million and $2.4 million  during the years ended  September
30,  2000  and  1999.  The  primary  activity  of the  Bank is  originating  and
purchasing loans and purchasing investment and mortgage-backed  securities.  The
primary  activity  of HMC is  originating  and  selling  loans in the  secondary
mortgage  market.  During the years ended September 30, 2001, 2000 and 1999, the
Corporation  originated  loans in the amount of $348.0 million  ($171.1  million
were  originated  by HMC),  $262.7  million  and  $260.7  million.  The net loan
originations  and  principal  payments  on loans used $32.3  million in 2000 and
provided  $25.9  million and $40.0 million in 2001 and 1999,  respectively.  The
purchase of loans used $27.3 million,  $32.4 million and $40.9 million in fiscal
2001, 2000 and 1999 and was largely comprised of commercial  business loans that
represented participation interests with other financial institutions.  The Bank
also sold a  participation  in a  development  loan in fiscal year 2001 for $1.6
million. Purchase of investment and mortgage-backed  securities held to maturity
used $1.2  million in 1999.  Maturities,  principal  payments or the exercise of
call  provisions by the issuers of such securities  provided $7.3 million,  $2.2
million and $14.5 million for the years ended September 30, 2001, 2000 and 1999.
Purchase of investment securities available for sale used $13.9 million, $50,000
and $13.0  million  and  maturities  or the  exercise of call  provision  by the
issuers of such  securities  provided $13.3  million,  $0 and $3.0 for the years
ended September 30, 2001, 2000 and 1999.  Other investment  activities  included
the sale of REO property,  the purchase of equipment  and property  improvements
and the net cash acquisition of HMC. For the fiscal year 1999, the Bank acquired
corporate owned insurance policies in the amount of $5.5 million.

For the year ended  September 30, 2001,  $17.7 million in cash was provided as a
result of an increase in deposits and net cash of $14.0 million was paid on FHLB
advances. The purchase of treasury stock and dividends on common stock used $2.5
million and $1.3 million,  respectively.  During the fiscal year ended September
30,  2000,  $63.2  million in cash was  provided  as a result of an  increase in
deposits and net cash of $13.5 million was paid on FHLB  advances.  The purchase
of treasury  stock used $4.9  million and  dividends  on common  stock used $1.2
million  during the 2000 fiscal year.  Basic and diluted  earnings per share for
the year ended  September  30, 2001,  were $1.68 and $1.61,  correspondingly.  A
portion of the earnings per share was a result of the purchase of treasury stock
during the fiscal year.  Financing  activities provided $207,000 during the year
ended  September  30, 2001 and provided  $43.4  million and used $7.9 million in
cash during the years ended September 30, 2000 and 1999.

                                       14
<PAGE>

The Bank's  liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits and other cash outflows in an efficient and cost  effective  manner.
The Bank's primary sources of funds are deposits and the scheduled  amortization
and prepayments of loan and mortgage-backed security principal.  During the past
several  years the Bank has used such  funds  primarily  to fund  maturing  time
deposits,  pay savings  withdrawals,  fund  lending  commitments,  purchase  new
investments and increase liquidity. The Bank funds its operations internally and
as needed with  borrowed  funds from the FHLB.  As of September  30, 2001,  such
borrowed  funds  totaled  $113.5  million.  While loan  repayments  and maturing
investments and mortgage-backed securities are relatively predictable sources of
funds,  deposit  flows and loan and  mortgage-backed  security  prepayments  are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.

The amount of  certificate  accounts  that are  scheduled  to mature  during the
twelve months ending September 30, 2002 is approximately  $131.9 million. To the
extent  that these  deposits do not remain at the Bank upon  maturity,  the Bank
believes that it can replace these funds with deposits, current excess liquidity
and FHLB advances or outside borrowings.  It has been the Bank's experience that
substantial portions of such maturing deposits remain at the Bank.

At September  30, 2001,  the Bank and HMC had  commitments  to extend  credit of
$35.0 million.  Funds required to fill these  commitments are derived  primarily
from FHLB borrowings,  current excess liquidity, deposit inflows, loan sales and
loan and security repayments.

OTS regulations  require the Bank to maintain core capital of 4.0% of assets, of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required  to  maintain  risk-based  capital  equal to 8.0% of  total  risk-based
assets.  The Bank's  regulatory  capital  exceeded its tangible  equity,  tier 1
(risk-cased),  tier 1 (core) and risk-based capital  requirements by 6.4%, 3.9%,
6.8% and 2.8%, respectively.

The Bank's  risk-based  capital  increased  from $36.1  million to $37.2 million
during the year ended  September 30, 2001.  This was primarily due to the Bank's
earnings of $3.9 million less the $3.0 million  dividend paid by the Bank to the
Corporation.

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

Impact of Inflation and Changing Prices

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

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

                                       15
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------






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


We have audited the accompanying  consolidated  statement of financial condition
of FSF Financial Corp. and  Subsidiaries  (the  Corporation) as of September 30,
2001 and the related consolidated  statements of income,  comprehensive  income,
changes in  stockholders'  equity and cash flows for fiscal year ended September
30, 2001. These financial statements are the responsibility of the Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audit.  The  consolidated  financial  statements of the
Corporation as of September 30, 2000 and for the years ended  September 30, 2000
and 1999 were audited by Bertram Cooper & Co., LLP (whose  practice  became part
of Larson Allen  Weishair & Co., LLP effective  November 1, 2001),  whose report
dated October 25, 2000 expressed an unqualified opinion of those statements.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of FSF Financial
Corp. and Subsidiaries as of September 30, 2001 and the consolidated  results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.





/s/Larson, Allen, Weishair & Co., LLP

Larson, Allen, Weishair & Co., LLP
Waseca, Minnesota
November 20, 2001

                                       16
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, except shares)
------------------------------------------------------------------------------------------

                                                                        September 30,
                                                                    ----------------------
                                                                       2001         2000
                                                                    ----------------------
                                                                        (In thousands)
<S>                                                               <C>          <C>
                                     ASSETS
                                     ------
Cash and cash equivalents                                           $  12,594    $   8,482
Securities available for sale, at fair value:
     Equity securities                                                 17,946       18,246
     Mortgage-backed and related securities                            27,481       15,369
     Debt securities                                                    3,055       12,728
Securities held to maturity, at amortized cost:
     Debt securities (Fair value of $12,490 and $16,974)               12,420       18,393
     Mortgage-backed and related securities
       (Fair value of $25,586 and $25,145)                             25,731       26,986
Loans held for sale                                                    12,082        3,191
Loans receivable, net                                                 340,484      341,813
Foreclosed real estate                                                    126          321
Accrued interest receivable                                             4,777        4,432
Premises and equipment                                                  5,439        5,514
Other assets                                                           11,496       11,040
                                                                    ----------------------

          Total assets                                              $ 473,631    $ 466,515
                                                                    ======================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
Liabilities:
     Demand deposits                                                $  40,721    $  36,964
     Savings accounts                                                  93,428       80,087
     Certificates of deposit                                          178,392      177,772
                                                                    ----------------------
          Total deposits                                              312,541      294,823

     Federal Home  Loan Bank borrowings                               113,500      127,500
     Advances from borrowers for taxes and insurance                      497          658
     Other liabilities                                                  5,152        3,769
                                                                    ----------------------
          Total liabilities                                           431,690      426,750

Stockholders' equity:
     Serial preferred stock, no par value 5,000,000 shares
       authorized, no shares issued                                         -            -
     Common stock, $.10 par value 10,000,000 shares authorized,
       4,501,277 and 4,501,277 shares issued                              450          450
     Additional paid in capital                                        43,184       43,391
     Retained earnings, substantially restricted                       31,355       28,925
     Treasury stock at cost (2,194,803 and 2,094,822 shares)          (31,146)     (29,504)
     Unearned ESOP shares at cost (90,863 and 126,823 shares)            (909)      (1,268)
     Unearned MSP stock grants at cost (42,564 and 42,964 shares)        (453)        (458)
     Accumulated other comprehensive (loss)                              (540)      (1,771)
                                                                    ----------------------
          Total stockholders' equity                                   41,941       39,765
                                                                    ----------------------

