SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K
            For Annual and Transition Reports Pursuant to Sections 13
                 or 15(d) of the Securities Exchange Act of 1934
(Mark One)
[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended      September 30, 1996
                          --------------------------------

                                     - or -

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

For the transition period  __________________ to ____________________

Commission Number: 0-24648

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

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

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

Registrant's telephone number, including area code:         (612) 234-4500

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

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

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

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ X ]
                              ---
      
     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Registrant,  based on the average  bid and asked price of the  Registrant's
Common Stock as quoted on the National Association of Securities Dealers,  Inc.,
Automated  Quotations  National  Market on  December  2,  1996 was $  38,845,104
(2,690,570 shares at $14.4375 per share).

        As of  December  2, 1996 there were  issued  and  outstanding  3,304,310
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     September 30, 1996. (Parts I, II and IV)

2.   Portions of the Proxy  Statement for the Annual Meeting of  Stockholders to
     be held January 21, 1997. (Part III)


<PAGE>

                                      INDEX

<TABLE>
<CAPTION>

PART I                                                                                                  Page

<S>           <C>                                                                                         <C>
Item 1.       Business.....................................................................................1

Item 2.       Properties..................................................................................19

Item 3.       Legal Proceedings...........................................................................20

Item 4.       Submission of Matters to a Vote of Security Holders.........................................20


PART II

Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters.......................20

Item 6.       Selected Financial Data ....................................................................20

Item 7.       Management's Discussion of Financial Condition and Results of Operations....................20

Item 8.       Financial Statements........................................................................20

Item 9.       Change in and Disagreements with Accountants on Accounting and
                Financial Disclosure......................................................................20


PART III

Item 10.      Directors and Executive Officers of the Registrant..........................................20

Item 11.      Executive Compensation......................................................................20

Item 12.      Security Ownership of Certain Beneficial Owners and Management..............................20

Item 13.      Certain Relationships and Related Transactions..............................................21


PART IV

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................21
</TABLE>

<PAGE>


                                     PART I



ITEM 1. BUSINESS

General

FSF Financial Corp. (the "Company"),  a Minnesota Corporation,  was organized in
May,  1994,  and as of October 6, 1994,  became the  holding  company  for First
Federal fsb ("First  Federal" or the  "Bank").  First  Federal is the  resulting
institution of the merger of First State Federal  Savings and Loan  Association,
Hutchinson, MN ("Hutchinson"), and First Federal Savings and Loan Association of
Hastings,  Hastings,  MN  ("Hastings").  The merger of the two  institutions was
completed in September,  1994  ("Merger").  Hutchinson  was organized as a state
chartered  mutual  savings and loan  association  in 1933 and received a federal
charter in 1934.  Hastings was initially chartered in 1881 as the "Dakota County
Building and Loan Association" and obtained a federal charter in 1968.

First  Federal's  business  consists  primarily of attracting  deposits from the
general  public and using such  deposits,  together  with  borrowings  and other
funds,  to make mortgage  loans secured by  residential  real estate  located in
Minnesota.  At September  30, 1996,  First  Federal  operated 11 retail  banking
offices in Minnesota.

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

On October 6,1994,  the Company sold 4,496,500  shares of common stock at $10.00
per share and net proceeds of $43.5 million. One-half of the net proceeds ($21.7
million)  was used to  purchase  all of the  common  stock of First  Federal  in
connection with the conversion of First Federal from the mutual to stock form of
organization ("Conversion"). The Merger and the Conversion were accounted for as
a "pooling of interests."  Consequently,  no goodwill or other  intangibles were
recorded as a result of this transaction.

Market Area

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

Lending Activities

General.   The  Bank's  loan  portfolio   composition   consists   primarily  of
conventional  fixed-rate,  balloon  and  adjustable-rate  first  mortgage  loans
secured by  one-to-four  family  residences.  The Bank also  makes,  to a lesser
extent,   mortgage  loans  on  multi-family   residences,   construction  loans,
commercial real estate loans,  and consumer loans. As of September 30, 1996, the
Bank's total loan portfolio (the "loan portfolio") was $232.1 million,  of which
$150.1  million,  or 64.7%,  was  secured by  one-to-  four  family  residential
dwellings.  At  that  same  date,  residential   construction  loans,  land  and
commercial real estate loans,  multifamily loans, and commercial  business loans
totaled $19.7 million  (8.5%),  $18.6 million (8.0%),  $3.8 million (1.6%),  and
$6.1  million  (2.6%),  respectively.  Of  the  one-to-four  family  residential
mortgage loans  outstanding at that date,  48.0% were  adjustable-rate  mortgage
(ARM) loans, 16.7% were balloon loans, and 35.3% were fixed-rate loans.

Consumer  and other  loans held by the Bank  totaled  $33.8  million or 14.6% of
total loans  outstanding  at September  30, 1996, of which $17.7 million or 7.6%
consisted  of  home  equity  and  second  mortgage  loans.  At that  same  date,
automobile loans,  loans on savings  accounts,  and other consumer loans totaled
$10.1million, $0.6 million and $5.5 million, respectively.

                                       1

<PAGE>


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

                                                                             At September 30,
                                   ------------------------------------------------------------------------------------------------
                                            1996                1995                1994               1993               1992
                                   ------------------------------------------------------------------------------------------------
                                      Amount      %      Amount       %      Amount       %      Amount      %     Amount      %
                                   ------------------------------------------------------------------------------------------------
Residential real estate:                                                  (Dollars in Thousands)

<S>                                  <C>       <C>      <C>        <C>      <C>        <C>      <C>       <C>     <C>       <C> 
  One-to-four family(1)              $150,102   64.7    $121,034    64.6    $ 89,100    72.8    $92,088    73.1   $ 94,190   74.4
  Residential construction             19,676    8.5      20,366    10.9       4,474     3.7      6,328     5.1      5,226    4.1
  Multi-family                          3,753    1.6       3,708     2.0       3,209     2.6      4,680     3.7      5,626    4.4
                                   ------------------------------------------------------------------------------------------------
                                      173,531   74.8     145,108    77.5      96,783    79.1    103,096    81.9    105,042   82.9
  Land and commercial real estate      18,637    8.0      16,951     9.0       7,024     5.7      5,565     4.4      5,266    4.2
  Commercial business                   6,089    2.6       2,715     1.4         439     0.4        832     0.7        884    0.7
                                   ------------------------------------------------------------------------------------------------
                                      198,257   85.4     164,774    87.9     104,246    85.2    109,493    87.0    111,192   87.8
Consumer:

  Savings accounts                        563    0.2         516     0.3         437     0.4        537     0.4        617    0.5
  Home equity and second mortgage      17,692    7.6      10,950     5.8       4,427     3.6      3,229     2.6      3,628    2.9
  Automobile loans                     10,080    4.3       8,399     4.5       6,950     5.7      6,753     5.4      6,543    5.2
  Other                                 5,512    2.5       2,810     1.5       6,305     5.1      5,910     4.6      4,640    3.6
                                   ------------------------------------------------------------------------------------------------
          Total loans                 232,104  100.0     187,449   100.0     122,365   100.0    125,922   100.0    126,620  100.0
                                               =====               =====               =====              =====             =====
Less:
   Loans in process                   (13,401)           (15,010)             (3,982)            (3,973)            (2,715)
   Deferred fees                         (757)              (613)               (315)              (282)              (247)
   Allowance for loan losses             (776)              (764)               (748)              (721)              (730)
                                     --------           --------            --------           --------           -------- 
      Total loans, net               $217,170           $171,062            $117,320           $120,946           $122,928
                                     ========           ========            ========           ========           ========
</TABLE>


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

     (1)  Includes  loans  held for sale in the  amount of  $443,000,  $230,000,
          $729,000,  $21.6  million and $17.6  million as of September 30, 1996,
          1995, 1994, 1993, and 1992, respectively.


