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


Corporate Profile

FSF Financial Corp. (the "Corporation") is the holding company for First Federal
fsb  ("First  Federal")  and  Insurance  Planners.   Insurance  Planners  is  an
independent  property  and  casualty  insurance  agency  located in  Hutchinson,
Minnesota.   Additionally,  on  November  17,  1998,  the  Corporation  acquired
Homeowners Mortgage  Corporation  ("HMC"), a mortgage banking company located in
Vadnais  Heights,  Minnesota.  As of June  1,  2000,  HMC  became  an  operation
subsidiary of First Federal (the "Bank") following  regulatory  approval.  Since
becoming an operating subsidiary of the Bank, HMC has become an integral part of
the residential construction lending function. The terms "First Federal", "Bank"
and "HMC" are synonymous when used in conjunction with  residential  lending and
residential construction lending.

First  Federal's  business  consists  primarily of attracting  deposits from the
general public and using such deposits, together with borrowings and other funds
to make a variety of loans. The Federal Deposit Insurance  Corporation,  subject
to applicable  limits,  insures  deposits with First  Federal.  At September 30,
2002, First Federal operated 12 retail-banking offices in Minnesota.

Stock Market Information

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

The number of  stockholders  of record of common  stock as of the record date of
November 30, 2002, were  approximately  511. This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage  firms. At November 29, 2002,  there were 2,303,514  shares issued and
outstanding.

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

                                       1
<PAGE>

<TABLE>
<CAPTION>

SELECTED FINANCIAL AND OATHER DATA FOR FSF FINANCIAL CORP.
-------------------------------------------------------------------------------------------------------------------

Financial Condition  (dollars in thousands)

Year Ended September 30,                                    2002         2001         2000         1999          1998
----------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>          <C>          <C>          <C>           <C>
Total assets                                           $ 532,160    $ 473,631    $ 466,515    $ 418,094     $ 416,232
Loans held for sale                                       29,242       12,082        3,191        5,334         2,672
Loans receivable, net                                    382,690      340,484      341,813      278,290       280,603
Mortgage-backed securities held to maturity               20,679       25,731       26,986       27,587        36,418
Mortgage-backed securities available for sale             29,196       27,481       15,369       15,979        16,574
Debt securities held to maturity                          12,447       12,420       18,393       19,937        24,412
Debt securities available for sale                             -        3,055       12,728       12,794         3,010
Equity securities available for sale                      12,046       12,021       12,321       12,909        13,084
Cash and cash equivalents (1)                             14,615       12,594        8,482       19,265        22,597
Savings deposits                                         381,924      312,541      294,823      231,651       226,542
Other borrowings                                          98,000      113,500      127,500      140,967       144,177
Stockholders' equity                                      45,881       41,941       39,765       42,325        42,518

Summary of Operations  (dollars in thousands)

Year Ended September 30,                                    2002         2001         2000         1999          1998
----------------------------------------------------------------------------------------------------------------------

Interest income                                         $ 35,174     $ 35,310     $ 32,877     $ 29,420      $ 29,981
Interest expense                                          17,248       21,900       19,753       18,198        18,499
Net interest income                                       17,926       13,410       13,124       11,222        11,482
Provision for loan losses                                    811        1,077          216          456           302
Non-interest income                                        8,975        6,599        4,825        5,259         2,269
Non-interest expense                                      16,131       12,815       11,979       11,826         8,395
Net income                                                 6,032        3,733        3,504        2,505         3,030

Other Selected Data

Year Ended September 30,                                    2002         2001         2000         1999          1998
----------------------------------------------------------------------------------------------------------------------

Return on average assets                                   1.18%        0.80%        0.81%        0.59%         0.74%
Return on average equity                                  13.69%        9.09%        8.54%        5.74%         6.94%
Average equity to average assets                           8.62%        8.86%        9.49%       10.26%        10.70%
Net interest rate spread (2)                               3.53%        2.77%        2.93%        2.39%         2.44%
Non-performing assets to total assets                      0.94%        0.65%        0.28%        0.13%         0.19%
Allowance for loan losses to net loans                     0.41%        0.44%        0.44%        0.48%         0.36%
Basic earnings per share                                 $  2.77      $  1.68      $  1.46      $  0.94       $  1.14
Diluted earnings per share                               $  2.63      $  1.61      $  1.43      $  0.90       $  1.05
Cash dividends declared per share                        $  1.00      $  0.60      $  0.50      $  0.50       $  0.50
Dividend payout ratio                                     36.02%       34.90%       34.40%       53.10%        44.80%

</TABLE>

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

                                       2
<PAGE>

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

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

General

The  Corporation  does not engage in any active  business.  The  earnings of the
Corporation  depend primarily on the Bank's net interest income, and to a lesser
extent, income from its wholly owned subsidiary Insurance Planners. Net interest
income is affected by the interest  rates that the Bank  receives from its loans
and investments and by the interest rates that the Bank must pay for its sources
of funds.  The difference  between the average rate of interest earned on assets
and the average rate paid on  liabilities  is the "interest  rate spread".  When
interest-earning  assets  equal  or  exceed  interest-bearing  liabilities,  any
positive  interest  rate spread will  produce net  interest  income.  The Bank's
interest  income  has  been  impacted  by  the  level  of   construction   loans
outstanding.  The Bank originates  construction loans and all construction loans
are closed in the Bank's name, administered and monitored by Bank personnel.

In addition,  the Bank receives income from service charges on deposit accounts,
other service  charges and fees,  commission  income and income from the sale of
loans  to  the  secondary  market.  When  construction  loans  are  complete,  a
modification agreement is executed and the loan is sold in the secondary market,
any gain on sale  appears  on the  Bank's  income  statement.  The  Bank  incurs
expenses in addition to interest  expense in the form of salaries and  benefits,
deposit insurance,  property  operations and maintenance,  advertising and other
related business expenses.

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

Asset/Liability Management

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

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

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

                                       4
<PAGE>

Management  attempts  to  reduce  the  Bank's  interest  rate risk by the way it
structures its assets and liabilities. The Bank sells all fixed-rate residential
mortgages  and  retains  for its  portfolio  residential  mortgages  with either
adjustable  interest rates or balloon  provisions.  These loans provide the Bank
with a repricing time frame that is  substantially  shorter than the contractual
term. During the 2002 fiscal year, the Bank originated $370,000 of single family
mortgage  loans that have initial  fixed rates for terms of one to ten years and
then adjust annually off a treasury index  thereafter.  The Bank also originated
$570,000  of single  family  mortgage  loans that have a balloon  payment due in
three to seven years.  Originations of construction and land development  loans,
which generally have a contractual maturity of two years or less, totaled $151.0
million. At September 30, 2002, the Bank had outstanding, $180.1 million of real
estate  mortgages that were adjustable  rate,  balloon or construction  and land
development loans, representing 47.1% of net loans and 33.8% of total assets.

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

The table that  follows  sets forth the amounts of  interest-earning  assets and
interest  bearing  liabilities  at  September  30,  2002,  which are expected to
reprice or mature in each of the future time periods shown.

                        Analysis of Repricing Mechanisms
<TABLE>
<CAPTION>
                                                                 Over One     Over Five
                                                     Within       to Five       to Ten       Over Ten
                                                    One Year       Years        Years         Years         Total
                                                ------------- ------------ ------------- ------------- ------------
                                                                      (Dollars in Thousands)
<S>                                              <C>          <C>            <C>          <C>          <C>
Interest-earning assets:
     Mortgage loans                                 $209,055     $ 46,567       $ 9,919      $ 14,822     $280,363
     Other loans                                      95,987       32,355         5,325           418      134,085
     Investment securities                            65,069        4,169         2,009        20,064       91,311
                                                ------------- ------------ ------------- ------------- ------------
Total interest-earning assets                        370,111       83,091        17,253        35,304      505,759
                                                ------------- ------------ ------------- ------------- ------------

Interest bearing liabilities:
     Non-interest bearing deposits                    26,387            -             -             -       26,387
     NOW and Super NOW accounts                       26,083            -             -             -       26,083
     Savings accounts                                 89,037            -             -             -       89,037
     Money market deposits accounts                   10,217            -             -             -       10,217
     Certificates                                    162,985       60,762         6,453             -      230,200
     Other borrowed money                             10,000       26,000        62,000             -       98,000
                                                ------------- ------------ ------------- ------------- ------------
Total interest-bearing liabilities                   324,709       86,762        68,453             -      479,924
                                                ------------- ------------ ------------- ------------- ------------

Interest sensitivity gap                            $ 45,402    $  (3,671)   $  (51,200)     $ 35,304     $ 25,835
                                                ============= ============ ============= ============= ============

Cumulative interest sensitivity gap                 $ 45,402    $  41,731    $   (9,469)     $ 25,835
                                                ============= ============ ============= =============
Cumulative ratio of interest-earning assets
  to interest-bearing liabilities                      1.14%        1.10%         0.98%         1.05%
                                                ============= ============ ============= =============
Cumulative ratio of cumulative interest
  sensitivity gap to total assets                      8.52%        7.83%        -1.78%         4.85%
                                                ============= ============ ============= =============
</TABLE>

                                       5

<PAGE>

The previous  table above  indicates the time periods in which  interest-earning
assets and  interest-bearing  liabilities  will mature or reprice in  accordance
with  their  contractual  terms.  The  following  assumptions  have been used in
calculating  the values in the table:  adjustable  rate and balloon loans have a
constant prepayment rate of 6.0%, mortgages held for sale are all set to reprice
in three years or less, while remaining  mortgages have prepayment rates ranging
from 4.0% to 10.0%.  Consumer loans have a prepayment rate that is constant over
time at 19.0%,  NOW checking,  core savings  deposits and money market  deposits
have an increasing  decay rate ranging from 6.0% to 30.0%.  Management  utilizes
its own  assumptions  and feels  that  these  assumptions  provide a  reasonable
estimate of actual experience.

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

Market Risk Management

Market risk is the risk of loss arising from  adverse  changes in market  prices
and rates.  The Bank's market risk is comprised  primarily of interest rate risk
resulting  from its core  banking  activities  of lending  and  deposit  taking.
Interest  rate risk is the risk that  changes  in market  interest  rates  might
adversely  affect the Bank's net interest  income or the  economic  value of its
portfolio of assets,  liabilities and off-balance  sheet  contracts.  Management
continually  develops and applies  strategies to mitigate this risk.  Management
does not believe that the Bank's  primary  market risk  exposures  and how those
exposures  are managed in fiscal 2002 have changed when compared to fiscal 2001.
Market risk limits have been  established by the Board of Directors based on the
Bank's tolerance for risk.