          Total liabilities and stockholders' equity                $ 473,631    $ 466,515
                                                                    ======================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       17
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, except per share amounts)
-------------------------------------------------------------------------------------------------------------------

                                                                     Years Ended September 30,
                                                                 --------------------------------
                                                                   2001        2000        1999
                                                                 --------------------------------
                                                                          (In thousands)
<S>                                                            <C>         <C>         <C>
Interest income:
     Loans receivable                                            $ 30,636    $ 27,097    $ 22,861
     Mortgage-backed and related securities                         2,395       2,668       2,318
     Investment securities                                          2,279       3,112       4,241
                                                                 --------------------------------
          Total interest income                                    35,310      32,877      29,420
                                                                 --------------------------------
Interest expense:
     Deposits                                                      14,826      11,608      10,233
     Borrowed funds                                                 7,074       8,145       7,965
                                                                 --------------------------------
          Total interest expense                                   21,900      19,753      18,198
                                                                 --------------------------------
          Net interest income                                      13,410      13,124      11,222
     Provision for loan losses                                      1,077         216         456
                                                                 --------------------------------
          Net interest income after provision for loan losses      12,333      12,908      10,766
                                                                 --------------------------------
Non-interest income:
     Gain (loss) on loans- net                                      2,499       1,197       2,341
     Other service charges and fees                                   979         765         801
     Service charges on deposit accounts                            1,551       1,262         968
     Commission income                                              1,145       1,108         946
     Other                                                            425         493         203
                                                                 --------------------------------
          Total non-interest income                                 6,599       4,825       5,259
                                                                 --------------------------------
Non-interest expense:
     Compensation and benefits                                      7,705       7,232       7,390
     Occupancy and equipment                                        1,515       1,406       1,313
     Deposit insurance premiums                                        57          71         134
     Data processing                                                  754         689         644
     Professional fees                                                401         378         276
     Other                                                          2,383       2,203       2,069
                                                                 --------------------------------
          Total non-interest expense                               12,815      11,979      11,826
                                                                 --------------------------------
          Income before provision for income taxes                  6,117       5,754       4,199
Income tax expense                                                  2,384       2,250       1,694
                                                                 --------------------------------
          Net income                                                3,733       3,504       2,505
                                                                 ================================

Basic earnings per share                                         $   1.68    $   1.46    $   0.94
Diluted earnings per share                                       $   1.61    $   1.43    $   0.90
</TABLE>


<TABLE>
<CAPTION>

FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
----------------------------------------------------------------------------------------------------

<S>                                                            <C>         <C>         <C>
Net Income                                                       $  3,733    $  3,504    $  2,505
Other comprehensive income
     Unrealized gains (losses) on securities
       Unrealized holding gains (losses) arising during period      1,966        (736)       (976)
       Tax benefit (expense)                                         (735)        278         324
                                                                 --------------------------------
      Other comprehensive income (loss) after tax                   1,231        (458)       (652)
                                                                 --------------------------------
Comprehensive income                                             $  4,964    $  3,046    $  1,853
                                                                 ================================
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       18
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY  (IN THOUSANDS, except per share amounts)
-------------------------------------------------------------------------------------------------------------------

                                                        Unallocated                        Accumulated
                                             Retained      Common     Unearned                 Other
                                  Additional Earnings       Stock      Stock               Comprehensive
                         Common    Paid-in Substantially   Held by   Acquired by  Treasury     Income
                         Stock     Capital  Restricted      ESOP       MSP          Stock      (Loss)       Total
                       --------------------------------------------------------------------------------------------
<S>                  <C>        <C>         <C>         <C>         <C>         <C>         <C>         <C>
Balance,
  September 30, 1998   $    450   $ 43,382    $ 25,451    $ (1,988)   $   (818)   $(23,298)   $   (661)   $ 42,518
    Net earnings              -          -       2,505           -           -           -           -       2,505
  Treasury stock
    acquired                  -          -           -           -           -      (2,912)          -      (2,912)
  Stock issued for
    stock options             -       (145)          -           -           -         509           -         364
  Amortization of
    MSP shares                -         54           -           -         290           -           -         344
  Common stock
    dividends ($0.50
    per share)                -          -      (1,329)          -           -           -           -      (1,329)
  Purchase of
    subsidiary                -       (109)          -           -           -       1,126           -       1,017
  Allocated ESOP
    shares                    -        110           -         360           -           -           -         470
  Other
    comprehensive
    income                    -          -           -           -           -           -        (652)       (652)
                       --------   --------    --------    --------    --------    --------    --------    --------
Balance,
  September 30, 1999        450     43,292      26,627      (1,628)       (528)    (24,575)     (1,313)     42,325
  Net earnings                -          -       3,504           -           -           -           -       3,504
  Treasury stock
    acquired                  -          -           -           -           -      (4,947)          -      (4,947)
  Stock issued for
    stock options             -          -           -           -           -          18           -          18
  Amortization of
    and tax on MSP
    shares                    -         18           -           -          70           -           -          88
  Common stock
    dividends (0.50
    per share)
                              -          -      (1,206)          -           -           -           -      (1,206)
  Allocated ESOP
    shares                    -         81           -         360           -           -           -         441
  Other
    comprehensive
    income                    -          -           -           -           -           -        (458)       (458)
                       --------   --------    --------    --------    --------    --------    --------    --------
Balance,
  September 30, 2000        450     43,391      28,925      (1,268)       (458)    (29,504)     (1,771)     39,765
  Net earnings                -          -       3,733           -           -           -           -       3,733
  Treasury stock
    acquired                  -          -           -           -           -      (2,488)          -      (2,488)
  Stock issued for
    stock options             -       (330)          -           -           -         846           -         516
  Amortization of
    and tax on MSP
    shares                    -          5           -           -           5           -           -          10
  Common stock
    dividends (0.60
      per share)              -          -      (1,303)          -           -           -           -      (1,303)
  Allocated ESOP
    shares                    -        118           -         359           -           -           -         477
  Other
    comprehensive
    income                    -          -           -           -           -           -       1,231       1,231
                       --------   --------    --------    --------    --------    --------    --------    --------
Balance,
  September 30, 2001   $    450   $ 43,184    $ 31,355    $   (909)   $   (453)   $(31,146)   $   (540)   $ 41,941
                       ========   ========    ========    ========    ========    ========    ========    ========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       19
<PAGE>
<TABLE>
<CAPTION>
FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
----------------------------------------------------------------------------------------------------
                                                                       Years Ended September 30,
                                                                 -----------------------------------
                                                                    2001         2000         1999
                                                                 -----------------------------------
<S>                                                            <C>          <C>          <C>
Cash flows from operating activities:
     Net income                                                  $   3,733    $   3,504    $   2,505
     Adjustments to reconcile net income to net cash
       provided by operating activities:
     Depreciation                                                      658          603          490
     Net amortization of discounts and premiums on securities
       held to maturity                                                (39)         (40)         (37)
     Provision for loan losses                                       1,077          216          456
     Net market value adjustment on ESOP shares                        117           71          128
     Amortization of ESOP and MSP stock compensation                   445          451          656
     Amortization of intangibles                                       118          118          105
     Net gain on sale of assets                                        (30)        (126)         (11)
     Net loan fees deferred and amortized                               64         (203)        (134)
     Loans originated for sale                                    (138,136)     (52,221)    (131,586)
     Loans sold                                                    129,245       54,364      134,539
     (Increase) decrease in:
       Accrued interest receivable                                    (345)      (1,104)        (234)
       Other assets                                                   (649)        (435)         (95)
     Increase (decrease) other liabilities                             724        1,699          216
                                                                 -----------------------------------
Net cash provided (used) by operating activities                    (3,018)       6,897        6,998
                                                                 -----------------------------------
Cash flows from investing activities:
     Loan originations and principal payments on loans, net         25,925      (32,349)      40,038
     Purchase of loans                                             (27,337)     (32,417)     (40,883)
     Loan participations sold                                        1,600          851        3,000
     Principal payments on securities held to maturity               1,260          604       10,002
     Purchase of mortgage related securities held to maturity            -            -       (1,161)
     Purchase of securities available for sale                     (13,938)         (50)     (12,987)
     Proceeds from FHLB stock redeemed                                 450        1,038            -
     Proceeds from maturities of securities available for sale      13,321            -        3,000
     Proceeds from maturities of securities held to maturity         6,000        1,570        4,500
     Investment in foreclosed real estate                               (6)          (7)         (38)
     Proceeds from sale of REO                                         231          428          500
     Purchase paid up life insurance policies                            -            -       (5,495)
     Proceeds from sale of fixed assets                                  -          157            -
     Acquisition of Homeowners, net of cash acquired                     -            -       (1,245)
     Purchase of equipment and property improvements                  (583)        (872)      (1,677)
                                                                 -----------------------------------
Net cash provided (used) by investing activities                 $   6,923    $ (61,047)   $  (2,446)
                                                                 -----------------------------------