The following  table sets forth the Bank's loan  originations,  loan  purchases,
loans sales, and principal payments for the periods indicated:

<TABLE>
<CAPTION>

                                                                    Years Ended September 30,
                                                 ----------------------------------------------------------------
                                                     1996        1995         1994         1993         1992
                                                 ----------------------------------------------------------------
                                                                         (In Thousands)
Total gross loans receivable at
<S>                                                 <C>         <C>          <C>          <C>          <C>      
    end of period                                   $ 232,104   $ 187,449    $ 122,365    $ 125,922    $ 126,620
Loans originated:
  Residential real estate:
     One-to-four family                                53,801      45,988       42,462       49,999       46,598
     Residential construction                          12,975      21,996        5,064        7,164        6,343
     Multi-family                                           -         437            -            -            -
                                                 ----------------------------------------------------------------
         Total residential real estate                 66,776      68,421       47,526       57,163       52,941
  Land and commercial real estate                       3,241       8,588        1,665        1,349        1,872
  Commercial business                                     274         250          123          261          259
  Consumer                                             27,270      17,465       13,438       12,019       12,167
                                                 ----------------------------------------------------------------
          Total loans originated                       97,561      94,724       62,752       70,792       67,239
Purchase of loans                                      17,447      20,993            -            -            -
Sale of loans                                          (3,509)       (810)     (19,141)     (22,685)     (14,046)
Principal repayments                                  (63,813)    (49,651)     (49,698)     (45,386)     (37,459)
Other (net)                                            (3,031)       (172)       2,530       (3,419)      (3,156)
                                                 ----------------------------------------------------------------
Net loan activity                                   $  44,655   $  65,084    $  (3,557)   $    (698)   $  12,578
                                                 ================================================================

</TABLE>

                                       2
<PAGE>
Maturity of Loans.  The  following  table sets forth the  maturity of the Bank's
loans at September 30, 1996. The table does not include prepayments or scheduled
principal  repayments.  Prepayments and scheduled principal  repayments on loans
totaled $63.8 million,  $49.7 million,  $49.7 million,  $45.4 million, and $37.5
million for the years ended  September  30,  1996,  1995,  1994,  1993 and 1992,
respectively.  Adjustable-rate  mortgage  loans are shown as  maturing  based on
contractual maturities.
<TABLE>
<CAPTION>
                                        One-to-Four        Land,
                                          Family        Multi-Family                     Commercial
                                        Real Estate    and Commercial                    Business and
                                         Mortgages      Real Estate      Construction     Consumer        Total
                                       -----------------------------------------------------------------------------
Amounts Due:                                                          (In Thousands)
<S>                                        <C>                 <C>            <C>            <C>          <C>
Within 3 months                            $  12,464           $    774       $  3,874       $  6,232     $  23,344
3 months to 1 year                            21,782              6,607         15,802         10,508        54,699
                                       -----------------------------------------------------------------------------
Total due before one year                     34,246              7,381         19,676         16,740        78,043
                                       -----------------------------------------------------------------------------

After 1 year:
   1 to 3 years                               32,893              6,786              -         11,308        50,987
   3 to 5 years                               21,561              7,547              -          9,058        38,166
   5 to 10 years                              32,511                367              -          2,830        35,708
   10 to 20 years                             22,983                309              -              -        23,292
   Over 20 years                               5,908                  -              -              -         5,908
                                       -----------------------------------------------------------------------------
Total due after one year                     115,856             15,009              -         23,196       154,061
                                       -----------------------------------------------------------------------------
Total amount due                           $ 150,102           $ 22,390       $ 19,676       $ 39,936     $ 232,104
                                       =============================================================================
</TABLE>
The  following  table  sets  forth  the  dollar  amount  of all  loans due after
September  30,  1997,  which have  predetermined  interest  rates and which have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                          Fixed-            Balloon          Adjustable
                                                           rates             Rates             Rates          Total
                                                       --------------     -------------    ---------------    -------------
                                                                         (In Thousands)
<S>                                                    <C>                  <C>            <C>                  <C>       
One-to four-family real estate (1)                     $      50,233        $   15,395     $       50,228       $  115,856
Land, multi-family and commercial real estate                 11,402             2,648                959           15,009
Consumer and commercial business                              23,196                 -                  -           23,196
                                                       --------------     -------------    ---------------    -------------
     Total                                             $      84,831      $      18,043    $       51,187     $    154,061
                                                       ==============     =============    ===============    =============
</TABLE>
     (1)  Includes residential construction loans.


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

The Bank originates  three-,  five- and seven-year  balloon  mortgage loans, the
majority of which are three-year balloon  mortgages.  These mortgages contain no
contractual  assurances  that the loan will be renewed.  At maturity the loan is
generally  rewritten and  re-recorded;  however,  if the borrower's loan payment
history is satisfactory,  a new appraisal is not required.  Management  believes
that  balloon  loans  have  a  pricing  characteristic  that  helps  offset  the
detrimental  effect that rising rates could have on net interest  income because
the balloon loans do not contain interest rate adjustment caps. At September 30,
1996,  balloon  mortgages  were  $25.1  million,  or  10.8% of the  Bank's  loan
portfolio.

The Bank offers ARM loans that adjust  every year,  with the initial  adjustment
coming one, three,  five, seven or ten years after  origination.  The loans have
terms from 10 to 30 years and the  interest  rates on these loans are  generally
based on the treasury  bill 
                                       3
<PAGE>

indices.  The annual interest rate cap (the maximum amount by which the interest
rate may be increased  in a year) on the Bank's ARM loans is generally  2.0% and
the lifetime cap is generally  6.0% over the initial rate of the loan.  The Bank
considers market factors and competitive  rates on loans as well as its own cost
of funds when  determining  the rates on the loans it offers.  The Bank does not
originate loans with negative amortization.

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

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

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

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

Multi-family  residential  real  estate  loans are  permanent  loans  secured by
apartment buildings. Of primary concern in multi-family  residential real estate
lending is the borrower's  creditworthiness  and the  feasibility  and cash flow
potential of the  project.  Loans  secured by income  properties  generally  are
larger  and  involve  greater  risks than  residential  mortgage  loans  because
payments  on loans  secured  by income  properties  are often  dependent  on the
successful operation or management of the properties.  As a result, repayment of
such loans may be subject to a greater extent than residential real estate loans
to adverse  conditions  in the real estate  market or the  economy.  In order to
monitor cash flows on income  properties,  the Bank requires  borrowers and loan
guarantors,  if any, to provide  annual  financial  statements and rent rolls on
multi-family loans. At September 30, 1996, the five largest land acquisition and
development,  commercial  real estate and  multi-family  loans  ranged from $1.1
million to $3.7 million with an average outstanding balance of $1.6 million. All
such loans were current and have  performed in  accordance  with their terms and
the property securing such loans is in the Bank's market area.

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

In connection with consumer loan applications,  the Bank verifies the borrower's
income and reviews a credit bureau report. In addition,  the relationship of the
loan to the value of the collateral is considered. Consumer loans entail greater
risks than one-to- four family residential mortgage loans, particularly consumer
loans secured by rapidly  depreciable  assets such as  automobiles or loans that
are unsecured.  In such cases,  any repossessed  collateral for a defaulted loan
may not provide an adequate source of repayment of the outstanding loan balance,
since  there is a greater  likelihood  of damage,  loss or  depreciation  of the
underlying collateral.  Further,  consumer loan collections are dependent on the
borrower's  continuing financial stability,  and therefore are more likely to be
adversely  affected  by job  loss,  divorce,  illness  or  personal  bankruptcy.
Finally,  the application of various federal and state laws,  including  federal
and state  bankruptcy  and  insolvency  laws,  may limit the amount which can be
recovered  on such  loans in the event of a  default.  At  September  30,  1996,
consumer  loans  90 days or more  delinquent  totaled  $90,000  or 0.23% of such
loans.  Management believes that the Bank's level of consumer loan delinquencies
is relatively low in 

                                       4
<PAGE>

comparison to other financial institutions.  No assurance can be given, however,
that the Bank's  delinquency  rate on consumer loans will continue to remain low
in the future.

