<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY

The  selected  consolidated  financial  and other data of the  Company set forth
below are  derived in part from,  and should be read in  conjunction  with,  the
Consolidated  Financial  Statements of the Company and Notes  thereto  presented
elsewhere in this Annual Report.

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                          At December 31,
                                                   -------------------------------------------------------------
                                                       2002        2001        2000         1999          1998
                                                   ----------  ----------   ----------   ----------   ----------
                                                                          (In thousands)
<S>                                                 <C>         <C>         <C>           <C>          <C>
SELECTED FINANCIAL CONDITION DATA:

Total assets                                       $1,525,612  $1,470,866   $1,327,782   $1,253,653   $1,139,123

Investment securities available for sale(1)           112,888      63,258       63,421       53,203       49,137

Investment securities held to maturity(1)               2,524         554        2,304        2,304        7,302

Mortgage-backed securities available for sale(1)      114,515      94,922       15,372       15,540       21,029

Mortgage-backed securities held to maturity(1)         25,429      40,822       55,283       13,941       22,913

Loans held for sale                                    31,614      24,612       12,816       16,174       17,008

Loans, net                                          1,071,356   1,055,798    1,036,435    1,032,594      943,662

Allowance for loan losses                              12,656      12,328       11,381       10,654        8,500

Deposit accounts                                      960,278     884,516      849,647      770,049      707,144

Borrowed funds                                        426,560     449,000      344,334      387,555      337,500

Stockholders' equity                                   92,973      93,388       89,913       85,704       81,794
</TABLE>



<TABLE>
<CAPTION>
                                                                  For The Year Ended December 31,
                                                   -------------------------------------------------------------
                                                       2002        2001        2000         1999          1998
                                                   ----------  ----------   ----------   ----------   ----------
                                                                          (In thousands)
<S>                                                   <C>         <C>          <C>          <C>          <C>
SELECTED OPERATING DATA:

Interest income                                       $85,603     $94,896      $91,834      $80,736      $74,775

Interest expense                                       48,089      57,562       55,626       47,208       42,557

Net interest income                                    37,514      37,334       36,208       33,528       32,218

Provision for loan losses                               1,350         820        1,000        1,626        1,642

Net interest income after provision for loan losses    36,164      36,514       35,208       31,902       30,576

Total non-interest income                              14,891      16,599       14,354        6,911        6,128

Total non-interest expense                             47,280      38,248       34,508       25,300       23,932

Income before income taxes                              3,775      14,865       15,054       13,513       12,772

Income tax expense                                      1,387       5,209        5,344        4,945        5,151

Net income                                            $ 2,388     $ 9,656      $ 9,710      $ 8,568      $ 7,621
</TABLE>

                                      -3-

<PAGE>

SELECTED FINANCIAL RATIOS AND OTHER DATA

<TABLE>
<CAPTION>
                                                              At Or For The Year Ended December 31,
                                                   -------------------------------------------------------------
                                                       2002        2001        2000         1999          1998
                                                   ----------  ----------   ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>           <C>          <C>

PERFORMANCE RATIOS:(2)

Return on average assets                                 0.16%       0.69%        0.75%        0.72%        0.72%

Return on average stockholders' equity                   2.44       10.32        10.72         10.00        9.02

Dividend payout ratio                                  116.67       26.61        24.64         25.84       24.67

Average stockholders' equity to average assets           6.54        6.65         6.99          7.21        7.99

Stockholders' equity to total assets at end of period    6.09        6.35         6.77          6.84        7.18

Average interest rate spread(3)                          2.44        2.56         2.75          2.59        2.69

Net interest margin(4)                                   2.71        2.86         3.02          2.97        3.17

Average interest-earning assets to average
interest-bearing liabilities                           107.6       106.9        106.0         109.0       111.6

ASSET QUALITY RATIOS:(2)

Non-performing loans as a percent of loans(5,6)          0.49        0.11         0.09          0.07        0.09

Non-performing assets as a percent of total assets(6)    0.43        0.08         0.08          0.09        0.08

Allowance for loan losses as a percent of loans(5)       1.13        1.13         1.07          1.01        0.88

Allowance for loan losses as a percent of
non-performing loans(6)                                230.23    1,064.59     1,190.48      1,428.15    1,050.68

Number of full-service banking facilities                  11          11           11            10          10

Number of shares outstanding at end of period
(in thousands)                                          4,425       4,451        4,648         4,973       5,112

PER SHARE DATA:

Basic earnings per common share                         $0.54       $2.18        $2.07         $1.78       $1.50

Diluted earnings per common share                        0.51        2.05         2.01          1.71        1.43

Dividends per common share                               0.63        0.58         0.51          0.46        0.37

Book value per common share at end of period            21.17       21.39        19.82         17.88       16.84

Market value per common share at end of period          26.70       24.10        20.88         15.88       17.63
</TABLE>

(1) The balance does not include FHLB-Boston stock.