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


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

                                                                             Years Ended September 30,
                                                                        -----------------------------------
                                                                           2001         2000         1999
                                                                        -----------------------------------
<S>                                                                   <C>          <C>          <C>
Cash flows from financing activities:
     Net increase in deposits                                           $  17,718    $  63,176    $   5,109
     FHLB Advances                                                         26,000       88,000            -
     Payments on FHLB Advances                                            (40,000)    (101,467)      (3,210)
     Net short term borrowings                                                  -         (200)      (5,726)
     Net increase (decrease) in mortgage escrow funds                        (160)         (12)        (152)
     Treasury stock purchased                                              (2,488)      (4,947)      (2,912)
     Dividends on common stock                                             (1,303)      (1,206)      (1,329)
     Proceeds from exercise of stock options                                  440           23          336
                                                                        -----------------------------------
Net cash provided (used) by financing activities                              207       43,367       (7,884)
                                                                        -----------------------------------

Net increase in cash and cash equivalents                                   4,112      (10,783)      (3,332)

Cash and cash equivalents:
     Beginning of year                                                      8,482       19,265       22,597
                                                                        -----------------------------------
     End of period                                                      $  12,594    $   8,482    $  19,265
                                                                        ===================================

Supplemental disclosures of cash flow information: Cash payments for:
        Interest on advances and other borrowed money                   $   7,074    $   8,144    $   7,980
        Interest on deposits                                               14,044       10,828        9,588
        Income taxes                                                        2,830        1,963        1,443

Supplemental schedule of non-cash investing and
     financing activities:
     Reinvested amounts of capital gains and dividends
           from mutual fund investments                                 $      69    $      72    $      80
     Foreclosed real estate                                                   339          378          197
     Acquisition of Homeowners Mortgage Corporation non-cash
           asset, net of assumed liabilities                                    -            -        1,037

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       21
<PAGE>

FSF FINANCIAL CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001, 2000 AND 1999
--------------------------------------------------------------------------------


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

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

Nature of Business
The  Corporation  is a holding  company  whose  subsidiaries  provide  financial
services. The Bank is a community financial institution attracting deposits from
the general public and using such deposits,  together with  borrowings and other
funds, to make mortgage,  construction,  consumer,  commercial and  agricultural
loans.  At September 30, 2001,  the Bank operated 11  retail-banking  offices in
Minnesota.  The Bank is subject to significant  competition from other financial
institutions  and is also subject to  regulation  by certain  federal  agencies,
therefore undergoing periodic examinations by those regulatory authorities.  The
Agency is a property and casualty insurance  company.  HMC is a mortgage banking
entity located in Vadnais Heights,  MN., which originates and sells  residential
mortgage loans.

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

Cash Equivalents (In thousands)
For  purposes of the  consolidated  statements  of cash flows,  the  Corporation
considers all highly liquid debt instruments  with original  maturities of three
months  or less and money  market  funds to be cash  equivalents.  Cash and cash
equivalents include interest-bearing  deposits of $9,767 and $5,552 at September
30, 2001 and 2000, respectively.

Debt and Equity Securities
The  Corporation   classifies  its  investments,   including  marketable  equity
securities,  mortgage-backed  securities and mortgage related securities, in one
of three categories:

         Trading Account Securities
         Securities held  principally for resale in the near term are classified
         as trading  account  securities  and  recorded  at their  fair  values.
         Unrealized gains and losses on trading account  securities are included
         in other income.  The Corporation  did not hold any trading  securities
         during the three fiscal years ended September 30, 2001.

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

                                       22
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

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

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

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

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

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

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

                                       23
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued


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

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

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

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

Goodwill
The  excess  of the  purchase  price  over the fair  value  of  assets  acquired
(goodwill)  in business  combinations  accounted  for by the purchase  method is
amortized using the  straight-line  method over twenty-five  years.  Goodwill is
evaluated for impairment based on all operations that it directly benefits using
the undiscounted cash flow method.

Advertising Costs (in thousands)
The Corporation expenses all advertising costs as incurred.  Advertising expense
totaled $348,  $268 and $242 for the years ended  September  30, 2001,  2000 and
1999, respectively.

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

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

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

                                       24
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued


Stock Based Compensation
The Corporation has adopted Statement of Financial  Accounting  Standards (SFAS)
No. 123,  "Accounting for Stock Based Compensation." As allowed by SFAS No. 123,
the Corporation has elected to continue using the accounting  methods prescribed
by the Accounting  Principles  Board (APB) Opinion No. 25 "Accounting  for Stock
Issued to Employees"  and related  interpretations,  which measure  compensation
cost using the  intrinsic  value  method.  See Note 9 for the impact of the fair
value of employee stock based  compensation plans on net income and earnings per
share on a pro-forma basis for awards granted after October 1, 1995.

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

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

Cash and  cash  equivalents-  the  carrying  value of cash and cash  equivalents
approximate  fair  value.
Debt and equity  securities- fair values of debt and equity securities have been
     estimated using quoted market prices.
Loans receivable-  for variable  rate loans, loans with balloon  maturities  and
     loans with relatively near term  maturities  (such as consumer  installment
     loans) carrying values approximate fair values. The fair value of long term
     fixed  rate  loans has been  estimated  using  present  value  cash  flows,
     discounted  at  a  rate  approximating  current  market  rates  and  giving
     consideration  to estimated  prepayment  risk and credit loss factors.  The
     estimated  fair  value of loans  held  for sale is based on  quoted  market
     prices of similar instruments trading in the secondary market.
Originated  mortgage  servicing  rights-  the  carrying  amounts  of  originated
     mortgage servicing rights approximate fair values.
Accrued   interest-  the  carrying  amounts  of  accrued   interest   receivable
approximate  their  fair  values.
Life  Insurance  policies-  cash value of the policies approximates fair value.
Deposit liabilities- the fair values of  demand  deposits  are,  by  definition,
     equal  to  the  amount payable on demand at the  reporting  date (that  is,
     their  carrying  amounts).  The carrying amounts of  variable  rate,  fixed
     term money market accounts and certificates of deposits  approximate  their
     fair  values   at  the  reporting   date.  Fair   values  of   fixed   rate
     certificates  of   deposit  are  estimated  using  a  discounted  cash flow
     calculation  that  applies  interest  rates  currently  being   offered  on
     certificates  to  a schedule of aggregated  expected monthly maturities  on
     time deposits.
Short term borrowings-  the carrying  amounts of advances  from the Federal Home
     Loan Bank (FHLB) of Des Moines  maturing within 90 days  approximate  their
     fair values.
Long term borrowings- the carrying amounts of long term borrowings are estimated
     using discounted cash flow analyses based on the Bank's current incremental
     borrowing rates for similar types of borrowing arrangements.
Off-balance sheet items- fair value for  off-balance  sheet lending  commitments
     are based on fees  currently  charges  to enter  into  similar  agreements,
     taking  into  account  the  remaining  terms  of  the  agreements  and  the
     counterparties  credit  standings.  The  carrying  value and fair  value of
     commitments to extend credit are not considered material for disclosure.