Loan Approval  Authority and  Underwriting.  First  Federal's  primary source of
mortgage loan  applications  is referrals  from existing or past  customers.  In
recent years,  refinancings  had been a significant  portion of First  Federal's
originations,  however,  such  loan  originations  have  decreased  due  to  the
increasing interest rate environment.  The Bank also solicits  applications from
real estate  brokers,  contractors,  and  call-ins  and walk-ins to its offices.
First Federal  advertises in local newspapers for first mortgage and home equity
loans.

Upon  receipt of any loan  application  from a  prospective  borrower,  a credit
report and verifications are ordered to confirm specific information relating to
the loan applicant's  employment,  income and credit  standing.  An appraisal or
valuation determination,  subject to regulatory requirements, of the real estate
intended to secure the proposed loan is undertaken.  First Federal  utilizes the
services of Board approved appraisers and two authorized  appraisers on staff at
the Bank. In connection  with the loan approval  process,  First  Federal's loan
officers  analyze  the  loan  applications  and  the  property   involved.   All
residential, home equity, multi-family,  construction and commercial real estate
loans are  underwritten  and processed at First  Federal's  main office by First
Federal's loan servicing  department,  subject to the loan underwriting policies
as approved by the Board of Directors.  The Chief Executive Officer,  President,
and the Directors of Lending are  authorized to approve all  one-to-four  family
applications.  Commercial  real estate  loans in excess of $1.0  million must be
approved by the Board of Directors.

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

Loans-to-One  Borrower.  Under  federal law,  federally-chartered  savings banks
have,  subject to certain  exemptions,  aggregate lending limits to one borrower
equal  to  15%  of the  institution's  unimpaired  capital  and  surplus.  As of
September 30, 1996, First Federal's five largest lending relationships  included
$3.7 million in land development loans to a local developer, a $3.0 million line
of credit to an unaffiliated mortgage-banking company, a $3.0 million commercial
loan secured by stock of another Minnesota financial institution, a $3.0 million
commercial real estate loans, and a $2.0 million commercial real estate loan. At
September  30,  1996,  all of these loans were within the loans to one  borrower
limitations, current and at market rates of interest.

Loan  Servicing.  The Bank generally  retains the servicing on all loans sold to
others. In addition,  the Bank services  substantially all of the loans which it
retains in its portfolio.  Loan servicing includes collecting and remitting loan
payments,  accounting  for  principal  and  interest,  making  advances to cover
delinquent  payments,  making  inspections  as required of  mortgaged  premises,
contacting  delinquent   mortgagors,   supervising   foreclosures  and  property
dispositions in the event of unremedied defaults and generally administering the
loans.   Funds  that  have  been  escrowed  by  borrowers  for  the  payment  of
mortgage-related  expenses,  such as  property  taxes and  hazard  and  mortgage
insurance premiums, are maintained in noninterest-bearing  accounts at the Bank.
At September 30, 1996,  the Bank had $235,000  deposited in escrow  accounts for
its loans serviced for others.

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

                                                   September 30,
                                        -------------------------------------
Mortgage loan portfolios serviced for:     1996         1995        1994
                                        -------------------------------------
                                                   (In Thousands)
          FHLMC                          $   40,561   $   43,481  $   45,921
          Other Investors                       572          971       1,288
                                        -------------------------------------
                                         $   41,133   $   44,452  $   47,209
                                        =====================================


The Bank receives fees for servicing  mortgage loans,  which generally amount to
0.25% per annum on the declining  balance of mortgage loans.  Such fees serve to
compensate the Bank for the costs of performing the servicing  functions.  Other
sources of loan  servicing  revenues  include late charges.  For the years ended
September  30,  1996,  1995 and 1994,  the Bank earned  gross fees of  $194,000,
$186,000 and  $170,000,  respectively  from loan  servicing.  The Bank retains a
portion of funds  received from borrowers on the loans it services for others in
payment of its servicing fees received on loans serviced for others.

Non-Performing and Problem Assets

Loan Collections and Delinquent Loans. The Bank's collection  procedures provide
that when a loan is 30 days or more  delinquent,  the  borrower is  contacted by
mail and  telephone  and payment is  requested.  If the  delinquency  continues,

                                       5
<PAGE>

subsequent efforts will be made to contact the delinquent  borrower.  In certain
instances,  the Bank may modify the loan or grant a limited  moratorium  on loan
payments to enable the borrower to reorganize his financial affairs. Once a loan
delinquency  exceeds 60 days it is  classified  as special  mention and the Bank
attempts to work with the borrower to establish a repayment schedule to cure the
delinquency.  If the borrower is unable to cure the  delinquency,  the Bank will
institute  foreclosure actions. If a foreclosure action is taken and the loan is
not reinstated,  paid in full or refinanced,  the property is sold at a judicial
sale at which the Bank may be the buyer if there  are no offers to  satisfy  the
debt. Any property acquired as the result of a foreclosure or by deed in lieu of
foreclosure  is classified  as  foreclosed  real estate until such time as it is
sold or otherwise  disposed of by the Bank. At September 30, 1996,  the Bank had
no  foreclosed  real estate.  When  foreclosed  real estate is  acquired,  it is
recorded at the lower of the unpaid principal balance of the related loan or its
fair market value less related  disposition costs. Any writedown of the property
is charged to the allowance for losses on real estate owned.

Non-performing Assets. Loans are reviewed on a regular basis and are placed on a
non-accrual  status  when,  in the  opinion of  management,  the  collection  of
additional  interest is  doubtful.  Residential  mortgage  loans are placed on a
non-accrual  status  when either  principal  or interest is 90 days or more past
due. Consumer loans generally are charged off when the loan becomes over 90 days
delinquent.  Commercial business and real estate loans are placed on non-accrual
status when the loan is 90 days or more past due. Interest accrued and unpaid at
the time a loan is placed on  non-accrual  status is  charged  against  interest
income.  Subsequent  payments are either  applied to the  outstanding  principal
balance or recorded as  interest  income,  depending  on the  assessment  of the
ultimate  collectibility  of the  loan.  At  September  30,  1996,  the Bank had
approximately $253,000 of loans that were more than 60 days delinquent.

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

<TABLE>
<CAPTION>

                                                                        At September 30,
                                                 ----------------------------------------------------------------
                                                        1996        1995         1994         1993         1992
                                                 ----------------------------------------------------------------
                                                                     (Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S>                                                  <C>          <C>          <C>          <C>          <C>     
   Residential construction loans                    $      -     $   209      $      -     $     -      $     63
   Permanent loans secured by one-to
      four-family units                                   129         138            26          244          457
   Other                                                    -           -           293          347            -
Non-mortgage loans:
   Commercial                                               -           -             -            -            -
   Consumer                                                90          33            21           12            1
                                                 ----------------------------------------------------------------
Total non-accrual loans                                   219         380           340          603          521
Foreclosed real estate and real estate
  held for investment                                       -           -           247          215          450
                                                 ----------------------------------------------------------------
Total non-performing assets                          $    219     $   380      $    587     $    818     $    971
                                                 ================================================================
Total non-performing loans to net loans                  0.10%       0.22%         0.27%        0.50%        0.42%
                                                 ================================================================
Total non-performing loans to total assets               0.06%       0.12%         0.11%        0.28%        0.27%
                                                 ================================================================
Total non-performing assets to total assets              0.06%       0.12%         0.20%        0.38%        0.51%
                                                 ================================================================

</TABLE>

During  the  years  ended  September  30,  1996,  1995,  1994,  1993  and  1992,
approximately $11,812, $11,593, $6,109, $38,271, and $25,262, respectively would
have been recorded on loans  accounted for on a non-accrual  basis if such loans
had been  current  according  to the  original  loan  agreements  for the entire
period.  These amounts were not included in the Bank's  interest  income for the
respective  periods.  No interest income on loans accounted for on a non-accrual
basis was included in income during any of these periods.

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

An asset is  considered  "substandard"  if it is  inadequately  protected by the
paying capacity and net worth of the obligor or the collateral  pledged, if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the  institution  will 

                                       6
<PAGE>


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

Management's  evaluation of the classification of assets and the adequacy of the
reserve  for loan losses is  reviewed  by  regulatory  agencies as part of their
periodic examinations. At September 30, 1996, First Federal had total classified
assets of $498,000 of which $329,000 were considered substandard,  and no assets
were classified as doubtful or loss.  Special mention assets totaled $169,000 at
September 30, 1996.