(2) Asset Quality and Capital Ratios are end of period.

(3) The average interest rate spread represents the difference between the
    weighted average yield on average interest-earning assets and the weighted
    average cost of average interest-bearing liabilities.

(4) The net interest margin represents net interest income as a percent of
    average interest-earning assets.

(5) Loans includes loans, net, and loans held for sale, excluding the allowance
    for loan losses.

(6) Non-performing assets consist of non-performing loans, real estate owned
    ("REO"), and other repossessed assets.
    Non-performing loans consist of all loans 90 days or more past due and
    other loans which have been identified by the Company as presenting
    uncertainty with respect to the collectibility of interest or principal.
    It is the Company's policy to cease accruing interest on all such loans.

                                      -4-



<PAGE>

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

     The following discussion may contain certain forward-looking statements,
which are based on current management expectations. Generally, verbs in the
future tense and the words, "believe", "expect", "anticipate", "intends",
"opinion", "potential", and similar expressions identify forward-looking
statements. Examples of this forward-looking information can be found in, but
are not limited to, the expected effects of accounting pronouncements applicable
to the Company's operations, the allowance for losses discussion, litigation,
subsequent events and any quantitative and qualitative disclosure about market
risk. The actual results of BostonFed Bancorp, Inc., (the "Company") could
differ materially from those management expectations. Factors that could cause
future results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal, state and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors and the effects of war or terrorist
activities affecting the Company's operations, markets, products, services,
prices and litigation. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.

     Except as may be required by applicable law and regulation, the Company
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions, which may be made to any forward-looking
statements, to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.

IMPACT OF INFLATION AND CHANGING PRICES

     The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected throughout the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.

CRITICAL ACCOUNTING POLICIES

     A summary of the Company's significant accounting policies is included in
footnote 1 of the Company's financial statements, which form a part of this
annual report. Various elements of accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. The Company's policies with respect to the methodologies
used to determine the allowance for loan losses, the valuation of originated
mortgage servicing rights ("OMSRs") and asset impairment judgments, including
the value of goodwill, are the Company's most critical accounting policies. They
are important to the presentation of our financial condition and results of
operations because they involve a higher degree of complexity and require
management to make difficult and subjective judgments, which often require
assumptions or estimates about highly uncertain matters. The use of different
judgments, assumptions and estimates could result in material differences in
results of operation or financial condition.

     The following is a description of the critical accounting policies and an
explanation of the methods and assumptions underlying their application. These
critical policies and their application are reviewed on a quarterly basis with
the Audit and Compliance Committee of the Board of Directors.

     Allowance for Loan Losses:  The Company's allowance for loan losses is
established and maintained through a provision for loan losses based on the
Company's evaluation of the risks inherent in the loan portfolio. The Company
evaluates the adequacy of its allowance on a quarterly basis. The allowance is
comprised of both specific valuation allowances and general valuation
allowances.

                                        5
<PAGE>

     Specific valuation allowances are established in connection with individual
loan reviews and the asset classification process including the procedures for
impairment testing under SFAS No. 114 Accounting by Creditors for Impairment of
a Loan, an Amendment of FASB Statements No. 5 and 15 and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures, an Amendment of FASB Statement No. 114. Such evaluation, which
includes a review of loans on which full collectibility is not reasonably
assured, considers the estimated fair value of the underlying collateral, if
any, current and anticipated economic and regulatory conditions, current and
historical loss experience of similar loans and other factors that determine
risk exposure to arrive at an adequate loan loss allowance. Pursuant to the
Company's policy, loan losses must be charged-off in the period the loans, or
portions thereof, are deemed uncollectable. The determination of the loans on
which full collectibility is not reasonably assured, the estimates of the fair
value of the underlying collateral and the assessments of economic and other
conditions are subject to assumptions and judgments by management. Specific
valuation allowance could differ materially as a result of changes in these
assumptions and judgments.