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

                                       25
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued


(2)      Debt and Equity Securities (in thousands)

Debt and equity  securities  have been  classified in the  consolidated  balance
sheets according to management's  intent.  The carrying amount of securities and
their approximate fair values at September 30, are presented as follows:

<TABLE>
<CAPTION>
                                                                             September 30, 2001
                                                -------------------------------------------------------------------------------
                                                                          Gross               Gross
                                                    Amortized          Unrealized           Unrealized             Fair
                                                      Cost                Gains               Losses               Value
                                                ------------------  ------------------   -----------------   ------------------
<S>                                                 <C>                  <C>                 <C>                 <C>
Available for sale securities:
     Equity securities
           Fund Investments                           $    12,522          $        -          $      501          $    12,021
           Stock in FHLB                                    5,925                   -                   -          $     5,925
                                                ------------------  ------------------   -----------------   ==================
                      Total                           $    18,447          $        -          $      501          $    17,946
                                                ==================  ==================   =================   ==================

     Mortgage backed securities:
           REMICs                                     $    27,602          $      162          $      283          $    27,481
                                                ==================  ==================   =================   ==================

     Debt Securities:                                 $     3,000          $       55          $        -          $     3,055
                                                ==================  ==================   =================   ==================

Held to maturity securities:
     Debt securities:
           U.S. Government and Agency                 $    12,420          $      298          $      228          $    12,490
                                                ==================  ==================   =================   ==================
     Mortgage backed securities:
           REMICs                                     $    24,970          $      150          $      320          $    24,800
           FNMA certificates                                  741                  25                   -          $       766
           Other certificates                                  20                   -                   -          $        20
                                                ------------------  ------------------   -----------------   ------------------
                      Total                           $    25,731          $      175          $      320          $    25,586
                                                ==================  ==================   =================   ==================
</TABLE>

The amortized cost of debt and mortgage-backed  securities at September 30, 2001
included  unamortized  premiums  of  $201  and  unaccreted  discounts  of  $246,
respectively.

<TABLE>
<CAPTION>
                                                                             September 30, 2000
                                                -------------------------------------------------------------------------------
                                                                            Gross               Gross
                                                      Amortized          Unrealized           Unrealized             Fair
                                                        Cost                Gains               Losses               Value
                                                ------------------  ------------------   -----------------   ------------------
<S>                                                 <C>                  <C>                 <C>                 <C>
Available for sale securities:
     Equity securities
           Fund Investments                           $    12,522          $        -          $      651          $    11,871
           Stock in FHLB                                    6,375                   -                   -          $     6,375
                                                ------------------  ------------------   -----------------   ==================
                      Total                           $    18,897          $        -          $      651          $    18,246
                                                ==================  ==================   =================   ==================

     Mortgage backed securities:
           REMICs                                     $    16,981          $        -         $     1,612          $    15,369
                                                ==================  ==================   =================   ==================

     Debt Securities:                                 $    12,998          $        -          $      270          $    12,728
                                                ==================  ==================   =================   ==================

Held to maturity securities:
     Debt securities:
           U.S. Government and Agency                 $    18,393          $      106         $     1,525          $    16,974
                                                ==================  ==================   =================   ==================
     Mortgage backed securities:
           REMICs                                     $    25,992          $       80         $     1,919          $    24,153
           FNMA certificates                                  970                   -                   2          $       968
           Other certificates                                  24                   -                   -          $        24
                                                ------------------  ------------------   -----------------   ------------------
                      Total                           $    26,986          $       80         $     1,921          $    25,145
                                                ==================  ==================   =================   ==================
</TABLE>

                                       26

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

The amortized cost of debt and mortgage backed  securities at September 30, 2000
includes  unamortized  premiums  of  $208  and  unaccreted  discounts  of  $305,
respectively.

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

The scheduled  maturities of securities  held to maturity and securities  (other
than equity securities) available for sale at September 30, 2001 are as follows:

<TABLE>
<CAPTION>
                                                              Held to Maturity                    Available for Sale
                                                                 Securities                           Securities
                                                     -----------------------------------  -----------------------------------
                                                        Amortized            Fair            Amortized            Fair
                                                          Cost              Value              Cost              Value
                                                     ----------------  -----------------  ----------------  -----------------
<S>                                                     <C>                <C>               <C>                <C>
Due in one year or less                                    $       -          $       -         $       -          $       -
Due from one to five years                                     9,221              9,278             3,000              3,055
Due from five to ten years                                     2,013              1,815                 -                  -
Due after ten years                                           26,917             26,983            27,602             27,481
                                                     ----------------  -----------------  ----------------  -----------------
          Total                                           $   38,151         $   38,076        $   30,602         $   30,536
                                                     ================  =================  ================  =================
</TABLE>

For purposes if this maturity table,  mortgage-backed securities,  which are not
due at a single maturity date, have been allocated over maturity groupings based
on  the  weighted  average  contractual  maturities  of  underlying  collateral.
Mortgage-backed  securities  may  mature  earlier  than their  weighted  average
contractual   maturities   because   of   principal   prepayments.    Debt   and
mortgage-backed  securities carried at approximately  $21.0 million at September
30, 2001 and $22.0  million at September  30, 2000 were pledged to secure public
deposits and for other purposes required or permitted by law.

(3)      Loans Receivable (in thousands)

Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                     September 30,
                                                       ----------------------------------------
                                                              2001                 2000
                                                       -------------------  -------------------
<S>                                                       <C>                  <C>
First mortgage loans:
     Secured by 1-4 family residences                        $     69,708         $     97,843
     Secured by other properties                                   48,322               43,133
     Construction and land development loans                      154,855               94,982
                                                       -------------------  -------------------
                                                                  272,885              235,958
     Less:
          Un-disbursed portion of construction
            and land development loans                            (73,235)             (36,864)
          Net deferred loan origination fees                       (1,060)                (988)
                                                       -------------------  -------------------
                    Subtotal first mortgage loans                 198,590              198,106
Consumer and other loans:
     Consumer loans                                                39,315               43,198
     Home equity and second mortgages                              29,991               28,106
     Commercial                                                    23,908               29,831
     Agricultural loans                                            49,935               43,829
                                                       -------------------  -------------------
                                                                  143,149              144,964
     Add:
          Net deferred loan origination costs                         286                  277
                                                       -------------------  -------------------
                    Subtotal consumer and other loans             143,435              145,241
                                                       -------------------  -------------------
                              Subtotal all loans                  342,025              343,347
     Less:
          Allowance for loan losses                                (1,541)              (1,534)
                                                       -------------------  -------------------
                                        Total                $    340,484         $    341,813
                                                       ===================  ===================
</TABLE>
                                       27
<PAGE>


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

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

<TABLE>
<CAPTION>
                                                                                 Years Ended September 30,
                                                               --------------------------------------------------------------
                                                                        2001                 2000                  1999
                                                               -------------------  --------------------  -------------------
<S>                                                                 <C>                   <C>                  <C>
Balance, beginning of period                                          $     1,534           $     1,387          $     1,035
Provision for losses                                                        1,077                   216                  456
Charge-offs                                                                (1,127)                  (98)                (142)
Recoveries                                                                     57                    29                   38
                                                               -------------------  --------------------  -------------------
Balance, end of period                                                $     1,541           $     1,534          $     1,387
                                                               ===================  ====================  ===================
</TABLE>

Loans,  having carrying values of $339 and $474, were  transferred to foreclosed
real estate in 2001 and 2000, respectively.

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

The  aggregate  amount  of loans to  executive  officers  and  directors  of the
Corporation  were $364 and $366 at  September  30, 2001 and 2000,  respectively.
During 2001,  repayments on loans to executive officers and directors aggregated
$78 and $76 was advanced.

(4)      Loan Servicing (in thousands)

Loans  serviced  for others are not  included in the  accompanying  consolidated
statements of financial condition.  The unpaid principal balances of these loans
serviced  for others were  $52,968 and $52,128 at  September  30, 2001 and 2000,
respectively.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing  and included in demand  deposits  were $298 and $318 at September 30,
2001 and 2000, respectively.