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

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

                                       6

<PAGE>

The  following  table  sets forth the  present  value  estimates  of the Bank at
September 30, 2002,  as calculated by the NPV Model.  The table shows the NPV of
the Bank  under  rate  shock  scenarios  of -300 to +300  basis  points  (bp) in
increments  of 100. As market  rates  increase,  the market  value of the Bank's
large  portfolio of mortgage loans and  securities  declines  significantly  and
prepayments are slow. As rates decrease,  the market value of mortgage loans and
securities increase only modestly due to prepayment risk, periodic rate caps and
other  embedded  options.  Actual  changes  in market  value  will  differ  from
estimated   changes   set  forth  in  this  table  due  to  various   risks  and
uncertainties.

<TABLE>
<CAPTION>

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

<S>                  <C>           <C>            <C>          <C>       <C>
      +300 bp           $41,269       $  (3,094)     (6.97) %     7.74 %    (44) bp
      +200 bp            42,233          (2,130)     (4.80)       7.87      (31) bp
      +100 bp            43,261          (1,102)     (2.48)       8.02      (16) bp
         0 bp            44,363               -          -        8.18        -  bp
      -100 bp            45,548           1,185       2.67        8.35       17  bp
      -200 bp            46,826           2,463       5.55        8.53       35  bp
      -300 bp            48,212           3,849       8.68        8.73       55  bp
</TABLE>

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

                                       7
<PAGE>

Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                               Increase (Decrease) Due To
                                         ---------------------------------------
                                                               Rate/
                                           Rate     Volume     Volume      Total
                                         -------    -------    -------    -------
                                                     (In Thousands)
<S>                                    <C>        <C>        <C>        <C>
Year Ended September 30, 2002 vs 2001:
Interest income:
   Loans Receivable                      $(2,458)   $ 3,492    $  (281)   $   753
   Mortgage-backed securities               (281)       356        (40)        35
   Investment securities                    (877)       (81)        34       (924)
                                         -------    -------    -------    -------
      Total change in interest income     (3,616)     3,767       (287)      (136)

Interest expense:
   Savings accounts                       (5,327)     3,058     (1,079)    (3,348)
   FHLB Borrowings                          (327)    (1,032)        55     (1,304)
                                         -------    -------    -------    -------
      Total change in interest expense    (5,654)     2,026     (1,024)    (4,652)
                                         -------    -------    -------    -------
Net change in net interest income        $ 2,038    $ 1,741    $   737    $ 4,516
                                         =======    =======    =======    =======
</TABLE>

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

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

                                       8
<PAGE>

Average Balances

The following table sets forth information relating to the Corporation's average
yield on assets and average cost of liabilities for the periods  indicated.  The
yields and costs are  computed  by  dividing  income or  expense by the  average
balance of  interest-earning  assets and  interest-bearing  liabilities  for the
periods indicated. Average balances are derived from daily balances.

<TABLE>
<CAPTION>
                                                                          Years Ended September 30,
                                            ----------------------------------------------------------------------------------------
                                                 2002                         2001                        2000
                                            ----------------------------------------------------------------------------------------
                                                                  Average                      Average                    Average
                                              Average    Income/  Yield/   Average   Income/   Yield/  Average   Income/  Yield/
                                              Balance    Expense   Cost    Balance   Expense   Cost    Balance   Expense   Cost
                                            ----------------------------------------------------------------------------------------
                                               (in thousands)              (in thousands)               (In thousands)
<S>                                       <C>        <C>         <C>   <C>        <C>        <C>    <C>       <C>         <C>
Interest Earning Assets
   Loans receivable (1)                     $ 383,892  $  31,389   8.18% $ 344,470  $ 30,636   8.89%  $ 308,721 $  27,097   8.78%
   Mortgage-backed securities                  51,415      2,430   4.72%    44,791     2,395   5.35%     43,224     2,668   6.17%
   Investment securities (2)                   48,519      1,355   2.79%    50,262     2,279   4.53%     57,508     3,112   5.41%
                                            --------------------         --------------------        ---------------------
      Total interest earning assets           483,826     35,174   7.27%   439,523    35,310   8.03%    409,453    32,877   8.03%
                                            --------------------         --------------------        ---------------------

Interest Bearing Liabilities
   NOW and money market accounts            $  56,294        411   0.73% $  35,305       266   0.75%  $  33,727       259   0.77%
   Passbook savings                            92,974      1,585   1.70%    87,064     3,491   4.01%     73,422     3,110   4.24%
   Certificates of deposit                    211,294      9,482   4.49%   176,336    11,069   6.28%    141,686     8,239   5.81%
                                            --------------------         --------------------        ---------------------
      Total deposits                          360,562     11,478   3.18%   298,705    14,826   4.96%    248,835    11,608   4.66%
   FHLB advances and other borrowed funds     100,871      5,770   5.72%   117,957     7,074   5.99%    138,213     8,145   5.89%
                                            --------------------         --------------------        ---------------------
      Total interest bearing liabilities      461,433     17,248   3.74%   416,662    21,900   5.26%    387,048    19,753   5.10%
                                            --------------------         --------------------        ---------------------
Net Interest Income                                    $  17,926                    $ 13,410                    $  13,124
                                                      ==========                   ==========                   ==========
Net Interest Rate Spread  (3)                                      3.53%                       2.77%                        2.93%
Net Interest Rate Margin  (4)                                      3.70%                       3.05%                        3.21%
Ratio of average interest earning assets
  to average interest bearing liabilities        1.05x                        1.05x                        1.06x
                                            ==========                   ==========                  ===========
</TABLE>
1.   Average balances include non-accrual loans and loans held for sale.
2.   Includes interest-bearing deposits in other financial institutions.
3.   Net interest  rate spread  represents  the  difference  between the average
     yield on  interest-earning  assets and the average cost of interest-bearing
     liabilities.
4.   Net interest rate margin  represents net interest income as a percentage of
     average interest-earning assets.

                                       9
<PAGE>

Changes in Financial Condition

General
Total assets  increased  from $473.6  million at September  30, 2001,  to $532.2
million at September  30, 2002.  This  increase of $58.4  million was mainly the
result of an increase in loans held for sale, an increase in construction  loans
outstanding and loans receivable from the ING Bank branch  acquisition (see Note
2 of the  Notes to  audited  Consolidated  Financial  Statements).  The Bank has
continued to experience good demand for loans and supplemented the internal loan
origination  of $481.0  million  with  purchases of other loans  totaling  $19.3
million that met the interest rate risk and credit risk criteria  established by
management.

Securities Available for Sale
Equity  securities  increased  by $25,000 due an increase in the market value of
fund  investments.  Mortgage-backed  and related  securities  available for sale
increased  by $1.7  million  during  the  2002  fiscal  year as a  result  of an
additional  security  purchased and an increase in market value. Debt securities
available for sale decreased $3.1 million due to maturities.  The net unrealized
losses on securities available for sale decreased from $567,000 at September 30,
2001 to $123,000 at September  30, 2002.  This decrease was primarily due to the
market  rate of interest  decreasing  as  compared  to the  contractual  rate of
interest.

Securities Held to Maturity
Debt  securities   held  to  maturity   remained  the  same  at  $12.4  million.
Mortgage-backed  securities  held to maturity  decreased  from $25.7  million to
$20.7  million  during  fiscal  2002,  due  to  principal  repayments.  The  net
unrealized  gain on securities  held to maturity was $748,000,  at September 30,
2002. At September 30, 2001,  held to maturity  securities  had a net unrealized
loss of $75,000. The improvement was a result of a decline in the market rate of
interest as compared to the contractual rate of interest on the securities.

Loans Held for Sale
Net loans held for sale  increased  from $12.1  million at September 30, 2001 to
$29.2 million at September 30, 2002. The Bank had firm commitments to sell these
loans held for sale that were closed by September 30, 2002.

Loans Receivable
Net loans  receivable  increased  from $340.5  million at September  30, 2001 to
$382.7  million at September  30,  2002.  This  increase of $42.2  million was a
result of increases in other real estate  mortgages  totaling $8.6 million,  net
construction  loans totaling $68.1 million and agricultural  loans in the amount
of $6.2 million,  partially  offset by a decline in one-to-four  family loans of
$27.3 million and consumer and commercial loans of $15.3 million. As part of the
acquisition of the ING branch, the Bank purchased $2.6 million of consumer loans
and $26.2 million in commercial and commercial real estate loans at a premium of
$316,000.

The  composition of the loans  originated  were  indicative of the change in the
Corporation's  loan portfolio.  During the last five years,  one-to-four  family
residential  mortgages  decreased from 55.1% of all loans to 11.1%. The interest
rate risk profile of residential  mortgages causes the Bank to sell the majority
of such loans in the secondary market. The diversification of the loan portfolio
helped to mitigate the impact of interest  rate  reductions on the average yield
in the loan portfolio, which decreased to 8.18% for the year ended September 30,
2002,  as  compared to 8.89% in the prior year.  While this yield  decreased  71
basis points, the cost of certificates of deposit decreased by 178 basis points,
which may be more indicative of interest rate movements.  See "Average Balances"
on page 9.

Deposits
Deposits,  after  interest  credited,  excluding  the  ING  branch  acquisition,
increased  from  $312.5  million  at  September  30,  2001 to $332.2  million at
September  30,  2002,  an increase of $19.7  million.  Overall  cost of funds on
deposits  during the period  decreased 178 basis points (100 basis points equals
1%) as the Bank attempted to maintain deposit rates consistent with market place
competitors.  Demand deposits increased $ 2.7 million or 6.6% from September 30,
2001 to September 30, 2002.  Savings  account  balances  decreased $10.6 million
during the same period,  while  certificates of deposit increased $27.6 million.
As part of the ING branch acquisition,  the Bank assumed $19.3 million in demand
deposits,  $6.2 million in savings accounts and $24.2 million in certificates of
deposit,  at a discount of  $416,000.  The Bank also  recorded  $794,000 of core
deposit  intangibles  in this  transaction.  The Bank  utilized this

                                       10
<PAGE>

increase in deposits to fund the continued  loan growth and reduce  Federal Home
Loan Bank ("FHLB")  borrowings.  Borrowings  decreased by $15.5 million  dollars
during fiscal 2002 due to principal payments.  The Bank was able to fund lending
and investments with loan repayments and deposit growth.

Stockholders' Equity
At September 30, 2002,  total  stockholders'  equity  increased  $3.9 million to
$45.9  million  from $41.9  million at  September  30,  2001.  The  increase was
primarily  due to net income of $6 million  during  the period  coupled  with an
increase in accumulated  comprehensive  income offset by stock  repurchases  and
dividends paid.

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

Comparison of Years Ended September 30, 2002 and 2001

Net Income
Net income increased to $6.0 million for the year ended September 30, 2002, from
$3.7 million for the year ended  September 30, 2001.  The increase was primarily
due to an increase in non-interest income of $2.4 million and an increase in net
interest income of $4.5 million less an increase in non-interest expense of $3.3
million.