     General valuation allowances represent loss allowances that have been
established to recognize the inherent risks associated with the Company's
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. The determination of the adequacy of the
valuation allowance is a multidimensional process, which takes into
consideration a variety of factors. The Company segments the loan portfolio into
like categories by composition and size and performs a variety of analyses
against each category. These include, but are not limited to, historical loss
experience, risk ratings assigned to individual loans, delinquency levels and
trends. In addition, the Company evaluates and considers the impact that
existing and projected economic and market conditions may have on the portfolio
as well as known and inherent risks in the portfolio. Finally, the Company
evaluates and considers the allowance ratios and coverage percentages of both
peer group and regulatory agency data. After evaluating these variables, the
Company determines appropriate allowance coverage percentages for each of the
portfolio segments and the appropriate level of the allowance for loan losses.

     These evaluations are inherently subjective because, even though they are
based on objective data, it is management's interpretation of that data that
determines the amount of the appropriate allowance. Therefore, from time to
time, management reviews the actual performance and charge-off history of the
portfolio and compares that to previously determined allowance coverage
percentages. In this manner, management evaluates the impact the previously
mentioned variables may have had on the portfolio to determine which changes, if
any, should be made to the assumptions and analyses. Recent analysis has
indicated that projections of estimated losses inherent in the portfolio has
approximated actual charge-off experience during the current economic
environment.

     As indicated above, actual results could differ from estimates as a result
of changes in economic or market conditions and other factors. Changes in
estimates could result in a material change in the allowance. While the Company
believes that the allowance for loan losses has been established and maintained
at levels adequate to reflect the risks inherent in the loan portfolio, future
increases may be necessary if economic or market conditions and other factors
differ substantially from the conditions that existed at the time of the initial
determinations.

     Valuation of OMSRs:  OMSRs are carried at cost, and impairment, if any, is
recognized through a charge to the loan servicing income and/or the OMSR
valuation allowance. Impairment exists if the carrying value of OMSRs exceeds
the estimated fair value. The Company stratifies OMSRs by underlying loan type,
primarily fixed and adjustable, and further stratifies fixed rate loans by
interest rates. Impairment allowances are established when necessary and then
adjusted in subsequent periods to reflect changes in the measurement of
impairment. The estimated fair value of each OMSR stratum is determined through
analyses of future cash flows, incorporating numerous assumptions including
servicing income, servicing costs, market discount rates, prepayment speeds and
other market driven data.

     The fair value of OMSRs is highly sensitive to changes in assumptions.
Changes in prepayment speed assumptions have the most significant impact on the
fair value of OMSRs. Generally, as interest rates decline, prepayments
accelerate due to increased refinance activity, which results in a decrease in
the fair value of OMSRs. As interest rates rise, prepayments slow down, which
results in an increase in the fair value of OMSRs. All assumptions are reviewed
for reasonableness on a quarterly basis and adjusted as necessary to reflect
current and anticipated market conditions. Thus, any measurement of the fair
value of OMSRs is limited by the conditions existing and the assumptions
utilized as of a particular point in time, and those assumptions may not be
appropriate if they are applied at a different point in time.

                                        6
<PAGE>

     Goodwill Impairment Evaluation:  On January 1, 2002, the Company adopted
SFAS 142, Goodwill and Other Intangible Assets ("SFAS 142"). This statement
addresses the method of identifying goodwill and other intangible assets
acquired in a business combination and eliminated amortization of further
goodwill. The statement requires an annual (or more often in certain
circumstances) evaluation of goodwill balances for impairment. As a result of
the Company's adoption of SFAS 142, the Company periodically assesses the
carrying value of goodwill to determine whether there is any impairment. Given
the continued downturn in the manufactured housing industry, budgeted sales
targets were not met and budget forecasts were revised. The negative trends
caused the Company to perform a discounted cash flow analysis, utilizing lowered
expectations, and determined that an impairment loss was evident. During the
third quarter of 2002, the Company recorded a $7.0 million write-down of
goodwill associated with the purchase of Forward Financial, reducing the
goodwill associated with that transaction to $7.8 million. At December 31, 2002
and 2001, total goodwill was $10.8 million and $17.8 million, respectively.

OTHER RISK FACTORS

     In addition to all of the information in this Report, the following risk
factors should be considered. Many of these risk factors are discussed in
greater detail throughout this annual report.