Capitalized  mortgage  servicing  rights and excess  servicing  receivables  are
summarized as follows:

<TABLE>
<CAPTION>
                                                                Years Ended September 30,
                                                      -----------------------------------------------------
                                                        2001                2000               1999
                                                      -------------   -----------------  ------------------
<S>                                                    <C>                 <C>                 <C>
Beginning balance, net of accumulated amortization       $     207           $     253           $     201
Amounts capitalized                                             36                  19                 132
Amortization                                                   (71)                (65)                (80)
Evaluation adjustments                                           -                   -                   -
                                                      -------------   -----------------  ------------------
Balance, end of period                                   $     172           $     207           $     253
                                                      =============   =================  ==================
</TABLE>

(5)      Foreclosed Real Estate (in thousands)

Net gains on foreclosed  real estate,  including  net revenues from  operations,
were not material for the three years ended  September  30, 2001.  The Bank held
foreclosed  real estate at  September  30, 2001 and 2000,  amounting to $126 and
$321.

                                       28
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(6)      Premises and Equipment (in thousands)

Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                September 30,
                                                       ------------------------------------
                                                         2001                  2000
                                                       --------------    ------------------
<S>                                                     <C>                   <C>
Land                                                      $      728            $      728
Buildings, improvements and leasehold improvements             4,898                 4,838
Furniture, equipment and automobiles                           4,368                 4,114
                                                       --------------    ------------------
     Total costs                                               9,994                 9,680
Less accumulated depreciation                                  4,555                 4,166
                                                       --------------    ------------------
     Total                                               $     5,439           $     5,514
                                                       ==============    ==================
</TABLE>

At September  30, 2001,  the  Corporation  was  obligated  under  non-cancelable
operating  leases for office  space and  equipment.  Net  rental  expense  under
operating leases,  included in occupancy and equipment,  was $231, $302 and $275
for the years ended September 30, 2001, 2000 and 1999.  Projected  minimum lease
commitments  under the terms of the leases for the three years ending  September
30, 2004 are $317, $217 and $103, respectively.

(7)      Deposits (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of $100,000, was $64,287 and $43,910 in 2001 and 2000, respectively.

Interest expense is summarized as follows:

<TABLE>
<CAPTION>
                                                     September 30,
                            ---------------------------------------------------------------------
                                  2001                      2000                      1999
                            -----------------     ---------------------     ---------------------

<S>                           <C>                       <C>                       <C>
Savings accounts                $      3,491              $      3,110              $      1,896
Demand deposits                          266                       259                       289
Certificates of deposit               11,069                     8,239                     8,048
                            -----------------     ---------------------     ---------------------
                                $     14,826              $     11,608              $     10,233
                            =================     =====================     =====================
</TABLE>

Non-interest  bearing demand deposits  amounted to $20,797,  $16,124 and $12,583
for the years ended September 30, 2001, 2000 and 1999, respectively.

At September 30, 2001, the scheduled  maturities of  certificates of deposit are
as follows:

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

             2002                           $ 131,871
             2003                              29,620
             2004                               7,711
             2005                               1,816
             2006 and thereafter                7,374
                                            ----------
                                            $  178,392
                                            ==========

The Bank held deposits of  approximately  $365 for related  parties at September
30, 2001.

                                       29
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

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

<TABLE>
<CAPTION>
                                                                September 30,
                                      -------------------------------------------------------------------
                                         2001                                 2000
                                      ------------------------------     --------------------------------
Fiscal Year of Maturity - Advances                          Weighted                             Weighted
----------------------------------           Amount            Rate               Amount            Rate
                                      --------------  --------------     ----------------  --------------
<S>                                    <C>               <C>                <C>               <C>
2001                                                              - %             35,000            6.18 %
2002                                         25,500            6.41               25,500            6.41
2003                                         10,000            6.53                    -               -
2004                                         16,000            5.83                    -               -
2005                                              -               -                    -               -
2006 and thereafter                          62,000            5.55               67,000            5.54
                                      --------------  --------------     ----------------  --------------
     Total                               $  113,500            5.87           $  127,500            5.88 %
                                      ==============  ==============     ================  ==============
</TABLE>

At September 30, 2001,  borrowed funds are  collateralized by stock in the FHLB,
loans with  carrying  value of $83,339 and debt and  mortgage-backed  securities
with carrying values of $51,017 under a collateral agreement.

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

Salary Continuation Plans
The Bank has  adopted  insured  salary  continuation  plans for the  benefit  of
selected  members of  management  by providing  them with  retirement  and death
benefits. The estimated liability under the agreements is charged to income over
the expected  remaining  years of  employment.  The Bank's policy is to fund the
costs accrued with insurance contracts.  Salary continuation expense amounted to
$135, $126 and $114 for the three years ended September 30, 2001, respectively.

Deferred Compensation 401(k) Plans
The  Corporation  provides 401(k) plans that cover  substantially  all employees
meeting age and length of service requirements.  The plan maintained by the Bank
covers  employees of both the Bank and the Agency.  Employees  participating  in
this plan are eligible to contribute up to 15% of their annual compensation. The
plan  maintained  by HMC for the  benefit of its  employees  also  provides  for
employee contribution up to 15% of their annual compensation. Both plans provide
for  discretionary  contributions  by the employers,  which are allocated to the
participants' accounts in proportion to employee contributions.  The Corporation
made no  discretionary  contributions  to these  plans for the three years ended
September 30, 2001.

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

Self Insurance
The  Corporation  has a  self-insured  health  plan for all its  employees.  The
Corporation  has purchased  stop loss  insurance to supplement  the health plan,
which will reimburse the Corporation for individual  claims in excess of $35,000
annually or aggregate claims exceeding $438,100 annually.

                                       30
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

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

A summary of the ESOP share allocation is as follows:

<TABLE>
<CAPTION>
                                                           September 30,
                                       -----------------------------------------------------------
                                            2001                  2000                  1999
                                       ---------------  ------------------------------------------
<S>                                     <C>                   <C>                   <C>
Shares allocated, beginning of year           232,885               196,919               160,947
Shares allocated during year                   35,972                35,972                35,975
Unreleased shares                              90,863               126,829               162,798
                                       ---------------  --------------------  --------------------
Total ESOP
                                              359,720               359,720               359,720

Fair value of unreleased shares           $     1,481           $     1,585           $     1,913
Amount charged to expense                 $       406           $       323           $       442
Dividend used for debt reduction          $       164           $       171           $       136

</TABLE>

Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended  September  30, 1995.  Following  shareholder  approval of the MSP in
January 1995, the Bank  purchased  179,860  shares of the  Corporation's  common
stock in the open  market  at $10.59  per share to be  awarded  to  officers  in
accordance  with the provisions of the MSP. The cost of the shares awarded under
these plans is recorded as unearned  compensation,  a contra-equity account, and
is recognized as an expense in accordance with the vesting  requirements defined
by the MSP. For each of the three fiscal years ended  September  30, 2001,  2000
and 1999, the amount included in compensation expense related to the MSP was $5,
$73 and $73,  respectively.  During  fiscal 2001,  2000 more shares were granted
from the original purchase.

The  following  summarizes  the  activity  in the MSP for the three  years ended
September 30, 2001.

                                              Unawarded               Awarded
                                               Shares                  Shares
                                      -------------------     ------------------
          At September 30, 1998                  42,964                 54,759
                    Vested                            -                (27,379)
                                      -------------------     ------------------
          At September 30, 1999                  42,964                 27,380
                    Vested                            -                (27,380)
                    Shares Granted               (2,000)                 2,000
                                      -------------------     ------------------
          At September 30, 2000                  40,964                  2,000
                    Vested                            -                   (400)
                                      -------------------     ------------------
          At September 30, 2001                  40,964                  1,600
                                      ===================     ==================

                                       31
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

Director's Stock Compensation Plan
In  January  1998,  the  shareholders  of  the  Corporation   approved  a  stock
compensation plan for its non-employee directors.  The plan granted 6,000 shares
of common stock issued from  treasury  that vests over a four year period,  with
1,200 shares awarded in January 1998. The compensation cost associated with this
plan is the fair value of the stock ($19.42/share) on the date that the plan was
approved  by  shareholders.  Compensation  cost  included  in  the  accompanying
financial  statements  for the last three fiscal  years was $23,300.  During the
year ended  September  30, 2001,  1,200 shares of the total grant were vested to
the plan recipients.