Interest Income
Total interest  income  decreased to $35.2 million for the year ended  September
30, 2002,  from $35.3 million for the year ended  September  30, 2001.  Interest
income on loans  increased  by  $753,000  from $30.6  million for the year ended
September 30, 2001, to $31.4 million for the year ended September 30, 2002. This
was a  result  of a $39.4  million  increase  in the  average  balance  of loans
receivable  from $344.5  million at  September  30, 2001,  to $383.8  million at
September  30, 2002.  The average  yield  decreased  from 8.89% at September 30,
2001,  to 8.18% at  September  30,  2002.  Interest  income  on  mortgage-backed
securities  increased $35,000 from September 30, 2001 to September 30, 2002. The
average  balance of investment  securities  decreased by $1.7 million during the
fiscal  year  and the  yield  decreased  from  4.53%  to  2.79%.  The  yield  on
interest-earning  assets  decreased from 8.03% at September 30, 2001 to 7.27% at
September  30, 2002.  Interest  income  increased by $3.8 million as a result of
increased  volume  during the year while the  changes in rates  caused  interest
income to decrease by $3.6 million and the rate/volume change decreased interest
income by $287,000. Details are contained in the tables at pages 8 and 9.

Interest Expense
Total interest expense  decreased to $17.2 million for the 2002 fiscal year from
$21.9  million  for the  2001  fiscal  year,  as the  average  balance  of total
interest-bearing  liabilities  increased  $61.9  million and the average cost of
funds  decreased 178 basis points.  The increased cost of deposits  attendant to
the growth of  balances  was  approximately  $3.1  million,  while the  decrease
associated with a change in interest rates was approximately  $5.3 million.  The
cost associated with interest-bearing deposits decreased from 4.96% for the year
ended  September 30, 2001 to 3.18% for the same period ended September 30, 2002.
The cost  associated  with borrowed funds  decreased to 5.72% for fiscal 2002 as
compared  to 5.99% for fiscal  2001.  $327,000  of the  decrease  in the cost of
borrowed  funds was a result of  decreases  in rates,  while  decreased  volumes
reduced  interest  expense  by $1.0  million  and  $55,000 of the  increase  was
rate/volume related. Details are contained in the tables at pages 8 and 9.

Net Interest Income
Net interest income increased $4.5 million during the 2002 fiscal year.  Changes
in interest  rates  caused an increase  in net income of $2.0  million,  volumes
accounted for an increase in net interest income of $1.7 million and rate/volume
differences increased $737,000.

                                       11
<PAGE>

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

The Bank's loan loss  provision  decreased  from $1.1 million for the year ended
September 30, 2001 to $811,000 for the year ended  September 30, 2002.  Included
in the Bank's loan loss  provision for September 30, 2001 was a $716,000  charge
in regard to an agricultural loan. See- "Comparison of the years ended September
30, 2001 and 2000,  Provision  for Loan Losses".  The Bank's  allowance for loan
losses was $1.7 million at September  30, 2002.  The  allowance  for loan losses
represents  0.41% of net loans  outstanding  and  33.8% of total  non-performing
assets.

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

Non-interest Income
Total non-interest income increased by $2.4 million to $9.0 million for the year
ended  September  30, 2002 from $6.6  million for the year ended  September  30,
2001.  Gains on loans sold  increased  from $2.5 million for fiscal year 2001 to
$4.3 million for fiscal year 2002 and other service  charges and fees  increased
from $979,000 for the year ended September 20, 2001 to $1.4 million for the year
ended September 30, 2002,  primarily due to declining interest rates that helped
boost the purchase and refinance  markets.  Service charges on deposit  accounts
increased $216,000 due to a combination of an increase in the number of accounts
and an increase in fees.

Non-interest Expense
Total  non-interest  expense  increased  from $12.8  million  for the year ended
September  30, 2001 to $16.1  million  for the year ended  September  30,  2002.
Compensation and benefits increased $1.8 million, as a result of the acquisition
of the St. Cloud office and higher indirect  administrative costs related to the
higher levels of construction lending activities and merit increases.  Occupancy
and  equipment  expense  decreased  $8,000  while  deposit  insurance   premiums
increased $4,000. Professional fees increased from $401,000 for fiscal year 2001
to $524,000  for fiscal  year 2002.  The  increase  is due to expenses  incurred
relating to evaluations  required with the St. Cloud  acquisition,  an increased
reliance  on  consultants,   where  appropriate,  and  general  increases.  Data
processing  increased  $147,000 to $901,000 for the period ended  September  30,
2002,  partially  due to the St.  Cloud  acquisition  and  partially  due to the
delivery of additional  data processing  related  services to our customer base.
Other  operating  expenses  increased  as a result of goodwill  and core deposit
intangibles  associated with the ING acquisition,  increased  indirect  expenses
related  to  the  higher  levels  of   construction   lending   activities   and
communication  and other costs  associated with the integration of an additional
branch location.

Income Tax Expense
Income tax expense  increased $1.5 million for the year ended September 30, 2002
to $3.9 million.  This increase was primarily due to a gain in pre-tax income of
$3.8 million.

Comparison of Years Ended September 30, 2001 and 2000

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

Interest Income
Total interest income increased $2.4 million to $35.3 million for the year ended
September 30, 2001,  from $32.9  million for the year ended  September 30, 2000.
Interest  income on loans  increased by $3.5 million

                                       12
<PAGE>

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

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

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

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

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

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

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

                                       13
<PAGE>

an  increase  in the number of  accounts  affected  and an  increase in the fees
associated with deposit accounts.

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

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

Liquidity and Capital Resources

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

Operating  activities  used cash of $8.6 million during the year ended September
30, 2002.  Operating  activities  used cash of $3.0 million and provided cash of
$6.9 million during the years ended  September 30, 2001 and 2000,  respectively.
In fiscal 2002, the cash flow in operating  activities was influenced  primarily
by the change in loans held for sale and other assets and liabilities.

Investing  activities  provided $9.4 million during the year ended September 30,
2002 and  provided  $6.9 million and used $61.0  million  during the years ended
September 30, 2001 and 2000. The primary activity of the Bank is originating and
purchasing loans and purchasing investment and mortgage-backed  securities.  The
primary  activity  of HMC is  originating  and  selling  loans in the  secondary
mortgage  market.  During the years ended September 30, 2002, 2001 and 2000, the
Corporation originated loans in the amount of $481.0 million, $348.0 million and
$262.7  million.  The net loan  originations  and  principal  payments  on loans
provided $4.6 million in 2002 and provided  $25.9 million in 2001 and used $32.3
million  in 2002 and  2000,  respectively.  The  purchase  of loans  used  $19.3
million,  $27.3 million and $32.4 million in fiscal 2002,  2001 and 2000 and was
largely  comprised of commercial  business loans that represented  participation
interests with other financial institutions.  The Bank also sold a participation
in a  development  loan in  fiscal  year  2001  for  $1.6  million.  Maturities,
principal  payments  or the  exercise  of  call  provisions  by the  issuers  of
mortgage-backed  securities held to maturity provided $5.1 million, $7.3 million
and $2.2  million for the years ended  September  30, 2002,  2001 and 2000.  The
purchase of investment  securities  available for sale used $3.0 million,  $13.9
million and $50,000 and  maturities  or the  exercise of call  provision  by the
issuers of such securities  provided $4.8 million,  $13.3 million and $0 for the
years ended  September  30, 2002,  2001 and 2000.  Other  investment  activities
included the purchase of equipment  and property  improvements  and the net cash
received in the acquisition of the ING branch.

For the year ended  September 30, 2002,  $19.9 million in cash was provided as a
result of an increase in deposits and net cash of $15.5 million was paid on FHLB
advances. The purchase of treasury stock and dividends on common stock used $1.5
million and $2.2 million,  respectively.  During the fiscal year ended September
30,  2001,  $17.7  million in cash was  provided  as a result of an  increase in
deposits and net cash of $14.0 million was paid on FHLB  advances.  The purchase
of treasury  stock used $2.5  million and  dividends  on common  stock used $1.3
million  during the 2001 fiscal year.  Basic and diluted  earnings per share for
the year ended  September  30, 2002,  were $2.77 and $2.63,  correspondingly.  A
portion of the earnings per share was a result of the purchase of treasury stock
during the fiscal year.  Financing  activities  provided $1.3 million during the
year ended  September  30, 2002 and provided  $207,000 and $43.4 million in cash
during the years ended September 30, 2001 and 2000.

                                       14
<PAGE>

The Bank's  liquidity is a measure of its ability to fund loans, pay withdrawals
of deposits and other cash outflows in an efficient and cost  effective  manner.
The Bank's primary sources of funds are deposits and the scheduled  amortization
and prepayments of loan and mortgage-backed security principal.  During the past
several  years the Bank has used such  funds  primarily  to fund  maturing  time
deposits,  pay savings  withdrawals,  fund  lending  commitments,  purchase  new
investments and increase liquidity. The Bank funds its operations internally and
as needed with  borrowed  funds from the FHLB.  As of September  30, 2002,  such
borrowed  funds  totaled  $98.0  million.  While loan  repayments  and  maturing
investments and mortgage-backed securities are relatively predictable sources of
funds,  deposit  flows and loan and  mortgage-backed  security  prepayments  are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.

The amount of  certificate  accounts  that are  scheduled  to mature  during the
twelve months ending September 30, 2003 is approximately  $163.0 million. To the
extent  that these  deposits do not remain at the Bank upon  maturity,  the Bank
believes that it can replace these funds with deposits, current excess liquidity
and FHLB advances or outside borrowings.  It has been the Bank's experience that
substantial portions of such maturing deposits remain at the Bank.

At  September  30,  2002,  the Bank had  commitments  to extend  credit of $63.9
million.  Funds required to fill these  commitments  are derived  primarily from
FHLB borrowings,  current excess liquidity, deposit inflows, loan sales and loan
and security repayments.

OTS regulations  require the Bank to maintain core capital of 4.0% of assets, of
which 2.0% must be tangible equity capital, excluding goodwill. The Bank is also
required  to  maintain  risk-based  capital  equal to 8.0% of  total  risk-based
assets.  The Bank's  regulatory  capital  exceeded its tangible  equity,  tier 1
(risk-based),  tier 1 (core) and risk-based capital  requirements by 5.9%, 3.4%,
6.8% and 3.3%, respectively.

The Bank's  risk-based  capital  increased  from $37.2  million to $40.5 million
during the year ended  September 30, 2002.  This was primarily due to the Bank's
net earnings less the amount of a dividend paid by the Bank to the Corporation.

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

Impact of Inflation and Changing Prices

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

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

                                       15

<PAGE>

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



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

We have audited the accompanying  consolidated statements of financial condition
of FSF Financial Corp. and  Subsidiaries  (the  Corporation) as of September 30,
2002 and 2001 and the related consolidated  statements of income,  comprehensive
income,  changes  in  stockholders'  equity and cash flows for each of the three
fiscal years in the period ended September 30, 2002. These financial  statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of FSF Financial
Corp. and  Subsidiaries  as of September 30, 2002 and 2001 and the  consolidated
results of their operations and their cash flows for each of the fiscal years in
the three-year  period ended  September 30, 2002, in conformity  with accounting
principles generally accepted in the United States of America.