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

As a result of the  decline in real  estate  values and the  significant  losses
experienced  by many financial  institutions,  there has been a greater level of
scrutiny  by  regulatory   authorities  of  the  loan  portfolios  of  financial
institutions   nationwide,   undertaken  as  part  of  the  examination  of  the
institution by the OTS and FDIC.  Results of recent  examinations  indicate that
these regulators may be applying more conservative criteria in establishing real
estate values,  requiring  significantly increased provisions for potential loan
losses.  While First Federal believes it has established its existing  allowance
for loan  losses  in  accordance  with  GAAP,  there  can be no  assurance  that
regulators,  in  reviewing  the Bank's loan  portfolio,  will not request  First
Federal to  significantly  increase its  allowance  for loan  losses,  or that a
deteriorating  real  estate  market will cause  First  Federal to  significantly
increase its allowance for loan losses,  therefore  negatively  affecting  First
Federal's financial condition and earnings.


                                       7
<PAGE>


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

                                                                        At September 30,
                                                 ----------------------------------------------------------------
                                                     1996        1995         1994         1993         1992
                                                 ----------------------------------------------------------------
                                                                     (Dollars in Thousands)
<S>                                                 <C>         <C>          <C>          <C>          <C>      
Total loans outstanding                             $ 232,104   $ 187,449    $ 122,365    $ 125,922    $ 126,620
                                                 ================================================================
Average loans outstanding                           $ 193,202   $ 142,711    $ 119,133    $ 109,448    $ 109,044
                                                 ================================================================
Allowance balance (beginning of period)             $     764   $     748    $     721    $     730    $     334
                                                 ----------------------------------------------------------------
Provision (credit):
   Residential                                              -           -           27           36           86
   Commercial real estate                                   -           -            -            -          321
   Consumer                                                42          24            6           11            5
                                                 ----------------------------------------------------------------
       Total provision                                     42          24           33           47          412
Charge-off:
   Residential                                              -           -            -            7            -
   Commercial real estate                                   -           -            -           36            -
   Consumer                                                34          20            6           18           22
                                                 ----------------------------------------------------------------
       Total charge-offs                                   34          20            6           61           22
Recoveries:
   Residential                                              -           -            -            -            -
   Commercial real estate                                   -           -            -            -            -
   Consumer                                                 4          12            -            5            6
                                                 ----------------------------------------------------------------
       Total recoveries                                     4          12            -            5            6
                                                 ----------------------------------------------------------------
Net charge-offs                                            30           8            6           56           16
                                                 ----------------------------------------------------------------
Allowance balance (at end of period)                $     776   $     764    $     748    $     721    $     730 
                                                 ================================================================
Allowance as percent of total loans                      0.33%       0.61%        0.61%        0.57%        0.58%
Net loans charged off as a percent of
   average loans                                         0.02%       0.01%        0.01%        0.04%        0.01%

</TABLE>

To further  monitor and assess the risk  characteristics  of the loan portfolio,
loan delinquencies are reviewed to consider any developing loan problems.  Based
upon  the  procedures  in  place,  First  Federal's  past  experience  regarding
charge-offs  and  recoveries  and the current  risk  elements in the  portfolio,
management  believes the  allowance  for loan losses at September  30, 1996,  is
adequate.  However,  assessment of the adequacy of the allowance for loan losses
involves  subjective  judgments regarding future events and thus there can be no
assurance  that  additional  provisions  for loan losses will not be required in
future periods.

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

<TABLE>
<CAPTION>

                                                                           September 30,
                                            ----------------------------------------------------------------------------
                                                        1996                    1995                     1994
                                            ----------------------------------------------------------------------------
                                                              Percent                 Percent                  Percent
                                                             of Total                of Total                 of Total
                                                 Amount       Loans       Amount      Loans        Amount      Loans
                                            ----------------------------------------------------------------------------
                                                                      (Dollars in Thousands)
<S>                                          <C>               <C>     <C>              <C>      <C>             <C>  
Real estate loans                            $        426       82.8%  $       675       86.4%   $      675       84.7%
Consumer and commercial business                      350       17.2%           89       13.6%           73       15.3%
                                            ----------------------------------------------------------------------------
                                             $        776      100.0%  $       764      100.0%   $      748      100.0%
                                            ============================================================================
</TABLE>



Investment and Mortgage-backed Securities Activities

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

                                       8
<PAGE>
securities and asset-backed  securities (e.g.,  mortgage-backed  securities).  A
significant  portion of First  Federal's  income  during  recent  years has been
attributable to interest  income on such  securities.  The Corporation  does not
have the same investment limitations as the Bank.

Mortgage-backed  and Related  Securities.  First Federal  invests in residential
mortgage-backed  securities  guaranteed by participation  certificates issues by
FHLMC and Government National Mortgage Association ("GNMA"). The mortgage-backed
securities portfolio as of September 30, 1996, consisted primarily of fixed-rate
certificates  issued by the  FHLMC  ($9,000),  GNMA  ($80,000)  and Real  Estate
Mortgage Investment Conduits ("REMICs") ($54.8 million).

At  September  30,  1996,  the  carrying  value of  mortgage-backed  and related
securities held to maturity totaled $38.6 million, or 10.9% of total assets. The
market value of such securities totaled approximately $36.9 million at September
30, 1996. First Federal also held $16.3 million of  mortgage-backed  and related
securities that were classified available for sale.

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

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

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

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

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

The  REMICs  held  by  First  Federal  at  September  30,  1996,   consisted  of
floating-rate  tranches.  The interest  rate of all of the Bank's  floating-rate
securities adjusts monthly and provides the institution with net interest margin
protection in an increasing market rate  environment.  The securities are backed
by mortgages on one- to four-family residential real estate and have contractual
maturities up to 30 years.  None of the  securities are deemed to be "High Risk"
according to OTS guidelines.  The securities are primarily companion tranches to
"PACs" and "TACs". PACs and TACs (Planned and Targeted Amortization Classes) are
designed  to provide a specific  principal  and  interest  cash-flow.  Principal
payments  that are received in excess of the amount needed for the PACs and TACs
are  allocated to the companion  tranches.  When the PACs and TACs are repaid in
full,  all  principal is then used to pay the companion  tranches.  Although the
timing of principal  payments may be impacted by the amount of prepayments  (the
higher the level of prepayments, the sooner the principal will be received), all
of the principal and interest payments are guaranteed.

                                       9
<PAGE>


Generally,  it is management's intent to hold  mortgage-backed  securities until
maturity. In recent periods,  certain mortgage-backed  securities were purchased
and categorized as available for sale.  These securities were purchased with the
proceeds from two FHLB advances in order to generate additional earnings spread.

Investment  Securities.  First Federal is required under federal  regulations to
maintain a minimum  amount of liquid  assets  which may be invested in specified
short-term  securities  and certain  other  investments.  The Bank has generally
maintained  a liquidity  portfolio  well in excess of  regulatory  requirements.
Liquidity  levels may be  increased or  decreased  depending  upon the yields on
investment  alternatives and upon management's judgment as to the attractiveness
of the  yields  then  available  in  relation  to  other  opportunities  and its
expectations of future yield levels,  as well as management's  projections as to
the short-term  demand for funds to be used in First Federal's loan  origination
and  other  activities.  At  September  30,  1996,  the Bank  had an  investment
securities  portfolio of  approximately  $62.6 million  (17.7% of total assets),
consisting  primarily of equity  securities  (mutual  funds),  U. S.  Government
Securities,  and  U.S.  government  agency  obligations.  The  market  value  of
investments  at September  30, 1996,  was $59.9  million or  approximately  $2.7
million below book value.

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

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

Investment and Mortgage-backed  Securities  Portfolio.  The following table sets
forth the carrying value of First  Federal's  investment  securities  portfolio,
short-term  investments,  FHLB stock, and mortgage-backed and related securities
at the  dated  indicated.  At  September  30,  1996,  the  market  value  of the
investment  securities portfolio  (including  securities available for sale) and
mortgage-backed  and related  securities  portfolio  (including  mortgage-backed
securities available for sale) was $59.9 and $53.2 million, respectively.