Stock Option Plans
The  Corporation   maintains  the  1994  stock  option  plan,  approved  by  the
Corporation's  stockholders  on January 17,  1995 (the 1994 Plan);  and the 1998
stock option plan,  approved by the  Corporation's  stockholders  on January 20,
1998 (the 1998 Plan). These plans permit the granting of stock options,  with an
exercise price equal to the fair value of the Corporation's stock on the date of
the option grant.  All options granted under these plans may be exercised over a
ten-year period  beginning on the date the option is granted.  Awards made under
the Plans may be incentive  stock plans (ISO's) as defined by Section 422 of the
Internal Revenue Code or options that do not qualify. Those options granted that
qualify as ISO's are generally  exercisable on the date of the grant while those
not qualifying  (non-incentive stock options granted to executives and directors
of the Corporation)  vest over 3-5 years. The following  summarizes the activity
in the two Plans for the three years ended September 30, 2001:

                            Shares Available  Options Shares   Weighted Average
                               for Grant       Outstanding      Exercise Price
                            ----------------  --------------   -----------------
At September 30, 1998           163,387         435,897            $   12.73
           1998 Plan Created    (90,074)         90,074                14.34
           Granted                    -         (33,988)                9.50
           Exercised              6,582          (6,582)               19.13
                            ----------------  --------------   -----------------
At September 30, 1999            79,895         485,401                13.40
           Granted              (32,187)         32,187                23.30
           Exercised                  -          (3,600)               19.42
        Cancelled                 2,995          (2,995)               19.13
                            ----------------  --------------   -----------------
At September 30, 2000            50,703         510,993                13.33
           Granted              (21,937)         21,937                16.05
           Exercised                  -         (93,087)               15.42
           Cancelled              1,550          (1,550)               17.46
                            ----------------  --------------   -----------------
At September 30, 2001            30,316         438,293            $   13.59
                            ================  ==============   ================

Shares available for future grants
           1994 Plan              8,988
           1998 Plan             21,328

The following table summarizes  information  about stock options  outstanding at
September 30, 2001:
<TABLE>
<CAPTION>
---------------------------------------------------------------------  ------------------------------
                         Options Outstanding                                     Options Exercisable
---------------------------------------------------------------------  ------------------------------
                                                   Weighted average
             Exercise             Number        remaining contractual
               Price           Outstanding           life in years            Price           Number
---------------------------------------------------------------------  ------------------------------
<S>    <C>                      <C>                     <C>             <C>                <C>
         $      9.500             167,121                 3.0             $      9.500       167,121
               19.125              99,024                 7.3                   19.125        83,310
               19.416               1,200                 7.3                   19.416         1,800
               19.250              30,000                 7.7                   19.250        30,000
               15.000              48,000                 8.2                   15.000        28,000
               14.750              18,987                 8.2                   14.750        18,987
               12.375              20,337                 9.0                   12.375        20,337
               12.375              21,687                10.0                   12.375        21,587
               12.125              10,000                10.0                   12.125         4,000
               16.050              21,937                 9.0                   16.050        21,937
                        ------------------                                             --------------
                                  438,293                                                    397,079
                        ==================                                             ==============

</TABLE>

                                       32
<PAGE>

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

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

                                               Years Ended September 30,
                                        ----------------------------------------
                                            2001          2000          1999
                                        ------------   -----------   -----------
          Net Income
                     As reported        $     3,733     $   3,504     $   2,505
                     Pro forma                3,518         3,371         2,322
          Earnings per common share
                     As reported
                            Basic       $      1.68     $    1.46     $    0.94
                            Diluted            1.61          1.43          0.90
                     Pro forma
                            Basic       $      1.58     $    1.41     $    0.87
                            Diluted            1.52          1.38          0.83

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

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

<TABLE>
<CAPTION>
                                                                        Years Ended September 30,
                                                             -------------------------------------------
                                                                  2001             2000         1999
                                                             -------------------------------------------
<S>                                                         <C>              <C>          <C>

Risk free interest rate                                             4.85%            5.45%        5.22%
Expected life                                                    10 years         10 years     10 years
Expected volatility                                                27.00%           26.00%       27.00%
Expected dividends                                                      -                -            -
Weighted average fair value per share of the option granted   $      7.16      $      7.00  $      7.27
</TABLE>

(10)     Income Taxes (in thousands)

The Corporation files a consolidated  federal income tax return. The Corporation
and its subsidiaries  entered into a tax sharing agreement that provides for the
allocation  and payment of federal and state income  taxes.  The  provision  for
income  taxes of each  corporation  is  computed  on a separate  company  basis,
subject to certain  adjustments.  Income tax expense  (benefit) is summarized as
follows:

<TABLE>
<CAPTION>
                                                                September 30,
                                                --------------------------------------------------
                                                    2001              2000            1999
                                                ---------------    --------------   --------------
<S>                                             <C>               <C>              <C>
Current
      Federal                                     $      2,313      $      1,565     $        936
      State                                                749               509              308
                                                ---------------    --------------   --------------
             Subtotal                                    3,062             2,074            1,244
Deferred
      Federal                                             (509)              132              338
      State                                               (169)               44              112
                                                ---------------    --------------   --------------
             Subtotal                                     (678)              176              450
                                                ---------------    --------------   --------------
                    Total income tax provision    $      2,384      $      2,250     $      1,694
                                                ===============    ==============   ==============

</TABLE>

                                       33
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

The State of Minnesota  follows the Internal Revenue Code for the  determination
of taxable  income,  in connection  with temporary  differences.  The portion of
deferred  tax  assets  and  liabilities  attributed  to  state  income  taxes is
approximately 25 percent.  Temporary differences between the financial statement
carrying  amounts  and the tax basis of assets and  liabilities  that can create
deferred tax assets and liabilities are as follows:

                                                        September 30,
                                                      ----------------
                                                        2001     2000
                                                       ------   ------
Deferred tax assets:
      Deferred compensation                            $  573   $  564
      Deferred net loan fees                               99      287
      Securities unrealized loss                          222    1,018
      Allowance for loan losses                           666      621
                                                       ------   ------
           Subtotal                                     1,560    2,490
      Less:  Valuation allowance                          203      264
                                                       ------   ------
                        Total                           1,357    2,226
Deferred tax liabilities:
      FHLB Stock                                          193      208
      Tax bad debt reserve                                128      170
      Premises and equipment                              427      416
      Installment obligation sale of former building       26       27
      Mortgage servicing rights                            49       59
      Discount on loans                                     2        3
      Section 475 "For Sale Assets"                        27      762
                                                       ------   ------
                        Total                             852    1,645
                                                       ------   ------
Net deferred tax asset                                 $  505   $  581
                                                       ======   ======

A valuation  allowance was  established to reduce the deferred tax asset related
to the unrealized loss on equity securities  because  management is uncertain if
it will be  realized.  The  Corporation  has  paid  sufficient  taxes  in  prior
carryback years, which will enable it to recover the balance of the net deferred
tax  assets.  Therefore,  no  additional  valuation  allowance  was  required at
September 30, 2001 and 2000.