     Competition:  The Company operates in a highly competitive market. The
Company competes on the basis of providing a higher level of service rather than
the lowest price in the markets in which it conducts its business. Both loans
and savings accounts are generally priced at mid-market. From time to time, the
Company's competitors seek to compete aggressively on the basis of pricing
factors and the Company may lose market share to the extent it is unwilling to
approximate its competitors' aggressive pricing. To the extent that the Company
seeks to minimize market share erosion through pricing alternatives, it may
experience lower interest margins.

     Interest rates:  Interest rates have a significant impact on the Company's
operations. The Company attempts to minimize the impact through various means
and monitoring through the use of modeling techniques. The repricing
characteristics of its loans do not necessarily match those of its deposit or
borrowed money liabilities. Changes in interest rates can also affect the number
of loans the Company originates, as well as the value of its loans and other
interest-earning assets and its ability to realize gains on the sale of those
assets. Prevailing interest rates also affect the extent to which borrowers
prepay loans owned by the Company. When interest rates increase, borrowers are
less likely to prepay their loans, and when interest rates decrease, borrowers
are more likely to prepay loans. The Company may then be forced to invest the
funds generated by those prepayments at less favorable interest rates.
Similarly, prepayments on mortgage-backed securities can cause the value of
those securities to fall. In addition, an increase in interest rates could lower
the ability of the Company's borrowers who currently have adjustable-rate loans,
to maintain their loans in a current status as their payments increase upon
repricing. Such an event could cause an increase in non-performing loans and
loan losses.

     Increases in interest rates might cause depositors to shift funds from
accounts that have comparatively lower cost (such as regular savings accounts)
to accounts with a higher cost (such as certificates of deposit). If the cost of
deposits increased at a rate greater than the yield on interest-earning assets
increases, the Company's interest-rate spread would decline.

     Market risk also arises as the Company originates and accumulates fixed
rate mortgage loans prior to their sale or securitization. As applications are
approved, a commitment is made to lend at a specified interest rate. Should
rates rise, either prior to closing or after closing but prior to sale or
securitization, the price at which the loan will be sold or securitized will
decline. Hedging strategies are implemented to mitigate this risk.

     Credit risk:  The Company assumes credit risk in the loan and investment
securities portfolios and in the recourse it has or may provide in conjunction
with loan sales and securitization. The majority of its loan portfolio consists
of adjustable-rate loans secured by one- to four-family residences and to a
lesser extent, commercial real estate loans, construction loans, equity lines of
credit, and business loans. Management believes that the allowance for loan
losses is adequate. However, such determination is susceptible to the effect of
future unanticipated changes in general economic and market conditions and other
factors that may affect the financial circumstances of borrowers and/or
residential/commercial real estate values or business loan environment within
the Company's lending areas.

     Risks to gain on sale of loans and originated mortgage servicing rights:  A
substantial portion of the Company's non-interest income is generated by gain on
sale of loans. The Company currently sells the vast

                                        7
<PAGE>

majority of longer-term fixed-rate loans and a portion of the adjustable-rate
loans it originates, into the secondary market. The Company generally retains
the servicing rights on mortgage loans sold. Gain on sale of loans and OMSRs can
be severely impacted by fluctuations in interest rates and other economic
conditions. When interest rates fall, gain on sale of loans generally increase,
but the value of OMSRs may be impaired. When interest rates increase, the
opposite may occur.

     Additionally, the Company sells loans originated on manufactured housing,
recreational vehicles and boats to various client lenders. The volume of gain on
sale of manufactured housing loans is dependent on consumer demand, the
Company's ability to originate, underwriting standards of the client lenders and
their desire to add to their portfolio. The vast majority of manufactured
housing loans are sold servicing released and without recourse. Soon after the
time the Company acquired its manufactured housing loan origination company,
Forward Financial, the manufactured housing industry became mired in a severe
recession and has experienced a glut of repossessions. The Company's gain on
sale of manufactured housing loans in 2002 was substantially less than the gain
earned in the prior years. The Company cannot estimate the duration of the
current manufactured housing recession or if prior lending volumes will be
achieved when the recession ends.

     Regulation:  The Company's operations are subject to extensive regulation
by several federal, state and local authorities and are subject to various laws
and judicial and administrative decisions imposing requirements and restrictions
on its operations. Policies adopted by these entities can significantly affect
the Company's business operations. In addition, certain of these authorities
periodically conduct examinations of the Company and may impose various
requirements or sanctions.