/s/Larson, Allen, Weishair & Co., LLP
Larson, Allen, Weishair & Co., LLP
Austin, Minnesota
October 26, 2002

                                       16

<PAGE>


FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, except shares)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                         September 30,
                                                                   -------------------------
                                                                      2002         2001
                                                                    ---------    ---------
                                                                        (In thousands)

<S>                                                               <C>          <C>
                                     ASSETS
                                     ------
Cash and cash equivalents                                           $  14,615    $  12,594
Securities available for sale, at fair value:
     Equity securities                                                 12,046       12,021
     Mortgage-backed and related securities                            29,196       27,481
     Debt securities                                                       --        3,055
Securities held to maturity, at amortized cost:
     Debt securities (Fair value of $13,150 and $12,490)               12,447       12,420
     Mortgage-backed and related securities
       (Fair value of $20,724 and $25,586)                             20,679       25,731
Restricted Stock                                                        5,925        5,925
Loans held for sale                                                    29,242       12,082
Loans receivable, net                                                 382,690      340,484
Foreclosed real estate                                                    122          126
Accrued interest receivable                                             4,436        4,777
Premises and equipment                                                  6,005        5,439
Other assets                                                            9,690        8,901
Goodwill                                                                4,451        2,595
Core deposit intangible                                                   616           --
                                                                    ---------    ---------

          Total assets                                              $ 532,160    $ 473,631
                                                                    =========    =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
Liabilities:
     Demand deposits                                                $  62,687    $  40,721
     Savings accounts                                                  89,037       93,428
     Certificates of deposit                                          230,200      178,392
                                                                    ---------    ---------
          Total deposits                                              381,924      312,541
     Federal Home  Loan Bank borrowings                                98,000      113,500
     Advances from borrowers for taxes and insurance                      352          497
     Other liabilities                                                  6,003        5,152
                                                                    ---------    ---------
          Total liabilities                                           486,279      431,690

Stockholders' equity:
     Serial preferred stock, no par value 5,000,000 shares
       authorized, no shares issued                                        --           --
     Common stock, $.10 par value 10,000,000 shares authorized,
       4,501,277 and 4,501,277 shares issued                              450          450
     Additional paid in capital                                        43,101       43,184
     Retained earnings, substantially restricted                       35,214       31,355
     Treasury stock at cost (2,197,763 and 2,194,803 shares)          (31,621)     (31,146)
     Unearned ESOP shares at cost (54,891 and 90,863 shares)             (549)        (909)
     Unearned MSP stock grants at cost (42,164 and 42,564 shares)        (448)        (453)
     Accumulated other comprehensive (loss)                              (266)        (540)
                                                                    ---------    ---------
          Total stockholders' equity                                   45,881       41,941
                                                                    ---------    ---------

          Total liabilities and stockholders' equity                $ 532,160    $ 473,631
                                                                    =========    =========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       17
<PAGE>



FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, except per share amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    Years Ended September 30,
                                                                 --------------------------------
                                                                   2002        2001        2000
                                                                 --------    --------    --------
                                                                          (In thousands)
<S>                                                            <C>         <C>         <C>
Interest income:
     Loans receivable                                            $ 31,389    $ 30,636    $ 27,097
     Mortgage-backed and related securities                         2,430       2,395       2,668
     Investment securities                                          1,355       2,279       3,112
                                                                 --------    --------    --------
          Total interest income                                    35,174      35,310      32,877
                                                                 --------    --------    --------
Interest expense:
     Deposits                                                      11,478      14,826      11,608
     Borrowed funds                                                 5,770       7,074       8,145
                                                                 --------    --------    --------
          Total interest expense                                   17,248      21,900      19,753
                                                                 --------    --------    --------
          Net interest income                                      17,926      13,410      13,124
     Provision for loan losses                                        811       1,077         216
                                                                 --------    --------    --------
          Net interest income after provision for loan losses      17,115      12,333      12,908
                                                                 --------    --------    --------
Non-interest income:
     Gain (loss) on loans- net                                      4,273       2,499       1,197
     Other service charges and fees                                 1,384         979         765
     Service charges on deposit accounts                            1,767       1,551       1,262
     Commission income                                              1,126       1,145       1,108
     Other                                                            425         425         493
                                                                 --------    --------    --------
          Total non-interest income                                 8,975       6,599       4,825
                                                                 --------    --------    --------
Non-interest expense:
     Compensation and benefits                                      9,533       7,705       7,232
     Occupancy and equipment                                        1,507       1,515       1,406
     Deposit insurance premiums                                        61          57          71
     Data processing                                                  901         754         689
     Professional fees                                                524         401         378
     Other                                                          3,605       2,383       2,203
                                                                 --------    --------    --------
          Total non-interest expense                               16,131      12,815      11,979
                                                                 --------    --------    --------
          Income before provision for income taxes                  9,959       6,117       5,754
Income tax expense                                                  3,927       2,384       2,250
                                                                 --------    --------    --------
          Net income                                                6,032       3,733       3,504
                                                                 ========    ========    ========

Basic earnings per share                                         $   2.77    $   1.68    $   1.46
Diluted earnings per share                                       $   2.63    $   1.61    $   1.43

</TABLE>


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

<S>                                                            <C>         <C>         <C>
Net Income                                                       $  6,032    $  3,733    $  3,504
Other comprehensive income
     Unrealized gains (losses) on securities
       Unrealized holding gains (losses) arising during period        444       1,966        (736)
       Tax benefit (expense)                                         (170)       (735)        278
                                                                 --------    --------    --------
      Other comprehensive income (loss) after tax                     274       1,231        (458)
                                                                 --------    --------    --------
Comprehensive income                                             $  6,306    $  4,964    $  3,046
                                                                 ========    ========    ========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       18
<PAGE>

<TABLE>
<CAPTION>

FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY  (IN THOUSANDS, except per share amounts)
-------------------------------------------------------------------------------------------------------------------

                                                                         Unallocated     Unearned            Accumulated
                                                             Retained      Common          Stock                 Other
                                            Additional       Earnings       Stock        Acquired            Comprehensive
                               Common         Paid-in     Substantially    Held by          by     Treasury     Income
                               Stock          Capital       Restricted      ESOP            MSP      Stock      (Loss)        Total
                               -----------------------------------------------------------------------------------------------------
<S>                          <C>         <C>            <C>            <C>           <C>         <C>         <C>          <C>
Balance, September 30, 1999    $  450      $   43,292     $   26,627     $  (1,628)    $     (528) $(24,575)   $ (1,313)    $42,325
  Net earnings                      -               -          3,504             -              -         -           -       3,504
  Treasury stock acquired           -               -              -             -              -    (4,947)          -      (4,947)
  Stock issued for options
    and compensation                -               -              -             -              -        18           -          18
  Amortization of and tax
    on MSP shares                   -              18              -             -             70         -           -          88
  Common stock dividends
  ($0.50 per share)                 -               -         (1,206)            -              -         -           -      (1,206)
  Allocated ESOP shares             -              81              -           360              -         -           -         441
  Other comprehensive loss          -               -              -             -              -         -        (458)       (458)
                               -----------------------------------------------------------------------------------------------------
Balance September 30, 2000        450          43,391         28,925        (1,268)          (458)  (29,504)     (1,771)     39,765
  Net earnings                      -               -          3,733             -              -         -           -       3,733
  Treasury stock acquired           -               -              -             -              -    (2,488)          -      (2,488)
  Stock issued for options
    and compensation                -            (330)             -             -              -       846           -         516
  Amortization of and tax
    on MSP shares                   -               5              -             -              5         -           -          10
  Common stock dividends
  ($0.60 per share)                 -               -         (1,303)            -              -         -           -      (1,303)
  Allocated ESOP shares             -             118              -           359              -         -           -         477
  Other comprehensive income        -               -              -             -              -         -       1,231       1,231
                               -----------------------------------------------------------------------------------------------------
Balance September 30, 2001        450          43,184         31,355          (909)          (453)  (31,146)       (540)     41,941
  Net earnings                      -               -          6,032             -              -         -           -       6,032
  Treasury stock acquired           -               -              -             -              -    (1,496)          -      (1,496)
  Stock issued for options
    and compensation                -            (246)             -             -              -     1,021           -         775
  Amortization of and tax
    on MSP shares                   -               -              -             -              5         -           -           5
  Common stock dividends
     ($1.00 per share)              -               -         (2,173)            -              -         -           -      (2,173)
  Allocated ESOP shares             -             163              -           360              -         -           -         523
  Other comprehensive income        -               -              -             -              -         -         274         274
                               -----------------------------------------------------------------------------------------------------
Balance September 30, 2002     $  450      $   43,101     $   35,214     $    (549)    $     (448) $(31,621)   $   (266)    $45,881
                               =====================================================================================================
</TABLE>
                The accompanying notes are an integral part of these statements.

                                       19
<PAGE>

FSF FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                     Years Ended September 30,
                                                                 -----------------------------------
                                                                    2002         2001         2000
                                                                 ---------    ---------    ---------
<S>                                                              <C>          <C>          <C>
Cash flows from operating activities:
     Net income                                                  $   6,032    $   3,733    $   3,504
     Adjustments to reconcile net income to net cash
       provided (used) by operating activities:
     Depreciation                                                      730          658          603
     Net amortization of discounts and premiums on securities
       held to maturity                                               (186)         (39)         (40)
     Provision for loan losses                                         811        1,077          216
     Net market value adjustment on ESOP shares                        163          117           71
     Amortization of ESOP and MSP stock compensation                   460          445          451
     Amortization of intangibles                                       444          118          118
     Net gain on sale of assets                                         --          (30)        (126)
     Net loan fees deferred and amortized                               91           64         (203)
     Loans originated for sale                                    (225,532)    (138,136)     (52,221)
     Loans sold                                                    208,371      129,245       54,364
     (Increase) decrease in:
       Accrued interest receivable                                     434         (345)      (1,104)
       Other assets                                                   (678)        (649)        (435)
     Increase (decrease) other liabilities                             242          724        1,699
                                                                 ---------    ---------    ---------
Net cash provided (used) by operating activities                    (8,618)      (3,018)       6,897
                                                                 ---------    ---------    ---------