<TABLE>
<CAPTION>

                                                                           September 30,
                                                       ---------------------------------------------------
                                                           1996               1995              1994
                                                       --------------     -------------    ---------------
Investment securities:                                                   (In Thousands)
   U.S. Government and Federal
<S>                                                      <C>                 <C>             <C>         
           Agency Securities                             $    44,349         $  40,914       $     22,797
   Certificates of Deposit                                         -                 -                100
   Corporate Notes and Bonds                                       -             1,000                  -
   FHLB Stock                                                  5,736             3,692              2,188
   Equity securities available for sale (1)                   12,495            12,473             11,984
                                                       --------------     -------------    ---------------
Total investment securities                                   62,580            58,079             37,069
Interest-bearing deposits                                      9,392            12,448             67,389
Federal funds sold                                                 -                 -                  -
Mortgage-backed and related securities:
   Mortgage-backed and related securities (2)                 38,557            37,110             33,267
   Mortgage-backed and related securities
       available for sale                                     16,336            16,141             16,338
                                                       --------------     -------------    ---------------
Total mortgage-backed and related securities                  54,893            53,251             49,605
                                                       --------------     -------------    ---------------
Total investments                                        $   126,865         $ 123,778       $    154,063
                                                       ==============     =============    ===============
</TABLE>

-------------------------------------------------------
(1)  Consists of Federated ARMS Fund and preferred stock
(2)  Includes  $38.4  million,  $37.0  million and $33.0 million of REMICs as of
     September 30, 1996, 1995, and 1994, respectively.


                                       10



<PAGE>


The  following  table sets forth  certain  information  regarding  the  carrying
values,  weighted  average  yields  and  maturities  of  the  Bank's  investment
portfolio at September  30, 1996.


<TABLE>
<CAPTION>
                                                                     September 30, 1996         
                       ------------------------------------------------------------------------------------------------------------
                             Adjustable              One Year or Less           One to Five Years           Five to Ten Years      
                       ------------------------   ------------------------   -------------------------   ------------------------- 
                        Carrying      Average      Carrying      Average       Carrying      Average      Carrying       Average   
                          Value        Yield         Yalue        Yield         Value         Yield         Value         Yield    
                          -----        -----         -----        -----         -----         -----         -----         -----    
                                                                                                      (Dollars in Thousands)
<S>                        <C>             <C>         <C>            <C>          <C>            <C>         <C>             <C>  
U.S. Government and
  Federal 
    Obligations........    $    --           --%       $2,496         6.70%        $12,571        5.91%       $15,069         5.66%
Equity Securities 
  available for sale...     12,495         5.83            --           --             --           --            --            -- 
FHLB Stock.............        N/A          N/A           N/A          N/A            N/A          N/A           N/A           N/A 
Mortgage-backed and
  related securities
  held to maturity.....     38,557         6.26            --           --             --           --            --            -- 
Mortgage-backed and
  related securities
  available for sale...     16,336         6.38            --           --             --           --            --            -- 
Interest-bearing
  deposits.............      9,392         5.18            --           --             --           --            --            -- 
                           -------         ----        ------         ----        -------         ----       -------          ---- 

  Total................    $76,780         6.08%       $2,496         6.70%       $12,571         5.91%      $15,069          5.66%
                           =======         ====        ======         ====        =======         ====       =======          ==== 
                           
</TABLE>

<TABLE>
<CAPTION>
                                                  September 30, 1996
                       ----------------------------------------------------------------------
                          More than Ten Years             Total Investment Securities        
                        -------------------------  ------------------------------------------- 
                         Carrying       Average      Carrying        Average        Market
                           Value         Yield        Value           Yield          Value
                           -----         -----        -----           -----          -----
                       
<S>                          <C>             <C>        <C>               <C>         <C>     
     
U.S. Government and
  Federal 
    Obligations........     $14,213          6.92%      $ 44,349          6.16%       $ 41,626
Equity Securities 
  available for sale...          --            --         12,495          5.83          12,495
FHLB Stock.............         N/A           N/A          5,736          7.00           5,736
Mortgage-backed and
  related securities
  held to maturity.....          --            --         38,557          6.26          36,915
Mortgage-backed and
  related securities
  available for sale...          --            --         16,336          6.38          16,336
Other Securities.......          --            --          9,392          5.18           9,392
                            -------         ----        --------          ----        --------

  Total................     $14,213         6.92%       $126,865          6.16%       $122,500
                            =======         ====        ========          ====        ========
                           
</TABLE>

                                       11
<PAGE>

--------------------------------------------------------------------------------
Deposits and Other Sources of Funds
--------------------------------------------------------------------------------

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

Deposits. First Federal offers a wide variety of deposit accounts, although less
than 50% of such deposits are in fixed-term,  market-rate  certificate accounts.
It constantly  strives to meet consumers' needs by offering new products.  This,
in addition to interest rate risk  management  and  asset/liability  ratios,  is
taken into consideration  prior to offering new products.  Deposit account terms
vary,  primarily as to the required  minimum balance amount,  the amount of time
that the funds must remain on deposit and the applicable interest rate.

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

Deposits are obtained  primarily  from  residents in the  Minnesota  counties of
McLeod, Dakota, Meeker, Sibley, Carver, Wright, Benton,  Sherburne,  Stearns and
Washington.  First Federal  attracts deposit accounts by offering a wide variety
of products,  competitive  interest rates, and convenient  locations and service
hours. The Bank uses traditional methods of advertising to attract new customers
and deposits,  including radio and print media  advertising.  First Federal does
not advertise outside its market area or utilize the services of deposit brokers
and management  believes that an  insignificant  number of deposit  accounts are
held by non-residents of Minnesota.

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

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

                                                  September 30,
                                     ---------------------------------------
                                         1996         1995         1994
                                     ---------------------------------------
                                                   (In Thousands)
NOW Accounts                           $   22,416   $   23,892   $   31,717
Commercial Demand                           5,185        3,446        1,895
Savings Accounts                           48,334       48,027       48,088
                                     ---------------------------------------
                                           75,935       75,365       81,700
                                     ---------------------------------------
Certificates of Deposit:
   Under 3.00%                                  -          477          853
   3.00 to 4.00%                              422        2,406       25,318
   4.01 to 5.00%                           28,155       23,061       20,266
   5.01 to 6.00%                           64,367       26,109       16,797
   6.01 to 7.00%                           13,693       37,079        2,449
   7.01 to 8.00%                            6,502        1,978        2,783
   8.01% and over                               -        5,041        6,313
                                     ---------------------------------------
                                          113,139       96,151       74,779
                                     ---------------------------------------
                 Total deposits         $ 189,074    $ 171,516    $ 156,479
                                     =======================================


                                       12

<PAGE>


The  following  table sets forth the amount and  maturities  of time deposits at
September 30, 1996.

<TABLE>
<CAPTION>

                                                                           Amount Due
                                                 ----------------------------------------------------------------
                                                    Less than      1 - 2       2 - 3    Greater than
                                                     One Year      Years        Years      3 years       Total
                                                 ----------------------------------------------------------------
Interest Rate                                                            (In Thousands)
<S>                                                <C>         <C>            <C>          <C>         <C>      
2.01 - 4.00%                                       $    3,625  $      361     $      -     $      -    $   3,986
4.01 - 6.00%                                           54,835      15,198        3,762          936       74,731
6.01 - 8.00%                                           19,523       3,256        4,429        2,321       29,529
Over 8.01%                                                  -       3,574        1,319            -        4,893
                                                 ----------------------------------------------------------------
                                                   $   77,983  $   22,389     $  9,510     $  3,257    $ 113,139
                                                 ================================================================
</TABLE>




The following table  indicates the amount of the Bank's  certificates of deposit
of $100,000 or more by time remaining until maturity as of September 30, 1996.