     Legislation:  Proposals to change the laws governing financial institutions
are frequently raised in federal, state and local legislatures and if passed
could lead to new regulatory requirements. The implementation of regulations
required under the Sarbanes-Oxley Act and other changes in applicable laws or
policies could materially affect the Company's businesses, and the likelihood of
any major changes in the future and their effects are impossible to determine.
Moreover, it is impossible to predict the ultimate form any proposed legislation
or regulation might take or how it might affect the Company. Similarly, changes
in applicable accounting principles, policies or guidelines could impact the
manner in which the Company reports the results of its operations.

     Stockholder dividends:  The Company is a holding company and substantially
all of its operations are conducted through its subsidiaries. Therefore, the
Company's ability to pay dividends is dependent upon the earnings of its
subsidiaries and their ability to pay dividends or make other payments to the
Company. Certain laws and regulatory requirements limit the ability of the
Company's subsidiaries to pay dividends or make other payments to it.

     Business continuity:  The Company has business continuity and disaster
recovery plans in place. However, events, including terrorist or military
actions and resulting political and social turmoil, could arise that would cause
unforeseen damage to the Company's physical facilities or could cause delays or
disruptions to operational functions, including information processing and
financial market settlement functions. Should these events affect the Company,
its customers, vendors or counterparties with which it conducts business, the
Company's results of operations could be negatively affected.

GENERAL

     The Company, headquartered in Burlington, Massachusetts, was organized in
1995 under Delaware law as the holding company for Boston Federal Savings Bank,
("BFS") in connection with the conversion of BFS from a mutual to a stock form
of ownership. The Company later acquired Broadway National Bank, ("BNB") a
nationally-chartered commercial bank, as its wholly-owned subsidiary. In
December 1999, the Company acquired Diversified Ventures, Inc., d/b/a Forward
Financial Company ("Forward Financial") and Ellsmere Insurance Agency, Inc.
("Ellsmere"). Forward Financial operates as a subsidiary of BFS and Ellsmere has
limited operations as a subsidiary of BNB.

     The Company's business has been conducted primarily through its
wholly-owned subsidiaries of BFS and BNB (collectively, the "Banks"). BFS
operates its administrative/bank branch office located in Burlington,
Massachusetts and its eight other bank branch offices located in Arlington,
Bedford, Billerica, Boston, Lexington, Peabody, Wellesley and Woburn, all of
which are located in the greater Boston metropolitan area. BFS' subsidiary,
Forward Financial, maintains its headquarters in Northborough, Massachusetts and
operates in approximately one-half the states across the U.S. BNB operates
banking offices in Chelsea and Revere, both of which are also in the greater
Boston metropolitan area. Through its

                                        8
<PAGE>

subsidiaries, the Company attracts retail deposits from the general public and
invests those deposits and other borrowed funds in loans, mortgage-backed
securities, U.S. Government and federal agency securities and other securities.
The Company originates mortgage loans for its investment portfolio and for sale
and generally retains the servicing rights of loans it sells. Additionally, the
Company originates chattel mortgage loans, substantially all of which are sold
in the secondary market, servicing released. Loan sales are made from loans held
in the Company's portfolio designated as being held for sale or originated for
sale during the period. The Company's revenues are derived principally from
interest on its loans, and to a lesser extent, interest and dividends on its
investment and mortgage-backed securities, gains on sale of loans, fees and loan
servicing income. The Company's primary sources of funds are deposits, principal
and interest payments on loans, investments, mortgage-backed securities, Federal
Home Loan Bank of Boston ("FHLB") advances and proceeds from the sale of loans.

     The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits, borrowings and corporation obligated mandatorily redeemable capital
securities distributions ("trust preferred securities") expense. Results of
operations are also affected by the Company's provision for loan losses,
investment activities, gains or losses on sale of loans, amortization of
originated mortgage servicing rights, loan servicing fees and other fees. The
Company's non-interest expense principally consists of compensation and
benefits, occupancy and equipment expense, advertising, data processing expense
and other expenses. Results of operations of the Company are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.

     The Company is a bank holding company subject to the regulations of the
Federal Reserve Bank, BFS is regulated by the OTS and BNB is regulated by the
Office of the Comptroller of the Currency ("OCC").