Cash flows from investing activities:
     Loan originations and principal payments on loans, net          4,599       25,925      (32,349)
     Purchase of loans                                             (19,298)     (27,337)     (32,417)
     Loan participations sold                                           --        1,600          851
     Principal payments on securities held to maturity               5,085        1,260          604
     Purchase of securities available for sale                      (2,992)     (13,938)         (50)
     Proceeds from FHLB stock redeemed                                  --          450        1,038
     Proceeds from maturities of securities available for sale       4,753       13,321           --
     Proceeds from maturities of securities held to maturity            --        6,000        1,570
     Investment in foreclosed real estate                              (21)          (6)          (7)
     Proceeds from sale of REO                                         175          231          428
     Proceeds from sale of fixed assets                                 --           --          157
     Purchase of ING Branch, net of deposits assumed                17,589           --           --
     Purchase of equipment and property improvements                  (530)        (583)        (872)
                                                                 ---------    ---------    ---------
Net cash provided (used) by investing activities                 $   9,360    $   6,923    $ (61,047)
                                                                 ---------    ---------    ---------
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Years Ended September 30,
                                                                        -----------------------------------
                                                                           2002         2001         2000
                                                                        ---------    ---------    ---------
<S>                                                                   <C>          <C>          <C>
Cash flows from financing activities:
     Net increase in deposits                                           $  19,912    $  17,718    $  63,176
     FHLB Advances                                                         10,000       26,000       88,000
     Payments on FHLB Advances                                            (25,500)     (40,000)    (101,467)
     Net short term borrowings                                                 --           --         (200)
     Net decrease in mortgage escrow funds                                   (146)        (160)         (12)
     Treasury stock purchased                                              (1,496)      (2,488)      (4,947)
     Dividends on common stock                                             (2,173)      (1,303)      (1,206)
     Proceeds from exercise of stock options                                  682          440           23
                                                                        ---------    ---------    ---------
Net cash provided by financing activities                                   1,279          207       43,367
                                                                        ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents                        2,021        4,112      (10,783)

Cash and cash equivalents:
     Beginning of year                                                     12,594        8,482       19,265
                                                                        ---------    ---------    ---------
     End of period                                                      $  14,615    $  12,594    $   8,482
                                                                        =========    =========    =========

Supplemental disclosures of cash flow information:
    Cash payments for:
        Interest on advances and other borrowed money                   $   5,770    $   7,074    $   8,144
        Interest on deposits                                               12,145       14,044       10,828
        Income taxes                                                        3,939        2,830        1,963

Supplemental schedule of non-cash investing and financing activities:
     Foreclosed real estate                                             $     149    $     339    $     378

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       21
<PAGE>

FSF FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002, 2001 AND 2000
--------------------------------------------------------------------------------


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

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

Nature of Business
The  Corporation  is  a  holding  company  whose  affiliated  companies  provide
financial  services.  The Agency is a property and casualty  insurance  company.
Firstate  Services is an investment  services  company.  The Bank is a community
financial institution attracting deposits from the general public and using such
deposits,   together  with   borrowings  and  other  funds,  to  make  mortgage,
construction,  consumer,  commercial  and  agricultural  loans.  HMC, a mortgage
banking entity, has become an integral part of the Bank's lending and fee income
function. At September 30, 2002, the Bank operated 12 retail-banking  offices in
Minnesota.  The Bank is subject to significant  competition from other financial
institutions  and is also subject to  regulation  by certain  federal  agencies,
therefore undergoing periodic examinations by those regulatory authorities.

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

Cash Equivalents (In thousands)
For  purposes of the  consolidated  statements  of cash flows,  the  Corporation
considers all highly liquid debt instruments  with original  maturities of three
months  or less and money  market  funds to be cash  equivalents.  Cash and cash
equivalents include interest-bearing deposits of $11,018 and $9,767 at September
30, 2002 and 2001, respectively.

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

         Trading Account Securities
         Securities held  principally for resale in the near term are classified
         as trading  account  securities  and  recorded  at their  fair  values.
         Unrealized gains and losses on trading account  securities are included
         in other income.  The Corporation  did not hold any trading  securities
         during the three fiscal years ended September 30, 2002.

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

                                       22
<PAGE>

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

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

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

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

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

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

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

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

                                       23

<PAGE>

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


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

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

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

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

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

Advertising Costs (in thousands)
The Corporation expenses all advertising costs as incurred.  Advertising expense
totaled $319,  $348 and $268 for the three years ended  September 30, 2002, 2001
and 2000, respectively.

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

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

Treasury Stock
Treasury  stock is recorded at cost.  In the event of  subsequent  reissue,  the
treasury  stock account will be reduced by the cost of such stock on the average
cost  basis  with  any  proceed   differences   reflected  as  paid  in  capital
adjustments. Treasury stock is available for general corporate purposes.

                                       24
<PAGE>

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


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

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

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


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

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

                                       25
<PAGE>

NOTE 2- BRANCH ACQUISITION (in thousands)
On November 9, 2001, the Bank acquired the St. Cloud,  Minnesota branch facility
and related business of ING Bank, fsb. The purchase method transaction  involved
the assumption of deposits and acquisitions of assets as follows (in thousands):

     Deposits assumed (at fair value)                              $ 50,083
                                                                   =========

     Assets acquired:
          Cash                                                     $ 17,589
          Loans receivable                                           28,806
          Premises and equipment                                        765
          Other assets                                                   14
          Core deposit intangible                                       794
                                                                   ---------

               Sub-total (at fair value)                           $ 47,968
                                                                   ---------

          Cost of unidentifiable intangible asset resulting
            from the excess of fair value of deposit
            liabilities assumed over the fair value of acquired
            identifiable asset (SFAS 72 Goodwill)                  $  2,115
                                                                   =========

The unidentifiable  intangible asset is recognized under SFAS No. 72, Accounting
for Certain Acquisitions of Banking and Thrift Institutions and is excluded from
the scope of  Statement  142 (See Note 17).  Statement  72  intangible  asset is
subject to  amortization  based upon the  estimated  remaining  maturity  of the
interest rate  sensitive  assets  acquired  (approximately  12 years) and is tax
deductible  over a  15-year  period.  The  primary  reason  for the  ING  branch
acquisition was to increase the Bank's business and market  potential in the St.
Cloud, Minnesota area.

The results of operations  for the current  fiscal year periods were affected by
less than two cents per share on a pro-forma  basis and  considered not material
for disclosure.  Unidentifiable  intangible  asset  amortization for the current
year was $146.

The  Financial  Accounting  Standards  Board (FASB)  issued SFAS No. 147,  which
amends SFAS No. 72,  effective  October 1, 2002. The  unidentifiable  intangible
goodwill recognized pursuant to SFAS 72 (i.e. the unamortized excess of the fair
value of  liabilities  assumed over the fair value of assets  acquired)  will be
reclassified as SFAS 141 goodwill as of the date that SFAS 142 is applied.  Note
that, as of such date, the carrying amount of core deposit intangible (for which
individual  accounting  records  have  been  kept) is  recorded  separately  and
continues to be amortized. Reclassified goodwill will be prospectively accounted
for in accordance  with SFAS 142, thus  effectively,  amortization  ceases as of
October 1, 2002.

                                       26
<PAGE>

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

(3)      Debt and Equity Securities (in thousands)

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

September 30, 2002

                                      ------------------------------------------
                                                   Gross        Gross
                                      Amortized  Unrealized   Unrealized  Fair
                                        Cost       Gains        Losses    Value
                                      ---------   -------      --------  -------
Available for sale securities:
     Equity securities
           Fund Investments             $12,522   $  --        $   476   $12,046
                                        =======   =======      =======   =======
     Mortgage backed securities:
           REMICs                       $28,843   $   448      $    95   $29,196
                                        =======   =======      =======   =======

Held to maturity securities:
     Debt securities:
           U.S. Government and Agency   $12,447   $   763      $    60   $13,150
                                        =======   =======      =======   =======
     Mortgage backed securities:
           REMICs                       $20,154   $   136      $    92   $20,198
           FNMA certificates                511         1           --   $   512
           Other certificates                14        --           --   $    14
                                        -------   -------      -------   -------
                      Total             $20,679   $   137      $    92   $20,724
                                        =======   =======      =======   =======




The amortized cost of debt and mortgage-backed  securities at September 30, 2002
included  unamortized  premiums  of  $192  and  unaccreted  discounts  of  $196,
respectively.

September 30, 2001

                                      ------------------------------------------
                                                   Gross        Gross
                                      Amortized  Unrealized   Unrealized  Fair
                                        Cost       Gains        Losses    Value
                                      ---------   -------      --------  -------
Available for sale securities:
     Equity securities
           Fund Investments             $12,522   $    --   $   501   $12,021
                                        =======   =======   =======   =======
     Mortgage backed securities:
           REMICs                       $27,602   $   162   $   283   $27,481
                                        =======   =======   =======   =======

     Debt Securities:                   $ 3,000   $    55   $    --   $ 3,055
                                        =======   =======   =======   =======
Held to maturity securities:
     Debt securities:
           U.S. Government and Agency   $12,420   $   298   $   228   $12,490
                                        =======   =======   =======   =======
     Mortgage backed securities:
           REMICs                       $24,970   $   150   $   320   $24,800
           FNMA certificates                741        25        --   $   766
           Other certificates                20        --        --   $    20
                                        -------   -------   -------   -------
                      Total             $25,731   $   175   $   320   $25,586
                                        =======   =======   =======   =======

                                       27

<PAGE>

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

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

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

The scheduled  maturities of securities  held to maturity and securities  (other
than equity securities) available for sale at September 30, 2002 are as follows:

                                      Held to Maturity       Available for Sale
                                         Securities              Securities
                                     -------------------     -------------------
                                     Amortized   Fair        Amortized   Fair
                                       Cost      Value          Cost     Value
                                     ---------  -------      ---------  -------
Due in one year or less               $ 5,092   $ 5,208       $    --   $    --
Due from one to five years              4,169     4,514            --        --
Due from five to ten years              2,009     1,949            --        --
Due after ten years                    21,856    22,203        28,843    29,196
                                      -------   -------       -------   -------
          Total                       $33,126   $33,874       $28,843   $29,196
                                      =======   =======       =======   =======

For purposes of this maturity table,  mortgage-backed securities,  which are not
due at a single maturity date, have been allocated over maturity groupings based
on  the  weighted  average  contractual  maturities  of  underlying  collateral.
Mortgage-backed  securities  may  mature  earlier  than their  weighted  average
contractual   maturities   because   of   principal   prepayments.    Debt   and
mortgage-backed  securities carried at approximately  $14.6 million at September
30, 2002 and $21.0  million at September  30, 2001 were pledged to secure public
deposits and for other purposes required or permitted by law.

(4)      Loans Receivable (in thousands)

Loans receivable are summarized as follows:

                                                             September 30,
                                                        ----------------------
                                                           2002         2001
                                                        ---------    ---------
First mortgage loans:
     Secured by 1-4 family residences                   $  42,383    $  69,708
     Secured by other properties                           52,043       43,395
     Land and Land development loans                       19,394       17,747
     Residential construction loans                       239,155      142,035
                                                        ---------    ---------
                                                          352,975      272,885
     Less:
          Un-disbursed portion of construction
            and land development loans                   (101,854)     (73,235)
          Net deferred loan origination fees                 (991)        (983)
                                                        ---------    ---------
                    Subtotal first mortgage loans         250,130      198,667

Consumer and other loans:
     Consumer loans                                        29,929       39,315
     Home equity and second mortgages                      27,543       29,991
     Commercial                                            20,484       23,908
     Agricultural loans                                    56,129       49,935
                                                        ---------    ---------
                                                          134,085      143,149
     Add:
          Net deferred loan origination costs                 156          209
                                                        ---------    ---------
                    Subtotal consumer and other loans     134,241      143,358
                                                        ---------    ---------
                              Subtotal all loans          384,371      342,025
     Less:
          Allowance for loan losses
                                                           (1,681)      (1,541)
                                                        ---------    ---------
                                        Total           $ 382,690    $ 340,484
                                                        =========    =========

                                       28

<PAGE>

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

Loans  receivable on non-accrual  status for which interest  income has not been
recognized  was $4,873 and $2,953 at September 30, 2002 and 2001,  respectively.
The  interest   income  not  recognized  on  these  loans  was  $264  and  $178,
respectively.