The actual income tax expense varied from the expected tax expense  (computed by
applying the United States  Federal  Corporate  income tax rate of 34 percent to
earnings before income taxes) as follows:

<TABLE>
<CAPTION>
                                                               Years Ended September 30,
                                                            2001        2000           1999
                                                        -----------   ---------     ----------
<S>                                                     <C>         <C>            <C>
       Computed "expected" tax expense                    $  2,080    $  1,956       $  1,428
       State income taxes, net of federal tax benefit
                                                               383         365            277
       Other, net
                                                               (79)        (71)           (11)
                                                        -----------   ---------     ----------
       Total income tax provision                         $  2,384    $  2,250       $  1,694
                                                        ===========   =========     ==========
</TABLE>

Retained  earnings at September  30, 2001,  include  $6,492 of which no deferred
federal  income tax liability  has been  recognized.  This amount  represents an
allocation of income to bad debt  deductions for tax purposes only that arose in
tax years beginning  before  September 30, 1988, (that is the base year amount).
Reduction  of the amount,  so  allocated  for  purposes  other than tax bad debt
losses or adjustments arising from this carryback of net operating losses, would
create income for tax purposes  only.  This would be subject to the then current
corporate  income tax rate. The unrecorded  deferred income tax liability on the
above amount was approximately $2,600 at September 30, 2001.

                                       34
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(11)     Earnings per Share

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                                                For the Years ended
                                                                                    September 30,
                                                          -------------------------------------------------------------------
                                                                       2001                   2000                  1999
                                                          -------------------------------------------------------------------
<S>                                                             <C>                    <C>                   <C>
Numerator:
   Net income - Numerator for basic earnings
      per share and diluted earnings per share--
      income available to common stockholders                     $   3,733,000          $   3,504,000         $   2,505,000
                                                          ===================================================================
Denominator:
   Denominator for basic earnings per share--
      weighted-average shares                                         2,220,067              2,395,287             2,663,691

   Effect of dilutive securities:
      Stock - based compensation plans                                   96,546                 56,224               108,713
                                                          -------------------------------------------------------------------
      Denominator for diluted earnings per share--
         adjusted weighted-average shares and
         assumed conversions                                          2,316,613              2,451,511             2,772,404
                                                          ===================================================================
Basic earnings per share                                          $        1.68          $        1.46         $        0.94
Diluted earnings per share                                        $        1.61          $        1.43         $        0.90
</TABLE>

(12)     Commitments and Contingencies

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

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

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

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

                                       35
<PAGE>



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

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

As of September 30, 2001, the most recent  notification from the OTS categorized
the Bank as  "well  capitalized"  under  the  regulatory  framework  for  prompt
corrective  action. To be categorized as well capitalized the Bank must maintain
minimum total risk based,  Tier 1 risk based,  and Tier 1 leverage ratios as set
forth  in the  table  below.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

The  Bank's  actual  regulatory  capital  amounts,  with  reconciliation  to the
Corporation's  investment in the Bank  determined in accordance  with  Generally
Accepted  Accounting  Principles  (GAAP),  and ratios are also  presented in the
table below.

<TABLE>
<CAPTION>
                                                                                                           To Be Well
                                                                                                        Capitalized Under
                                                                                 For Capital            Prompt Corrective
                                                          Actual              Adequacy Purposes         Action Provisions
                                                 ------------------------- ------------------------- ------------------------
<S>                                             <C>               <C>        <C>            <C>         <C>           <C>
GAAP capital, September 30, 2001                     $  39,032
Add:  Unrealized losses on debt
        securities held for sale                            40
Less:  Goodwill                                         (2,010)
                                                 --------------
Tangible equity capital and ratio to
        adjusted total assets                        $  37,062       7.9%      $   7,035       1.5%      $   9,380      2.0%
                                                 ------------------------- ------------------------- ------------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                        $  37,062       7.9%      $  18,761       4.0%      $  23,451      5.0%
                                                 ------------------------- ------------------------- ------------------------
Total risk based capital and ratio to
        risk weighted assets                         $  37,062      10.8%      $  13,156       4.0%      $  19,734      6.0%
                                                               ----------- ------------------------- ------------------------
Tier 2 risk based capital, net adjustment                  130
                                                 --------------
Total risk based capital and ratio to risk
       weighted assets, September 30 , 2001          $  37,192      10.8%      $  26,312       8.0%      $  32,890     10.0%
                                                 ========================= ========================= ========================
</TABLE>

<TABLE>
<CAPTION>
                                                                                                           To Be Well
                                                                                                        Capitalized Under
                                                                                 For Capital            Prompt Corrective
                                                          Actual              Adequacy Purposes         Action Provisions
                                                 ------------------------- ------------------------- ------------------------
<S>                                             <C>               <C>        <C>            <C>         <C>           <C>
GAAP capital, September 30, 2000                     $  36,943
Add:  Unrealized losses on debt
        securities held for sale                         1,120
Less:  Goodwill                                         (2,101)
                                                 --------------
Tangible equity capital and ratio to
        adjusted total assets                        $  35,962       7.7%       $  6,947       1.5%       $  9,262      2.0%
                                                 ------------------------- ------------------------- ------------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                        $  35,962       7.7%      $  18,524       4.0%      $  23,155      5.0%
                                                 ------------------------- ------------------------- ------------------------
Total risk based capital and ratio to
        risk weighted assets                         $  35,962      10.9%      $  13,257       4.0%      $  19,885      6.0%
                                                               ----------- ------------------------- ------------------------
Tier 2 risk based capital, net adjustment                  106
                                                 --------------
Total risk based capital and ratio to risk
       weighted assets, September 30 , 2000          $  36,068      10.9%      $  26,513       8.0%      $  33,142     10.0%
                                                 ========================= ========================= ========================

</TABLE>

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

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

(14)     Concentration of Credit Risk (in thousands)

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

The  Corporation  had cash on deposit in a  financial  institution  in excess of
Federal deposit insurance limits of approximately $9,667 at September 30, 2001.

(15)     Financial Instruments (in thousands)

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

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

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

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

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

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

A summary of the notional amounts of the Corporation's  financial instruments at
September 30, 2001 follows:

            Commitments to extend credit          $   35,031
            Standby letters of credit                    233
            Commitments to sell loans                 13,620

                                       37
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

<TABLE>
<CAPTION>
                                                          September 30,
                                                  2001                       2000
                                       ---------------------------------------------------
                                         Carrying        Fair        Carrying       Fair
                                           Value         Value        Value        Value
                                       ---------------------------------------------------
<S>                                    <C>           <C>          <C>          <C>
Financial Assets:
Cash & cash equivalents                  $ 12,594      $ 12,594     $  8,482     $  8,482
Investment securities                      33,421        33,491       49,367       47,948
Mortgage-backed and related securities     53,212        53,067       42,355       40,514
Loans held for sale                        12,082        12,082        3,191        3,191
Loans receivable, net                     340,484       343,404      341,813      341,374
Accrued interest receivable                 4,777         4,777        4,432        4,432
Life Insurance Policies                     7,581         7,581        7,199        7,199
Financial Liabilities:
Deposits                                  312,541       309,330      294,823      292,267
Borrowings                                113,500       115,134      127,500      131,555
</TABLE>

(16)     Effects of New Financial Accounting Standards ( in thousands)

On June 29, 2001, the Financial Accounting Standards Board (FASB) voted to issue
Financial  Accounting  Standards  Statement No. 141,  Business  Combinations and
Statement No. 142, Goodwill and Other Intangible Assets.  Statement 141 requires
that the purchase  method of  accounting  be used for all business  combinations
initiated after June 30, 2001. Statement 142 changes the accounting for goodwill
from an amortization method to an impairment-only  approach.  Thus, amortization
of goodwill,  including  goodwill recorded in past business  combinations,  will
cease upon  adoption of the  Statement.  The Company  must adopt  Statement  142
effective  for the fiscal year  beginning  October 1, 2002,  and may elect early
adoption  for the fiscal  year  beginning  October 1, 2001.  Management  has not
determined  which  fiscal year will be  effective  for the adoption of Statement
142.  Amortization  of goodwill for the years ended September 30, 2001, 2000 and
1999 was $91, $91 and $79, respectively.