RESULTS OF OPERATIONS

  GENERAL

     Net income for the year ended December 31, 2002, was $2.4 million, or $.54
basic earnings per share and $.51 diluted earnings per share, compared to $9.7
million, or $2.18 basic earnings per share and $2.05 diluted earnings per share
for the comparable period in 2001. Net income for the current year was severely
impacted by the Company's $7.0 million goodwill impairment related to the
acquisition of Forward Financial, $5.1 million in OMSR impairment resulting from
rapid prepayments of loans serviced for others and $1.3 million for the
settlement of two lawsuits. Net income for the year ended December 31, 2000, was
$9.7 million, or $2.07 basic earnings per share and $2.01 diluted earnings per
share. The return on average stockholder's equity was 2.44% during the year
ended December 31, 2002, compared to 10.32% during the year ended December 31,
2001, and 10.72% for the year ended December 31, 2000. Return on average assets
was .16% for the year ended December 31, 2002, compared to 0.69% for the year
ended December 31, 2001, and 0.75% for the year ended December 31, 2000.

     Earnings were impacted in the current year by a decline in net interest
margin, which was 2.71% for the year ended December 31, 2002, compared to 2.86%
for the prior year and 3.02% for the year ended December 31, 2000. Federal
Reserve induced decreases in short-term interest rates throughout 2001 and 2002
caused yields to decline rapidly on adjustable-rate loan products and
investments and accelerated refinancings of higher yielding loans. While
interest rates paid on deposits and borrowings were also lowered during 2002 and
2001, management was unable to reduce interest rates on core deposits in lock-
step with overall market interest rates due to the generally low interest rates
already being paid on core deposits.

     However, declining interest rates during 2002 and 2001 provided the Company
with an opportunity to increase volumes of loans sold in the secondary market.
Gain on the sale of loans was $12.7 million for the year ended December 31,
2002, and $10.6 million for the year ended December 31, 2001. The gain on sale
of loans was $9.0 million in the year 2000.

     The results of operations for the year ended December 31, 2002, included
the benefit derived from the adoption of SFAS No. 142, which eliminated goodwill
amortization. The Company was incurring approximately $1.4 million in goodwill
amortization prior to the effective date of SFAS No. 142. The amortization of
goodwill in the year ended December 31, 2001, reduced basic and diluted earnings
per share by $.21 and $.20, respectively. For the year ended December 31, 2000,
basic and diluted earnings per

                                        9
<PAGE>

share were reduced by $.19 each. The goodwill impairment charge in the year
ended December 31, 2002, reduced basic and diluted earnings by approximately
$1.03 and $.97, respectively.

  INTEREST INCOME

     Total interest income for the year ended December 31, 2002, decreased by
$9.3 million to $85.6 million compared to $94.9 million for the year ended
December 31, 2001. The decline in interest earned on loans, net, caused by lower
yields, was the major factor.

     Total interest income for the year ended December 31, 2001, increased by
$3.1 million to $94.9 million compared to $91.8 million for the year ended
December 31, 2000. An increase in interest earned on mortgage-backed securities
was the major contributor to the increase in interest income. The increase in
interest income in 2001 was attributable to higher average balances of interest
earning assets, partially offset by a decline in yields. The increased balances
were primarily increases in the average balance of mortgage-backed securities
and the average balance of loans.

     Interest income on loans, net was $73.4 million for the year ended December
31, 2002, compared to $81.9 million for the prior year. Reinvestment and
repricing at lower interest rates reduced the average yield on loans, net, from
7.54% for the year ended December 31, 2001, to an average yield of 6.62% for the
current year. The increase in average balances was not sufficient to offset the
decline in yields. Average loan balances increased from $1.086 billion for 2001
to $1.110 billion for 2002. The increased average loans, net, balances generated
an additional $1.8 million of interest earned while lower yields reduced
interest earned on loans, net, by $10.3 million. The Company slowed the decline
in yields by continuing to increase volume of construction and land and
commercial real estate.

     Interest income on mortgage-backed securities increased by $539,000 for the
year ended December 31, 2002, due to an increase in average balances compared to
the prior year. Average mortgage-backed securities balances increased by $25.2
million from an average of $116.6 million during 2001 to an average of $141.8
million during 2002. The major reason for the increase in the average balance
was due to the purchase of collateralized mortgage obligations, (CMOs). The
yields on mortgage-backed securities declined by 75 basis points from an average
yield of 6.32% in 2001 to 5.57% in 2002. Higher average balances generated an
increase in interest earned on mortgage-backed securities of $1.6 million, while
lower yields reduced interest earned on such securities by $1.1 million in 2002
when compared to the prior year.