                                                    Certificates of
Maturity Period                                        Deposits
                                                     -------------
                                                    (In Thousands)
Within three months                                    $    4,865
Three through six months                                    3,798
Six through twelve months                                   4,779
Over twelve months                                          2,566
                                                     -------------
                                                       $   16,008
                                                     =============


Borrowings. Savings deposits are the primary source of funds for First Federal's
lending and investment  activities and for its general  business  purposes.  The
Bank, if the need arises,  may rely upon advances from the FHLB of Des Moines to
supplement  its  supply  of  lendable  funds  and  to  meet  deposit  withdrawal
requirements.  Advances  from the FHLB of Des  Moines are  typically  secured by
First Federal's  stock in the FHLB and a portion of First Federal's  residential
mortgage loans and other assets (principally securities which are obligations of
or guaranteed by the U.S. Government).  First Federal has an Open Line of Credit
("LOC") in the amount of $25.0 million with the FHLB,  which had an  outstanding
balance of $10.0 million. The LOC requires an annual review and a commitment fee
of 0.05%.  The LOC is reviewed for renewal  annually.  The LOC is  maintained in
order to help meet on-going liquidity and cash flow needs of First Federal.

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

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

                                   As of and for the Years Ended
                                           September 30,
                               --------------------------------------
                                   1996        1995         1994
                               --------------------------------------
                                       (Dollars in Thousands)
Maximum balance                   $ 114,693  $   73,807   $   37,872
Average balance                      90,408      52,688       34,080
Balance at end of period            114,693      73,807       37,688
Weighted average rate:
     at end of period                  5.88%       5.82%        4.15%
     during the period                 5.91%       5.16%        4.23%


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

                                       13
<PAGE>

Subsidiary Activity

First Federal is permitted to invest up to 2% of its assets in the capital stock
of,  in  secured  or  unsecured  loans  to,  subsidiary  corporations,  with  an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community development  purposes.  Under such limitations,
as of  September  30,  1996,  First  Federal  was  authorized  to  invest  up to
approximately $7.1 million in the stock of service  corporations (based upon the
2%  limitation).  First  Federal  has  one  wholly-owned  subsidiary,   Firstate
Services,  Inc.  ("FSI").  FSI was  incorporated  in the State of  Minnesota  in
August,  1983, and is engaged in the sale, on an agency basis,  of mutual funds,
annuities  and  life,  credit  life and  disability  insurance  products.  As of
September 30, 1996, the net book value of First  Federal's  investment in stock,
unsecured loans,  and conforming  loans in its subsidiary was $129,896.  For the
fiscal year ended September 30, 1996, FSI had net income of $27,445.

Personnel

As of  September  30,1996,  First  Federal  had 71  full-time  employees  and 42
part-time  employees,  representing a total of 90.0 full-time  equivalents.  The
employees  are not  represented  by a  collective  bargaining  agreement.  First
Federal believes its relationship with its employees is satisfactory.

Competition

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

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

Bank Regulation

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

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

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

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

                                       14
<PAGE>


Federal Home Loan Bank System
As a member of the FHLB System,  First  Federal is required to own capital stock
in its regional FHLB, the FHLB of Des Moines, in an amount at least equal to the
greater  of 1% of the  aggregate  principal  amount  of its  unpaid  residential
mortgage loans,  home purchase  contracts and similar  obligations at the end of
each year,  or 5% of its  outstanding  borrowings  from the FHLB of Des  Moines.
First Federal was in  compliance  with this  requirement,  with an investment of
$5.7 million in FHLB of Des Moines stock at September 30, 1996.

The FHLB of Des  Moines  serves  as a reserve  or  central  bank for the  member
institutions within its assigned region, the Eighth FHLB District.  It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB  System.  It makes  advances to members in  accordance  with  policies  and
procedures  established  by the Federal  Housing  Finance Board and the Board of
Directors of the FHLB of Des Moines.

Current law requires each FHLB to transfer a certain portion of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"),  the entity
established  to raise  funds  to  resolve  troubled  thrift  cases,  to fund the
principal  and a portion of the  interest  on bonds  issued by the  REFCORP  and
certain other obligations.  In addition, each FHLB is required to transfer 5% of
its annual net earnings to fund certain affordable housing programs. That amount
is  scheduled  to  increase to at least 10% of its annual net income in 1995 and
subsequent years. As a result of these requirements and other factors,  the FHLB
of Des Moines has experienced  reduced  earnings since these  provisions  became
effective  in 1989.  It is  anticipated  that this may  continue  and that First
Federal will continue to receive a reduced level of dividends on its FHLB of Des
Moines stock in future  periods.  During 1996,  1995,  and 1994,  First  Federal
recorded dividend income of $328,853, $177,660, and $159,519,  respectively,  on
its FHLB of Des Moines stock.

Insurance of Accounts
The FDIC  administers two separate  deposit  insurance funds. The Bank Insurance
Fund (the "BIF") insures the deposits of commercial banks and other institutions
which  were  insured  by the  FDIC  prior  to  the  enactment  of the  Financial
Institutions Reform,  Recovery and Enforcement Act of 1989 ("FIRREA").  The SAIF
insures the  deposits of savings  institutions  which were  insured by the FSLIC
prior to the enactment of FIRREA.  The FDIC is  authorized  to increase  deposit
insurance  premiums if it determines  such increases are appropriate to maintain
the  reserves  of either  the SAIF or BIF or to fund the  administration  of the
FDIC. In addition,  the FDIC is authorized to levy emergency special assessments
on BIF and SAIF members.

The FDIC charges an annual assessment for the insurance of deposits based on the
risk a particular  institution  poses to its deposit  insurance fund. Under this
system as of September 30, 1996, SAIF members paid within a range of 23 cents to
31 cents per $100 of domestic  deposits,  depending upon the institution's  risk
classification.  This risk  classification is based on an institution's  capital
group and supervisory subgroup  assignment.  Pursuant to the Economic Growth and
Paperwork  Reduction  Act of 1996  (the  "Act"),  the  FDIC  imposed  a  special
assessment  on SAIF members to  capitalize  the SAIF at the  designated  reserve
level of 1.25% as of October 1, 1996.  Based on the Bank's  deposits as of March
31, 1995, the date of measuring the amount of the special assessment pursuant to
the Act,  the Bank paid a special  assessment  of $1.0  million on November  27,
1996, to recapitalize  the SAIF.  This expense was recognized  during the fourth
quarter of fiscal  1996.  The FDIC is  expected to lower the premium for deposit
insurance to a level  necessary  to maintain  the SAIF at its  required  reserve
level; however, the range of premiums has not been determined at this time.

Pursuant  to the Act,  the Bank will pay,  in  addition  to its  normal  deposit
insurance  premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the  retirement of the  Financing  Corporation  bonds ("FICO
Bonds")  issued in the 1980's to assist in the  recovery of the savings and loan
industry.  Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal  deposit  insurance  premium,  approximately  1.3 basis
points.  Based on total  deposits as of September 30, 1996,  had the Act been in
effect, the Bank's FICO Bond premium would have been  approximately  $121,000 in
addition  to its  normal  deposit  insurance  premium.  Beginning  no later than
January  1,  2000,  the rate paid to  retire  the FICO  Bonds  will be equal for
members of the BIF and the SAIF.  The Act also  provides  for the merging of the
BIF  and  the  SAIF  by  January  1,  1999,  provided  there  are  no  financial
institutions  still chartered as savings  associations at that time.  Should the
insurance  funds be merged before  January 1, 2000,  the rate paid to retire the
FICO Bonds by all members of this new fund would be equal.

Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires each
savings  institution,  as well as commercial banks and certain other lenders, to
identify the  communities  served by the institution and assess the credit needs
of those  communities.  The CRA also requires the OTS to assess an institution's
performance in meeting the credit needs of its identified communities as part of
its  examination  of  the  institution,   and  to  take  such  assessments  into
consideration in reviewing  applications  with respect to branches,  mergers and
other business combinations,  and savings and loan holding company acquisitions.
An  unsatisfactory  CRA rating may be the basis for denying such an  application
and community groups have  successfully  protested  applications on CRA grounds.
The OTS assigns CRA ratings of "outstanding,  satisfactory,  need to improve, or
substantial  noncompliance".  First Federal was rated  "outstanding" in its last
CRA examination in May, 1996.