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

(17)              Subsequent Event

On July 25, 2001,  the Bank entered into a "Purchase and  Assumption  Agreement"
with ING Bank, fsb to purchase ING's St. Cloud,  Minnesota branch facility.  The
acquisition has received  regulatory  approval and will be completed on November
9, 2001. The Bank will acquire,  in a cash transaction,  the branch real estate,
equipment and  approximately  $30 million of loans and assume  approximately $50
million in  deposits.  The  purchase  includes  approximately  $2.75  million in
goodwill and other intangible assets.

                                       38
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

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

The  information  should  be  read  in  conjunction  with  the  other  Notes  to
Consolidated  Financial  Statements.   Stockholder's  equity  differs  from  the
consolidated statements by the amount of the ESOP loan.

                        STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                                                  September 30,
                                                                                        ------------------------------------
                                                                                              2001                2000
                                                                                        ----------------   -----------------
<S>                                                                                        <C>                 <C>
ASSETS
           Cash and cash equivalents                                                         $    2,188          $    2,152
           Investment in subsidiaries                                                            39,714              37,674
           Loan to Bank ESOP                                                                        909               1,268
           Other assets                                                                              81                  12
                                                                                        ----------------   -----------------
                                 Total assets                                                $   42,892          $   41,106
                                                                                        ================   =================


LIABILITIES AND STOCKHOLDERS' EQUITY
           Other liabilities                                                                  $      42           $      73
           Stockholders' equity                                                                  42,850              41,033
                                                                                        ----------------   -----------------
                                 Total liabilities & stockholders' equity                     $  42,892           $  41,106
                                                                                        ================   =================
</TABLE>

                               STATEMENT OF INCOME
<TABLE>
<CAPTION>
                                                                                           Years Ended September 30,
                                                                                      2001             2000            1999
                                                                                 --------------   -------------   -------------
<S>                                                                                 <C>             <C>              <C>
Income:
Dividends from Bank Subsidiary                                                        $  3,000        $  6,000         $ 3,000
Interest From:
        Bank's ESOP Plan                                                                   105             142             159
        Investments                                                                         69             133             180
                                                                                 ------------------------------   -------------
                                                                                         3,174           6,275           3,339
Expense:
       Non-Interest Expense                                                                457             400             462
                                                                                 --------------   -------------   -------------
Income before income taxes and equity in undistributed
   net income of subsidiaries                                                            2,717           5,875           2,877
Income tax (benefit) expense                                                              (114)            (47)            (48)
                                                                                 --------------   -------------   -------------
                                                                                         2,831           5,922           2,925
Equity in undistributed net income of subsidiaries                                         902               -               -
Subsidiaries dividends received in excess of subsidiaries net income                         -          (2,418)           (420)
                                                                                 --------------   -------------   -------------
Net income                                                                            $  3,733        $  3,504         $ 2,505
                                                                                 ==============   =============   =============

</TABLE>

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

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


                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                      Years Ended September 30,
                                                                      2001       2000       1999
                                                                    -------    -------    -------
<S>                                                               <C>        <C>        <C>
Cash flows from operating activities:
            Net Income                                              $ 3,733    $ 3,504    $ 2,505
            Adjustments:
                        Subsidiaries dividends received in excess
                           of subsidiaries net income                  (902)     2,418        420
                        (Increase) decrease in other assets             (69)        55        215
                        Increase (decrease)in other liabilities         (31)        22          6
                        Other                                           296         75         80
                                                                    -------    -------    -------
Net cash provided by operations                                       3,027      6,074      3,226
                                                                    -------    -------    -------
Cash flows from investing activities:
            Proceeds from maturities of investments                       -      1,570          -
            Investment in Homeowners                                      -          -     (2,267)
                                                                    -------    -------    -------
Net cash provided (used) by investing activities                          -      1,570     (2,267)
                                                                    -------    -------    -------
Cash flows from financing activities:
            Payments received on ESOP bank loan                         360        360        360
            Purchases of treasury stock                              (2,488)    (4,947)    (2,912)
            Proceeds from exercise of stock options                     440         23        336
            Payments of cash dividends
                                                                     (1,303)    (1,206)    (1,381)
                                                                    -------    -------    -------
Net cash used in financing activities                                (2,991)    (5,770)    (3,597)
                                                                    -------    -------    -------

Increase (decrease) in cash and cash equivalents                         36      1,874     (2,638)
Cash and cash equivalents:
            Beginning of year                                         2,152        278      2,916
                                                                    -------    -------    -------
            End of year                                             $ 2,188    $ 2,152    $   278
                                                                    =======    =======    =======
</TABLE>

(18)     Business Segments

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

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

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

                                       40
<PAGE>
                      FSF Financial Corp. and Subsidiaries
              Notes to Consolidated Financial Statements- Continued

(18)              Business Segments- Continued (in thousands)

<TABLE>
<CAPTION>
                                                     First       Homeowners                       Consolidated
                                                   Federal fsb Mortgage Corp. Other  Eliminations    Total
                                                   -----------------------------------------------------------
<S>                                                <C>             <C>    <C>        <C>         <C>
As of and for the year ended September 30, 2001
        Interest income from external sources       $ 34,993   $    239    $     78    $      -    $ 35,310
        Non-interest income from external sources      3,923      1,723         953           -       6,599
        Inter-segment interest income                    168          -         174        (342)       --
        Interest expense                              21,900        168           -        (168)     21,900
        Provision for loan loss                        1,077          -           -           -       1,077
        Depreciation and Amortization                    602        132          43           -         777
        Other non-interest expense                     9,707      3,371       1,296      (1,559)     12,815
        Income tax expense (benefit)                   2,450        (13)        (53)          -       2,384
        Net Income (loss)                              3,951       (111)      2,893      (3,000)      3,733
                                                    -------------------------------------------------------
        Total Assets                                $471,922   $  9,250    $ 39,803    $(47,344)   $473,631
                                                    =======================================================

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

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

                                       41
<PAGE>
                  Selected Quarterly Financial Data (Unaudited)
                  For the Three Years Ended September 30, 2000

<TABLE>
<CAPTION>
                                      First    Second    Third    Fourth
                                     Quarter   Quarter  Quarter   Quarter     Year
                                    -----------------------------------------------
<S>                               <C>       <C>       <C>       <C>       <C>
Fiscal 2001
Interest income                     $ 9,216   $ 9,035   $ 8,482   $ 8,577   $35,310
Interest expense                      5,913     5,759     5,186     5,042    21,900
                                    -----------------------------------------------
Net Interest Income                   3,303     3,276     3,296     3,535    13,410
Provision for loan losses                90       705        90       192     1,077
Gain on sale of assets                  372       575       769       783     2,499
Net income                          $   857   $   577   $ 1,150   $ 1,149   $ 3,733
Basic earnings per share               0.38      0.26      0.52      0.52      1.68
Diluted earnings per share             0.37      0.25      0.50      0.50      1.61
Cash dividends declared per share   $ 0.150   $ 0.150   $ 0.150   $ 0.150   $  0.60
Market range:
     High bid (1)                   $ 15.63   $ 15.38   $ 15.70   $ 17.25   $ 17.25
     Low bid (1)                    $ 12.36   $ 13.85   $ 13.91   $ 14.27   $ 12.36

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

Fiscal 1999
Interest income                     $ 7,503   $ 7,242   $ 7,267   $ 7,408   $29,420
Interest expense                      4,704     4,522     4,526     4,446    18,198
                                    -----------------------------------------------
Net Interest Income                   2,799     2,720     2,741     2,946    11,222
Provision for loan losses               114       114       114       114       456
Gain on sale of assets                  700       573       624       444     2,341
Net income                          $   842   $   693   $   525   $   445   $ 2,505
Basic earnings per share               0.32      0.26      0.20      0.17      0.94
Diluted earnings per share             0.30      0.25      0.19      0.17      0.90
Cash dividends declared per share   $ 0.125   $ 0.125   $ 0.125   $ 0.125   $  0.50
Market range:
     High bid (1)                   $ 15.75   $ 15.50   $ 14.44   $ 14.13   $ 15.75
     Low bid (1)                    $ 14.25   $ 13.56   $ 13.50   $ 11.75   $ 11.75

</TABLE>

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

                                       42