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

                                               Years Ended September 30,
                                             -----------------------------
                                              2002       2001       2000
                                             -------    -------    -------

Balance, beginning of period                 $ 1,541    $ 1,534    $ 1,387
ING Branch acquisition                           274         --         --
Provision for losses                             811      1,077        216
Charge-offs                                     (988)    (1,127)       (98)
Recoveries                                        43         57         29
                                             -------    -------    -------
Balance, end of period                       $ 1,681    $ 1,541    $ 1,534
                                             =======    =======    =======

Loans,  having carrying values of $149 and $339, were  transferred to foreclosed
real estate in 2002 and 2001, respectively.

The  aggregate  amount  of loans to  executive  officers  and  directors  of the
Corporation  were $240 and $364 at  September  30, 2002 and 2001,  respectively.
During 2002, repayments on loans to executive officers and directors amounted to
$259 and $135 was advanced.

(5)      Loan Servicing (in thousands)

Loans  serviced  for others are not  included in the  accompanying  consolidated
statements of financial condition.  The unpaid principal balances of these loans
serviced for others were  $46,093,  $52,968 and $52,127 at  September  30, 2002,
2001 and 2000, respectively.

Custodial  escrow  balances  maintained  in connection  with the foregoing  loan
servicing  and included in demand  deposits  were $260 and $298 at September 30,
2002 and 2001, respectively.

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

                                                    Years Ended September 30,
                                                    -------------------------
                                                      2002     2001     2000
                                                     -----    -----    -----

Beginning balance, net of accumulated amortization   $ 172    $ 207    $ 253
Amounts capitalized                                     53       36       19
Amortization                                           (88)     (71)     (65)
Valuation adjustments                                   --       --       --
                                                     -----    -----    -----
Balance, end of period                               $ 137    $ 172    $ 207
                                                     =====    =====    =====

(6)      Foreclosed Real Estate (in thousands)

Net gains on foreclosed  real estate,  including  net revenues from  operations,
were not material for the three years ended  September  30, 2002.  The Bank held
foreclosed  real estate at  September  30, 2002 and 2001,  amounting to $122 and
$126.

                                       29

<PAGE>

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

(7)      Premises and Equipment (in thousands)

Premises and equipment are summarized as follows:

                                                       September 30,
                                                     -----------------
                                                       2002      2001
                                                     -------   -------

Land                                                 $ 1,044   $   728
Buildings, improvements and leasehold improvements     5,186     4,898
Furniture, equipment and automobiles                   4,680     4,368
                                                     -------   -------
     Total costs                                      10,910     9,994
Less accumulated depreciation                          4,905     4,555
                                                     -------   -------
     Total                                           $ 6,005   $ 5,439
                                                     =======   =======

At September  30, 2002,  the  Corporation  was  obligated  under  non-cancelable
operating  leases for office  space and  equipment.  Net  rental  expense  under
operating  leases,  included in occupancy and equipment was $318,  $398 and $442
for the years ended September 30, 2002, 2001 and 2000.  Projected  minimum lease
commitments  under  the terms of the  leases  for the five  year  period  ending
September 30, 2007 are $310, $272, $272, $272 and $45, respectively.

(8)      Deposits (in thousands)

The aggregate amount of short-term  jumbo CDs, each with a minimum  denomination
of one  hundred  thousand  dollars  was  $62,600  and  $64,287 in 2002 and 2001,
respectively.

Interest expense is summarized as follows:

                                                         September 30,
                                                   ---------------------------
                                                    2002      2001      2000
                                                   -------   -------   -------

Savings accounts                                   $ 1,585   $ 3,491   $ 3,110
Demand deposits                                        411       266       259
Certificates of deposit                              9,482    11,069     8,239
                                                   -------   -------   -------
                                                   $11,478   $14,826   $11,608
                                                   =======   =======   =======

Accrued  interest  payable on total  deposits was $2,061 and $2,728 at September
30, 2002 and 2001, respectively.

Non-interest  bearing demand deposits  amounted to $26,387,  $20,797 and $16,124
for the years ended September 30, 2002, 2001 and 2000, respectively.

At September 30, 2002, the scheduled  maturities of  certificates of deposit are
as follows:

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

            2003                               $  162,985
            2004                                   33,550
            2005                                   23,561
            2006                                    3,651
            2007 and thereafter                     6,453
                                               ----------
                                               $  230,200
                                               ==========

The Bank held deposits of  approximately  $548 for related  parties at September
30, 2002.

                                       30
<PAGE>

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

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

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

                                                    September 30,
                                    --------------------------------------------
                                         2002                    2001
                                    ---------------------   --------------------
Fiscal Year of Maturity - Advances
----------------------------------              Weighted                Weighted
                                       Amount     Rate         Amount     Rate
                                    ----------  --------    ---------   -------
2002                                                  - %     25,500      6.41 %
2003                                   10,000      6.53       10,000      6.53
2004                                   21,000      5.30       16,000      5.83
2005                                        -         -            -         -
2006                                    5,000      4.93        5,000      4.93
2007 and thereafter                    62,000      5.55       57,000      5.59
                                    ----------  --------    ---------   -------
     Total                          $  98,000      5.56 %   $113,500      5.88 %
                                    ==========  ========    =========   =======

Prepayment  penalties  will be incurred if the  advances are paid prior to their
maturity date.

At September 30, 2002,  borrowed funds are  collateralized by stock in the FHLB,
loans with  carrying  value of $69,280 and debt and  mortgage-backed  securities
with carrying values of $47,389 under a collateral agreement.

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

Salary Continuation Plans
The Bank has  adopted  insured  salary  continuation  plans for the  benefit  of
selected  members of  management  by providing  them with  retirement  and death
benefits. The estimated liability under the agreements is charged to income over
the expected  remaining  years of  employment.  The Bank's policy is to fund the
costs accrued with insurance contracts.  Salary continuation expense amounted to
$277, $135 and $126 for the three years ended September 30, 2002, respectively.

Deferred Compensation 401(k) Plans
The  Corporation  provides 401(k) plans that cover  substantially  all employees
meeting age and length of service requirements.  The plan maintained by the Bank
covers  employees of both the Bank and the Agency.  Employees  participating  in
this plan are eligible to contribute up to 15% of their annual compensation. The
plan  maintained  by HMC for the  benefit of its  employees  also  provides  for
employee contribution up to 15% of their annual compensation. Both plans provide
for  discretionary  contributions  by the employers,  which are allocated to the
participants' accounts in proportion to employee contributions.  The Corporation
made no  discretionary  contributions  to these  plans for the three years ended
September 30, 2002.

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

Self Insurance
The  Corporation  has a  self-insured  health  plan for all its  employees.  The
Corporation  has purchased  stop loss  insurance to supplement  the health plan,
which will reimburse the Corporation for individual  claims in excess of $35,000
annually or aggregate claims exceeding $473,300 annually.

                                       31
<PAGE>

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

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

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

A summary of the ESOP share allocation is as follows:

                                                     September 30,
                                            --------------------------------
                                              2002        2001        2000
                                            --------    --------    --------

Shares allocated, beginning of year          268,857     232,885     196,919
Shares allocated during year                  35,972      35,972      35,972
Unreleased shares                             54,891      90,863     126,829
                                            --------    --------    --------
Total ESOP                                   359,720     359,720     359,720

Fair value of unreleased shares             $  1,087    $  1,481    $  1,585
Amount charged to expense                   $    214    $    406    $    323
Dividend used for debt reduction            $    340    $    164    $    171

Management Stock Plan
The Bank established the Management Stock Plan (MSP) for key officers during the
year ended  September  30, 1995.  Following  shareholder  approval of the MSP in
January 1995, the Bank  purchased  179,860  shares of the  Corporation's  common
stock in the open  market  at $10.59  per share to be  awarded  to  officers  in
accordance  with the provisions of the MSP. The cost of the shares awarded under
these plans is recorded as unearned  compensation,  a contra-equity account, and
is recognized as an expense in accordance with the vesting  requirements defined
by the MSP. For each of the three fiscal years ended  September  30, 2002,  2001
and 2000, the amount included in compensation expense related to the MSP was $5,
$5 and $73, respectively.

The  following  summarizes  the  activity  in the MSP for the three  years ended
September 30, 2002:

                                            Unawarded            Awarded
                                             Shares              Shares
                                           -----------        -------------
            At September 30, 1999
                                                42,964              27,380
                      Vested                         -             (27,380)
                      Shares Granted            (2,000)              2,000
                                           ------------       -------------
            At September 30, 2000               40,964               2,000
                      Vested                         -               (400)
                                           ------------       -------------
            At September 30, 2001               40,964               1,600
                      Vested                         -               (400)
                                           ------------       -------------
            At September 30, 2002               40,964               1,200
                                           ============       =============

                                       32

<PAGE>

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

Director's Stock Compensation Plan
In  January  1998,  the  shareholders  of  the  Corporation   approved  a  stock
compensation plan for its non-employee directors.  The plan granted 6,000 shares
of common stock issued from  treasury that vests over a four-year  period,  with
1,200 shares awarded in January 1998. The compensation cost associated with this
plan is the fair value of the stock ($19.42/share) on the date that the plan was
approved by shareholders. During the year ended September 30, 2002, 1,200 shares
of the total grant were  vested to the plan  recipients  to  complete  the plan.
Compensation  costs included in the  accompanying  financial  statements for the
fiscal years ended  September 30, 2002 was $6 and $23 for September 30, 2000 and
2001.