                                       15
<PAGE>

Regulatory Capital  Requirement.  The following table reflects,  in both dollars
and ratios,  First  Federal's  regulatory  capital  position as of September 30,
1996, as well as the requirements at that date.

<TABLE>
<CAPTION>
                                                                                      
                                                                                     
                                              First Federal fsb            Required        
                                              regulatory capital           minimum         Excess
                                       ---------------------------------  regulatory     regulatory
                                          Amount        Percent (1)        capital        capital
                                       ---------------------------------------------------------------
                                                           (Dollars in Thousands)
<S>                                      <C>              <C>            <C>             <C>        
Tangible capital                         $ 39,239         11.28%         $   5,218       $  34,021    
Core capital                               39,239         11.28%            10,436          28,803
Risk-based capital                         40,014         22.79%            14,046          25,968

</TABLE>


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

(1)  Based upon a  percentage  of adjusted  total  assets for  tangible and core
     capital and a percentage of risk-adjusted assets for risk-based capital.


Beginning  July 1, 1994,  OTS  regulated  institutions  are required to maintain
additional  risk-based  capital  equal to  one-half  of the  amount by which the
decline in its "net portfolio  value" that would result from a hypothetical  200
basis point  change (up or down,  depending on which would result in the greater
reduction  in  net  portfolio  value)  in  interest  rates  on  its  assets  and
liabilities  exceeds 2% of the estimated "economic value" of its assets. The one
exception  to  this  general  rule  is that if the  three  month  Treasury  bond
equivalent  yield falls below 4%, an institution  would measure the hypothetical
downward  change at one-half  of that  Treasury  yield.  An  institution's  "net
portfolio  value" is defined  for this  purpose as the  difference  between  the
aggregate  expected  future cash  inflows from an  institution's  assets and the
aggregate expected cash outflows on its liabilities,  plus the net expected cash
flows from  existing  off-balance  sheet  contract,  each  discounted to present
value. The estimated  "economic value" of an institution's  assets is defined as
the discounted present value of the estimated future cash flows from its assets.
Both the "net portfolio value" and the "economic value" include, as specified in
the regulation,  the book value of assets and liabilities  that are not interest
rate sensitive.  The OTS has stated that implementation of this amendment to its
regulations   will  require   additional   capital  to  be  maintained  only  by
institutions  having "above normal"  interest rate risk. Based on the assets and
liabilities  comprising First Federal's  statement of financial  condition as of
September 30, 1996,  there was no increase in First  Federal's  minimum  capital
requirement.

Prompt Corrective Action. The Federal Deposit Insurance Corporation  Improvement
Act of 1989  ("FDICIA"),  among  other  things,  established  a system of prompt
corrective action to resolve problems of  undercapitalized  institutions.  Under
this system,  the banking  regulators  are required to take certain  supervisory
actions  against  undercapitalized  institutions,  the severity of which depends
upon the  institution's  degree of  capitalization.  Under  the OTS  final  rule
implementing the prompt  corrective action  provisions,  an institution shall be
deemed to be (i) "well  capitalized" if it has total risk-based capital of 10.0%
or more,  has a Tier I  risk-based  capital  ratio (core or leverage  capital to
risk-weighted  assets) of 6.0% or more,  has a leverage  capital of 5.0% or more
and is not subject to any order or final capital  directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately  capitalized"
if it has a total  risk-based  capital ratio of 8.0% or more,  Tier I risk-based
ratio of 4.0% or more and a leverage  capital  ratio of 4.0% or more (3.0% under
certain  circumstances)  and does not meet the  definition of well  capitalized,
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than  6.0%,  a Tier I  risk-based  capital  ratio  that is less  than  4.0% or a
leverage  capital ratio that is less than 4.0% (3.0% in certain  circumstances),
(iv) "significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%
or a  leverage  capital  ratio  that  is less  than  3.0%  and  (v)  "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances,  a federal
banking  agency may  reclassify a well  capitalized  institution  as  adequately
capitalized  and  may  require  an  adequately  capitalized  institution  or  an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category  (except that the OTS may not reclassify a significantly
undercapitalized institution as critically  undercapitalized).  At September 30,
1996 First Federal was a "well capitalized institution" as defined in the prompt
corrective  action  regulations  and as  such  is  not  subject  to  any  prompt
corrective action measures.

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

OTS regulations  impose  limitations  upon all capital  distributions by savings
institutions,  such as cash  dividends,  payments  to  repurchase  or  otherwise
acquire  its  shares,  payments  to  shareholders  of another  institution  in a
cash-out  merger  and other  distributions  charged  against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1

                                       16
<PAGE>

institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without approval of the
OTS, make capital  distributions  during a calendar year equal to the greater of
(i) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus  capital  ratio" (the excess  capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net income  over the most  recent four  quarter  period.  Any
additional  capital   distributions   require  prior  regulatory  approval.   An
institution  is further  limited in its ability to pay  dividends as its capital
levels  decrease  below its  regulatory  requirement.  As of September 30, 1996,
First Federal was a Tier 1 institution.

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

Qualified  Thrift Lender Test.  The Home Owners' Loan Act, as amended  ("HOLA"),
requires savings institutions to meet a Qualified Thrift Lender ("QTL") test. If
an institution  maintains an appropriate  level of Qualified Thrift  Investments
(primarily   residential   mortgages   and   related   investments,    including
mortgage-backed  securities) ("QTIs") on a monthly basis in nine out of every 12
months  and  otherwise  qualifies  as a QTL,  it will  continue  to  enjoy  full
borrowing  privileges  from the FHLB of Des Moines.  The required  percentage of
QTIs is 65% of portfolio assets (defined as all assets minus intangible  assets,
property used by the  institution  in conducting  its business and liquid assets
equal to 10% of total  assets).  Certain  assets  are  subject  to a  percentage
limitation of 20% of portfolio  assets.  In addition,  savings  associations may
include shares of stock of the FHLBs,  FNMA and FHLMC as qualifying  QTIs. As of
September 30, 1996,  First Federal was in  compliance  with its QTL  requirement
with 90.2% of assets invested in QTIs.

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

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

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

Federal  Reserve  System.  The Federal  Reserve  Board  requires all  depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements that are imposed by the OTS. At September
30, 1996, the Bank was in compliance with all applicable requirements.

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

Holding Company Regulation

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

QTL Test. As a unitary savings and loan holding company,  the Company  generally
is not subject to activity  restrictions,  provided the Bank  satisfies  the QTL
test.  If the  Company  acquires  control of another  savings  association  as a
separate  

                                       17
<PAGE>

subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Company and any subsidiaries (other than the Bank or any other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies unless such other  associations  each also
qualify as a QTL and were acquired in a supervisory acquisition.

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

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

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

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

Other Regulatory Events

Recapture of Post-1987  Bad-Debt  Reserves.  Prior to the enactment of the Small
Business  Jobs  Protection  Act,  which was signed into law on August 21,  1996,
certain  thrift  institutions  such as the Bank were allowed  deductions for bad
debts under methods more  favorable than those granted to other  taxpayers.  The
Small  Business Job  Protection Act repealed the Code Section 593 reserve method
of  accounting  for bad debts by thrift  institutions,  effective  for tax years
beginning after 1995.  Thrift  institutions  that are treated as small banks are
allowed to utilize the experience method applicable to such institutions,  while
thrift  institutions  that are treated as large banks (banks with assets of more
than $500 million) are required to use only the specific charge off method.

The amount of the applicable  excess reserves will be taken into account ratably
over a six taxable year period,  beginning with the first taxable year beginning
after 1995, subject to the residential loan requirement described below.