Stock Option Plans
The  Corporation   maintains  the  1994  stock  option  plan,  approved  by  the
Corporation's  stockholders  on January 17,  1995 (the 1994 Plan);  and the 1998
stock option plan,  approved by the  Corporation's  stockholders  on January 20,
1998 (the 1998 Plan). These plans permit the granting of stock options,  with an
exercise price equal to the fair value of the Corporation's stock on the date of
the option grant.  All options granted under these plans may be exercised over a
ten-year period  beginning on the date the option is granted.  Awards made under
the Plans may be incentive  stock plans (ISO's) as defined by Section 422 of the
Internal Revenue Code or options that do not qualify. Those options granted that
qualify as ISO's are generally  exercisable on the date of the grant while those
not qualifying  (non-incentive stock options granted to executives and directors
of the Corporation)  vest over 3-5 years. The following  summarizes the activity
in the two Plans for the three years ended September 30, 2002:

<TABLE>
<CAPTION>
                                 Shares Available     Options Shares     Weighted Average
                                   for Grant           Outstanding        Exercise Price
                                   ---------           -----------        --------------
<S>                                <C>               <C>               <C>
At September 30, 1999                  79,894            486,993           $   13.40
           Granted                    (32,187)            32,187               23.30
           Exercised                       --             (3,600)              19.42
           Cancelled                    2,995             (2,995)              19.13
                                     --------           --------           ---------
At September 30, 2000                  50,702            512,585               13.33
           Granted                    (21,937)            21,937               16.05
           Exercised                       --            (93,087)              15.42
        Cancelled                       1,550             (1,550)              17.46
                                     --------           --------           ---------
At September 30, 2001                  30,315            439,885               13.59
           Granted                     (2,500)             2,500               16.05
           Exercised                       --            (81,375)              18.28
           Cancelled                    1,944             (1,944)              17.40
                                     --------           --------           ---------
At September 30, 2002                  29,759            359,066           $   14.67
                                     ========           ========           =========

Shares available for future grants
           1994 Plan                    8,987
           1998 Plan                   20,772
</TABLE>

       The  following  table  summarizes  the  information  about stock  options
outstanding at September 30, 2002:

--------------------------------------------------------------------------------
              Options Outstanding                        Options Exercisable
--------------------------------------------------------------------------------
                                  Weighted average
    Exercise         Number     remaining contractual
     Price        Outstanding        life in years       Price        Number
-----------------------------------------------------   ------------------------
   $   9.500          105,694            3.0           $ 9.500        105,694
      19.125           98,924            6.3            19.125         98,924
      16.050            2,500            9.0            16.050          2,500
      19.250           30,000            6.7            19.250         30,000
      15.000           37,000            7.2            15.000         27,000
      14.750           18,087            7.2            14.750         18,087
      12.375           19,237            8.0            12.375         19,237
      12.375           20,637            9.0            12.375         20,637
      12.125            6,000            9.0            12.125          2,000
      16.050           20,987            8.0            16.050         20,987
                --------------                                 ---------------
                      359,066                                         345,066
                ==============                                 ===============

                                       33
<PAGE>

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

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

                                                 Years Ended September 30,
                                              --------------------------------
                                               2002         2001        2000
                                              -------     -------     --------
Net Income
           As reported                        $ 6,032     $ 3,733     $ 3,504
           Pro forma                            5,984       3,518       3,371
Earnings per common share
           As reported
                  Basic                       $  2.77     $  1.68     $  1.46
                  Diluted                        2.63        1.61        1.43
           Pro forma
                  Basic                       $  2.75     $  1.58     $  1.41
                  Diluted                        2.60        1.52        1.38


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

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

<TABLE>
<CAPTION>
                                                                      Years Ended September 30,
                                                               --------------------------------------
                                                                   2002          2001       2000
                                                               --------------------------------------
<S>                                                             <C>           <C>         <C>

Risk free interest rate                                               4.63%         4.85%       5.45%
Expected life                                                     10 years      10 years    10 years
Expected volatility                                                  44.00%        27.00%      26.00%
Expected dividends                                                    8.00          7.00        4.00
Weighted average fair value per share of the option granted      $    7.20     $    7.16   $    7.00
</TABLE>

(11)     Income Taxes (in thousands)

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

                                                      September 30,
                                               -----------------------------
                                                 2002       2001       2000
                                               -------    -------    -------
Current
  Federal                                      $ 3,176    $ 2,313    $ 1,565
  State                                          1,027        749        509
                                               -------    -------    -------
     Subtotal                                    4,203      3,062      2,074
Deferred
  Federal                                         (207)      (509)       132
  State                                            (69)      (169)        44
                                               -------    -------    -------
      Subtotal                                    (276)      (678)       176
                                               -------    -------    -------
         Total income tax provision            $ 3,927    $ 2,384    $ 2,250
                                               =======    =======    =======

                                       34

<PAGE>

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

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

                                                        September 30,
                                                       ---------------
                                                        2002     2001
                                                       ------   ------
Deferred tax assets:
      Deferred compensation                            $  686   $  573
      Deferred net loan fees                              166       99
      Securities unrealized loss                           41      222
      Intangible assets                                     4       --
      Section 475 "For Sale Assets"                       143       --
      Allowance for loan losses                           681      666
                                                       ------   ------
           Subtotal                                     1,721    1,560
      Less:  Valuation allowance                          193      203
                                                       ------   ------
                        Total                           1,528    1,357
Deferred tax liabilities:
      FHLB Stock                                          193      193
      Tax bad debt reserve                                 85      128
      Premises and equipment                              571      427
      Installment obligation sale of former building       26       26
      Mortgage servicing rights                            42       49
      Discount on loans                                    --        2
      Section 475 "For Sale Assets"                        --       27
                                                       ------   ------
                        Total                             917      852
                                                       ------   ------
Net deferred tax asset                                 $  611   $  505
                                                       ======   ======


A valuation  allowance was  established to reduce the deferred tax asset related
to the unrealized loss on equity securities  because  management is uncertain if
it will be  realized.  The  Corporation  has  paid  sufficient  taxes  in  prior
carryback years, which will enable it to recover the balance of the net deferred
tax  assets.  Therefore,  no  additional  valuation  allowance  was  required at
September 30, 2002 and 2001.

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

                                                    Years Ended September 30,
                                                 -----------------------------
                                                   2002       2001       2000
                                                 -------    -------    -------
Computed "expected" tax expense                  $ 3,386    $ 2,080    $ 1,956
State income taxes, net of federal tax benefit       633        383        365
Other, net                                           (92)       (79)       (71)
                                                 -------    -------    -------
Total income tax provision                       $ 3,927    $ 2,384    $ 2,250
                                                 =======    =======    =======


Retained  earnings at  September  30, 2002  include  $6,492 of which no deferred
federal  income tax liability  has been  recognized.  This amount  represents an
allocation of income to bad debt  deductions for tax purposes only that arose in
tax years beginning  before  September 30, 1988, (that is the base year amount).
Reduction  of the amount,  so  allocated  for  purposes  other than tax bad debt
losses or adjustments arising from this carryback of net operating losses, would
create income for tax purposes  only.  This would be subject to the then current
corporate  income tax rate. The unrecorded  deferred income tax liability on the
above amount was approximately $2,600 at September 30, 2002.

                                       35
<PAGE>

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

(12)     Earnings per Share

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

<TABLE>
<CAPTION>
                                                                For the Years ended
                                                                    September 30,
                                                     ------------------------------------
                                                           2002         2001         2000
                                                     ------------------------------------
<S>                                                <C>          <C>          <C>
Numerator:
   Net income - Numerator for basic earnings
      per share and diluted earnings per share--
      income available to common stockholders        $6,032,000   $3,733,000   $3,504,000
                                                      ===================================
Denominator:
   Denominator for basic earnings per share--
      weighted-average shares                         2,179,824    2,220,067    2,395,287

   Effect of dilutive securities:
      Stock - based compensation plans                  117,431       96,546       56,224
                                                     ------------------------------------
      Denominator for diluted earnings per share--
         adjusted weighted-average shares and
         assumed conversions                          2,297,255    2,316,613    2,451,511
                                                      ===================================
Basic earnings per share                             $     2.77   $     1.68   $     1.46
Diluted earnings per share                           $     2.63   $     1.61   $     1.43
</TABLE>

(13)     Commitments and Contingencies

In the ordinary  course of business,  the  Corporation  has various  outstanding
commitments   and  contingent   liabilities   that  are  not  reflected  in  the
accompanying consolidated financial statements.

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

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

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

                                       36

<PAGE>

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below) of total and Tier 1  capital  (as  defined  in the  regulations)  to risk
weighted  assets (as defined) and of tangible and Tier 1 capital (as defined) to
adjusted  total assets (as defined).  Management  believes that, as of September
30,  2002,  the Bank  meets all  capital  adequacy  requirements  to which it is
subject.

As of September 30, 2002, the most recent  notification from the OTS categorized
the Bank as  "well  capitalized"  under  the  regulatory  framework  for  prompt
corrective  action. To be categorized as well capitalized the Bank must maintain
minimum total risk based,  Tier 1 risk based,  and Tier 1 leverage ratios as set
forth  in the  table  below.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

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

<TABLE>
<CAPTION>
                                                                                                                To Be Well
                                                                                                            Capitalized Under
                                                                                     For Capital            Prompt Corrective
                                                              Actual              Adequacy Purposes         Action Provisions
                                                      ------------------------ ------------------------- -------------------------
<S>                                                     <C>           <C>         <C>            <C>       <C>            <C>
GAAP capital, September 30, 2002                          $  43,555
Add:  Unrealized gains on debt
        securities held for sale                              (210)
Less:  Goodwill                                             (4,499)
                                                      --------------
Tangible equity capital and ratio to
        adjusted total assets                             $  38,846      7.4%        $  7,882      1.5%      $  10,510       2.0%
                                                      ------------------------ ------------------------- -------------------------
Tier 1 (Core) capital and ratio to
        adjusted total assets                             $  38,846      7.4%       $  21,020      4.0%      $  26,275       5.0%
                                                      ------------------------ ------------------------- -------------------------
Total risk based capital and ratio to
        risk weighted assets                              $  38,846     10.8%       $  14,365      4.0%      $  21,548       6.0%
                                                                    ---------- ------------------------- -------------------------
Tier 2 risk based capital, net adjustment                     1,681
                                                      --------------
Total risk based capital and ratio to risk
       weighted assets, September 30 , 2002               $  40,527     11.3%       $  28,730      8.0%      $  35,913      10.0%
                                                      ======================== ========================= =========================
</TABLE>

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

</TABLE>

                                       37
<PAGE>

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

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

(15)     Concentration of Credit Risk (in thousands)

The  Corporation  is primarily  engaged in  originating  mortgage,  consumer and
business  loans in the Minnesota  counties of McLeod,  Dakota,  Meeker,  Wright,
Carver, Washington, Benton, Sherburne, Stearns and Sibley. The Bank offers fixed
and  adjustable  rates of interest on these loans that have  amortization  terms
ranging up to thirty  years.  In  addition,  the Bank has  expanded  residential
construction  lending in recent years and currently  does business in 44 states.
The following table indicates the percentage of construction  loans  outstanding
by state.

                                                           % OF TOTAL
                   STATE                                   OUTSTANDING
               --------------------------------------------------------

               Minnesota                                         37.7%
               Wisconsin                                         14.7%
               Michigan                                           6.5%
               Colorado                                           5.0%
               40 Other States                              5% or less


The  Corporation  had cash on deposit in a  financial  institution  in excess of
Federal deposit insurance limits of approximately $10,918 at September 30, 2002.

(16)     Financial Instruments (in thousands)

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

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

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

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

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

                                       38
<PAGE>

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

A summary of the notional amounts of the Corporation's  financial instruments at
September 30, 2002 follows:

            Commitments to extend credit               $   63,889
            Standby letters of credit                         156
            Commitments to sell loans                      51,299


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

<TABLE>
<CAPTION>
                                                              September 30,
                                                      2002                    2001
                                         ----------------------------------------------------
                                              Carrying       Fair       Carrying       Fair
                                               Value        Value         Value       Value
                                         ----------------------------------------------------
<S>                                        <C>          <C>          <C>          <C>
Financial Assets:
Cash & cash equivalents                      $  14,615    $ 14,615     $  12,594    $ 12,594
Investment securities                           30,418      31,121        33,421      33,491
Mortgage-backed and related securities          49,875      49,920        53,212      53,067
Loans held for sale                             29,242      29,242        12,082      12,082
Loans receivable, net                          382,690     385,138       340,484     343,404
Accrued interest receivable                      4,436       4,436         4,777       4,777
Life Insurance Policies                          7,982       7,982         7,581       7,581
Financial Liabilities:
Deposits                                       381,924     385,529       312,541     309,330
Borrowings                                      98,000     106,683       113,500     115,134
</TABLE>


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

In June 2001,  the Financial  Accounting  Standards  Board (FASB) voted to issue
Financial  Accounting  Standards  Statement No. 141,  Business  Combinations and
Statement No. 142, Goodwill and Other Intangible Assets.  Statement 141 requires
that the purchase  method of  accounting  be used for all business  combinations
initiated after June 30, 2001. Statement 142 changes the accounting for goodwill
from an amortization method to an impairment-only  approach.  Thus, amortization
of goodwill,  including  goodwill recorded in past business  combinations,  will
cease upon  adoption of the  Statement.  The Company  must adopt  Statement  142
effective  for the  fiscal  year  beginning  October 1,  2002.  Amortization  of
goodwill for the years ended September 30, 2002, 2001 and 2000 was $238, $91 and
$91, respectively.

Impairment  is the  condition  that exists when the carrying  amount of goodwill
exceeds its implied fair value.  In the event of impairment,  an impairment loss
would be recognized  in an amount equal to that excess.  SFAS No. 142 requires a
two step impairment test to identify potential  goodwill  impairment and measure
the  amount  of the  goodwill  impairment  loss to be  recognized.  The two step
impairment test is summarized as follows:

1.       Compare the fair value of the reporting  unit with its carrying  amount
         including  goodwill.  If the fair value of a reporting unit exceeds its
         carrying  amount,  goodwill of the  reporting  unit is  considered  not
         impaired and no second step is required.

2.       To measure the amount of  impairment  loss,  compare  the implied  fair
         value of the reporting  unit  goodwill with the carrying  amount of the
         goodwill.  The impairment loss shall equal the excess of carrying value
         over fair value.

Goodwill  was  tested  for  impairment  on  October  1, 2002 and its fair  value
exceeded  the carrying  value.  See also,  Note 2 for a  discussion  of recently
issued SFAS 147.

                                       39

<PAGE>

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

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

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


                        STATEMENT OF FINANCIAL CONDITION

                                                            September 30,
                                                       ---------------------
                                                          2002          2001
                                                       -------       -------
ASSETS
   Cash and cash equivalents                           $ 1,499       $ 2,188
   Investment in subsidiaries                           44,303        39,714
   Loan to Bank ESOP                                       549           909
   Other assets                                            116            81
                                                       -------       -------
        Total assets                                   $46,467       $42,892
                                                       =======       =======

LIABILITIES AND STOCKHOLDERS' EQUITY
   Other liabilities                                   $    37       $    42
   Stockholders' equity                                 46,430        42,850
                                                       -------       -------
        Total liabilities & stockholders' equity       $46,467       $42,892
                                                       =======       =======



STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                          Years Ended September 30,
                                                                         2002       2001       2000
                                                                       -------    -------    -------
<S>                                                                  <C>        <C>        <C>
Income:
Dividends from Bank Subsidiary                                         $ 2,000    $ 3,000    $ 6,000
Interest From:
      Bank's ESOP Plan                                                      37        105        142
      Investments                                                           17         69        133
                                                                       -------    -------    -------

                                                                         2,054      3,174      6,275
Expense:
      Non-Interest Expense                                                 473        457        400
                                                                       -------    -------    -------
Income before income taxes and equity in undistributed
  net income of subsidiaries                                             1,581      2,717      5,875
Income tax benefit                                                        (140)      (114)       (47)
                                                                       -------    -------    -------

                                                                         1,721      2,831      5,922
Equity in undistributed net income of subsidiaries                       4,311        902         --
Subsidiaries dividends received in excess of subsidiaries net income        --         --     (2,418)
                                                                       -------    -------    -------
Net income                                                             $ 6,032    $ 3,733    $ 3,504
                                                                       =======    =======    =======
</TABLE>

                                       40

<PAGE>

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

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

                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                Years Ended September 30,
                                                                2002       2001       2000
                                                              -------    -------    -------
<S>                                                         <C>        <C>        <C>
Cash flows from operating activities:
    Net Income                                                $ 6,032    $ 3,733    $ 3,504
    Adjustments:
         Equity in undistributed net income of subsidiaries    (4,311)      (902)        --
         Subsidiaries dividends received in excess
            of subsidiaries net income                             --         --      2,418
         (Increase) decrease in other assets                       35        (69)        55
         Increase (decrease)in other liabilities                   (5)       (31)        22
         Other                                                    187        296         75
                                                              -------    -------    -------
Net cash provided by operations                                 1,938      3,027      6,074
                                                              -------    -------    -------

Cash flows from investing activities:
    Proceeds from maturities of investments                        --         --      1,570
                                                              -------    -------    -------
Net cash provided  by investing activities                         --         --      1,570
                                                              -------    -------    -------

Cash flows from financing activities:
    Payments received on ESOP bank loan                           360        360        360
    Purchases of treasury stock                                (1,496)    (2,488)    (4,947)
    Proceeds from exercise of stock options                       682        440         23
    Payments of cash dividends                                 (2,173)    (1,303)    (1,206)
                                                              -------    -------    -------
Net cash used in financing activities                          (2,627)    (2,991)    (5,770)
                                                              -------    -------    -------

Increase (decrease) in cash and cash equivalents                 (699)        36      1,874
Cash and cash equivalents:
    Beginning of year                                           2,188      2,152        278
                                                              -------    -------    -------
    End of year                                               $ 1,499    $ 2,188    $ 2,152
                                                              =======    =======    =======
</TABLE>


(19)     Business Segments

The  Corporation's  operating  segments are business units that offer  different
products and services that are marketed  through  different  channels.  Firstate
Services,  the Agency and FSF Financial  Corporation (the "holding company") did
not meet the  quantitative  thresholds for determining  reportable  segments and
therefore are included in the "other"  category.  Management  has identified the
Bank's  activity  and HMC  activity as  aggregated  components  of a  reportable
business segment.

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

Due to the integration of HMC lending  activity into the Bank during the current
year (the two  components  have similar  qualitative  economic  characteristics)
results of prior periods have been reclassified to allow for comparability.

                                       41
<PAGE>

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

 (19)    Business Segments- Continued (in thousands)

<TABLE>
<CAPTION>
                                                                                     Consolidated
                                                   Banking     Other    Eliminations    Total
                                                  -----------------------------------------------
<S>                                             <C>        <C>         <C>         <C>
As of and for the year ended September 30, 2002
   Interest income from external sources          $ 35,157   $     17          --    $ 35,174
   Non-interest income from external sources         8,219        756          --       8,975
   Inter-segment interest income                      --           37         (37)         --
   Interest expense                                 17,248         --          --      17,248
   Provision for loan loss                             811         --          --         811
   Depreciation and Amortization                     1,139         36          --       1,175
   Other non-interest expense                       13,934      1,060         (38)     14,956
   Income tax expense (benefit)                      4,001        (74)         --       3,927
   Net Income (loss)                                 6,244      1,788      (2,000)      6,032
   Total Assets                                    530,666     41,479     (39,985)    532,160


As of and for the year ended September 30, 2001
   Interest income from external sources          $ 35,242   $     68          --    $ 35,310
   Non-interest income from external sources         5,889        710          --       6,599
   Inter-segment interest income                        --        174        (106)         68
   Interest expense                                 21,900         --          --      21,900
   Provision for loan loss                           1,077         --          --       1,077
   Depreciation and Amortization                       734         43          --         777
   Other non-interest expense                       11,118      1,026        (106)     12,038
   Income tax expense (benefit)                      2,447        (63)         --       2,384
   Net Income (loss)                                 3,854      2,879      (3,000)      3,733
   Total Assets                                    471,467     39,676     (37,512)    473,631


As of and for the year ended September 30, 2000
   Interest income from external sources          $ 32,745   $    132          --    $ 32,877
   Non-interest income from external sources         4,146        982          --       5,128
   Inter-segment interest income                        --        143        (143)         --
   Interest expense                                 19,753         --          --      19,753
   Provision for loan loss                             216         --          --         216
   Depreciation and Amortization                       676         45          --         721
   Other non-interest expense                       10,437        964        (143)     11,258
   Income tax expense (benefit)                      2,257         (7)         --       2,250
   Net Income (loss)                                 3,551      5,953      (6,000)      3,504
   Total Assets                                    464,465     38,180     (36,130)    466,515

</TABLE>


                                       42

<PAGE>

                  Selected Quarterly Financial Data (Unaudited)
                  For the Three Years Ended September 30, 2002
<TABLE>
<CAPTION>
                                     First    Second     Third    Fourth
                                    Quarter   Quarter   Quarter   Quarter      Year
                                    -----------------------------------------------
<S>                                <C>       <C>       <C>       <C>       <C>

Fiscal 2002
Interest income                     $ 8,825   $ 8,712   $ 8,677   $ 8,960   $35,174
Interest expense                      4,873     4,237     4,089     4,049    17,248
                                    -----------------------------------------------
Net Interest Income                   3,952     4,475     4,588     4,911    17,926
Provision for loan losses               150       275       203       183       811
Gain on sale of assets                1,348       862       887     1,176     4,273
Net income                          $ 1,530   $ 1,375   $ 1,426   $ 1,701   $ 6,032
Basic earnings per share               0.70      0.64      0.65      0.77      2.77
Diluted earnings per share             0.67      0.61      0.61      0.74      2.63
Cash dividends declared per share   $ 0.250   $ 0.250   $ 0.250   $ 0.250   $  1.00
Market range:
     High bid (1)                   $ 18.40   $ 19.78   $ 23.21   $ 22.21   $ 23.21
     Low bid (1)                    $ 15.77   $ 16.86   $ 18.94   $ 18.65   $ 15.77

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

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

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

                                       43