For the Bank, a small bank, the amount of the  institution's  applicable  excess
reserves  generally  is the excess of (i) the balances of its reserve for losses
on qualifying  real property  loans and its reserve for losses on  nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the  greater of the balance of (a) its  pre-1988  reserves or (b) what
the Bank's  reserves would have been at the close of its last tax year beginning
before  January 1, 1996,  had the Bank always  used the  experience  method.  At
September  30, 1996,  the Bank had $6.5 million of pre-1988  bad-debt  reserves.
Since the percentage of taxable income method for tax bad debt deduction and the
corresponding  increase  in the tax bad debt  reserve in excess of the base year
have been  recorded as  temporary  differences  pursuant  to SFAS No. 109,  this
change in the tax law will not have a material effect on the Company's financial
statements.

                                       18
<PAGE>


ITEM 2.  PROPERTIES

The Bank  operates  from its  main  office  located  at 201 Main  Street  South,
Hutchinson,  Minnesota.  The Bank owns this 20,000  square feet office  facility
which it built in 1985/86. The total investment in property and equipment at 201
Main Street South had a net book value of $1.4 million at September 30, 1996.

Additional offices, either owned or leased by the Bank, are set forth below with
information  regarding  net book value of the  premises  and  equipment  at such
facilities at September 30, 1996.

<TABLE>
<CAPTION>

                                                   Year
                                                Acquired or            Net Book
                                                Date Lease             Value at                 Square
Location                                          Expires         September 30, 1996           Footage
--------------------------                   -----------------------------------------------------------------
                                                                (Dollars in thousands)
14994 Glazier Avenue
<S>                                                <C>                   <C>                    <C>  
Apple Valley, MN  55124                            1989                  $331                   3,000

19 Central Avenue
Buffalo, MN  55313                                 1973                   103                   1,800

1002 Greeley Avenue
Glencoe, MN  55336                               1996 (1)                 20                    1,100

1320 South Frontage Road
Hastings, MN  55033                                1984                   822                   15,000

905 Highway 15 South,
Frontage Road
Hutchinson, MN  55350                              1980                   226                   1,400

6505 Cahill Avenue
Inver Grove Heights, MN  55075                     1979                   249                   3,000

501 North Sibley Avenue
Litchfield, MN  55355                              1978                   203                   2,400

200 East Frontage Road,
Highway 5
Waconia, MN  55387                                 1985                   270                   2,400

122 East Second Street
Winthrop, MN  55396                                1996 (2)                 9                     950

113 Waite Avenue South
Waite Park, MN  56387                              1998 (3)                58                     550
</TABLE>

(1)   One  year lease  expires in April,  1997 with option to renew for one year
      terms thereafter. 
      The Bank expects to renew the lease.
(2)   Lease expires in July, 1997 with option to renew for one year terms.  
      The Bank expects to renew the lease.
(3)   Lease expires in September, 1998 with options to renew for five year terms

The Bank leases  approximately  4,535  square feet of the  property in Hastings,
Minnesota to various  tenants under three year  operating  leases.  These leases
expire April 14, 1997,  October 31, 1997 and December 31, 1998. The annual rents
total $36,880 in addition to each tenant's  proportionate share of the operating
expenses.

                                       19
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

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

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

None.

                                     PART II

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

Information  relating to the market for  Registrant's  common equity and related
stockholder   matters  appears  under   "Corporate   Profile  and  Stock  Market
Information" in the  Registrant's  1996 Annual Report to Stockholders on page 1,
and is incorporated herein by reference.

ITEM 6.  SELECTED FINANCIAL DATA

The  above-captioned  information appears under "Selected Financial Data" in the
Registrant's  1996 Annual Report to  Stockholders  on page 3 and is incorporated
herein by reference.

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

The  above-captioned  information  appears  under  Management's  Discussion  and
Analysis of Financial  Condition and Results of  Operations in the  Registrant's
1996 Annual  Report to  Stockholders  on Pages 5 through 15 and is  incorporated
herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  Consolidated  Financial  Statements  of the  Company  and  its  subsidiary,
together  with the report  thereon by Bertram  Cooper & Co.,  LLP appears in the
Bank's  1996  Annual  Report  to  Stockholders  on pages 16  through  38 and are
incorporated herein by reference.

Quarterly  Results  of  Operations  on  page 39 of the  1996  Annual  Report  to
Stockholders is incorporated herein by reference.

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

None.

                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

The information contained under the section captioned  "Information with Respect
to  Nominees  for  Director,  Directors  Continuing  in  Office,  and  Executive
Officers" at pages 3 to 12 the  Registrant's  definitive proxy statement for the
Company's  Annual  Meeting of  Stockholders  to he held on January 21, 1997 (the
"Proxy Statement"), which was filed with the Commission on December 8, 1996, and
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The information  relating to executive  compensation  is incorporated  herein by
reference to the Registrant's Proxy Statement at pages 8 through 12.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information  relating to security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  to the  Registrant's  Proxy
Statement at pages 3 through 5.

                                       20
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  relating to certain  relationships and related  transactions is
incorporated herein by reference to the Registrant's Proxy Statement at page 14.

                                     PART IV

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

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

         (1)   Consolidated Financial Statements of the Bank are incorporated by
reference  to  the  following  indicated  pages  of  the  1996  Annual Report to
Stockholders.

<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      ----

<S>                                                                                                     <C>
           Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     16
           Consolidated Statements of Financial Condition as of 
                September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . .     17
           Consolidated Statements of Income for the Years
                Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . .     18
           Consolidated Statements of Changes in Stockholders' Equity for the
                Years Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . .     19
           Consolidated Statements of Cash Flows for the Years Ended
                September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . .     20
           Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . .     22

</TABLE>


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

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

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

        2.1       Plan of Conversion Merger of Hutchinson and Hastings *
        2.2       Agreement of Merger *
        3.1       Articles of Incorporation of FSF Financial Corp. *
        3.2       Bylaws of FSF Financial Corp. *
        4.0       Stock Certificate of FSF Financial Corp. *
       10.1       Form of Employment Agreement with Donald A. Glas, George B. 
                    Loban and Richard H. Burgart *
       10.2       First Federal fsb Management Stock Plan
       10.3       FSF Financial Corp. 1994 Stock Option Plan
       11.0       Statement regarding computation of earnings per share
       13.0       1996 Annual Report to Stockholders
       21.0        Subsidiary Information
       27.0       Financial Data Schedule **

---------------------
*         Incorporated  herein by reference into this document from the Exhibits
          to  Form  S-1,  Registration  Statement,   initially  filed  with  the
          Commission, on June 1, 1994, Registration No. 33-79570.
**        Included with electronic filing only.

                  (b)      Reports on Form 8-K.

                           On September 6, 1996, the  Registrant filed a current
report on Form 8-K announcing receipt of appropriate regulatory approval for  an
additional 5% common stock repurchase plan.

                           On December 2, 1996, the  Registrant  filed a current
report on Form 8-K announcing  receipt of appropriate  regulatory  approval  for
an additional 10% common stock repurchase plan.

                                       21
<PAGE>


                                   SIGNATURES

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

<TABLE>
<CAPTION>

                                                                   FSF Financial Corp.
<S>      <C>                                                       <C>     <C>                 
Dated:   December 12, 1996                                         By:     /s/ Donald A. Glas
                                                                           --------------------------------------------
                                                                           Donald A. Glas
                                                                           Co-Chair of the Board and Chief
                                                                           Executive Officer
                                                                           (Duly Authorized Representative)

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



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

Date:    December 12, 1996                                         Date:   December 12, 1996



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

Date:    December 12, 1996                                         Date:   December 12, 1996



By:      /s/ Carl O. Bretzke                                       By:     /s/ Sever B. Knutson
         ------------------------------------------                        --------------------------------------------
         Carl O. Bretzke                                                   Sever B. Knutson
         Director                                                          Director

Date:    December 12, 1996                                         Date:   December 12, 1996



By:      /s/ Roger R. Stearns                                      By:     /s/ James J. Caturia
         ------------------------------------------                        --------------------------------------------
         Roger R. Stearns                                                  James J. Caturia
         Director                                                          Director

Date:    December 12, 1996                                         Date:   December 12, 1996



By:      /s/ Jerome R. Dempsey
         ------------------------------------------
         Jerome R. Dempsey
         Director

Date:    December 12, 1996

</TABLE>
                                       22