     Interest income on mortgage-backed securities increased by $2.9 million for
the year ended December 31, 2001 due to an increase in average balances compared
to the year ended December 31, 2000. Average mortgage-backed securities balances
increased by $48.9 million from an average of $67.7 million during 2000 to an
average of $116.6 million during 2001 also due to the purchase of CMOs.

     Interest income on investment securities and FHLB overnight and federal
funds sold decreased by $1.3 million to $4.3 million for the year ended December
31, 2002, compared to $5.6 million for the year ended December 31, 2001. The
primary reason for the decrease is due to a lower average yield of 3.23% for the
year ended December 31, 2002, compared to an average yield of 5.52% for the year
ended December 31, 2001. Investment securities balances averaged $132.6 million
during the year ended December 31, 2002, compared to average balances of $101.7
million for the year ended December 31, 2001.

     Interest income on investment securities and FHLB overnight and federal
funds sold decreased by $864,000 for the year ended December 31, 2001, compared
to $6.5 million for the year ended December 31, 2000. The primary reason for the
decrease was due to a lower average yield of 5.52% for the year ended December
31, 2001, compared to an average yield of 6.77% for the year ended December 31,
2000.

ANALYSIS OF NET INTEREST INCOME

     Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends primarily upon the volume of interest-earning assets and
interest-bearing liabilities and the corresponding interest rates earned or
paid. Net interest income can be significantly impacted by changes in interest
rates and market yield curves. See "Market Risk and Management of Interest Rate
Risk" for further discussion of the potential impact of changes in interest
rates on results of operations.

                                        10
<PAGE>

     The following table sets forth certain information relating to the Company
for the years ended December 31, 2002, 2001 and 2000. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. The average balance data is derived from daily balances. The
yields and costs include fees, premiums and discounts, which are considered
adjustments to yields.

                                        11
<PAGE>
<Table>
<Caption>
                                                                                FOR THE YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------------------------------------
                                     AT DECEMBER 31, 2002                  2002                                 2001
                                     --------------------   ----------------------------------   ----------------------------------
                                                   YIELD/    AVERAGE                 AVERAGE      AVERAGE                 AVERAGE
                                      BALANCE       COST     BALANCE     INTEREST   YIELD/COST    BALANCE     INTEREST   YIELD/COST
                                     ----------    ------   ----------   --------   ----------   ----------   --------   ----------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                  <C>           <C>      <C>          <C>        <C>          <C>          <C>        <C>
ASSETS:
Interest-earning assets:
  Investment securities(1).........  $  166,041     3.00%   $  132,569   $ 4,281       3.23%     $  101,675   $ 5,617       5.52%
  Loan, net and loans held for
    sale(2)........................   1,102,970     6.32%    1,109,799    73,418       6.62%      1,085,798    81,914       7.54%
  Mortgage-backed securities(3)....     139,944     5.52%      141,796     7,904       5.57%        116,557     7,365       6.32%
                                     ----------             ----------   -------                 ----------   -------
    Total interest-earning
      assets.......................   1,408,955     5.85%    1,384,164    85,603       6.18%      1,304,030    94,896       7.28%
                                                   -----                 -------      -----                   -------      -----
  Non-interest-earning assets......     116,657                110,316                              103,625
                                     ----------             ----------                           ----------
    Total assets...................  $1,525,612             $1,494,480                           $1,407,655
                                     ==========             ==========                           ==========
LIABILITIES AND STOCKHOLDERS'
  EQUITY:
Interest-bearing liabilities:
  Money market deposit accounts....  $   62,530     1.35%   $   60,530       946       1.56%     $   54,965     1,380       2.51%
  Savings accounts.................     218,133     1.18%      200,552     2,838       1.42%        174,651     4,104       2.35%
  NOW accounts.....................     150,342      .31%      140,470       447       0.32%        127,779       735       0.58%
  Certificate accounts.............     422,119     4.07%      409,493    18,110       4.42%        410,119    23,884       5.82%
                                     ----------             ----------   -------                 ----------   -------
    Total..........................     853,124     2.47%      811,045    22,341       2.75%        767,514    30,103       3.92%
  Borrowed funds(4)................     426,560     4.38%      443,931    22,219       5.01%        419,867    23,937       5.70%
  Corporation-obligated mandatorily
    redeemable capital
    securities.....................      32,000    11.01%       32,000     3,529      11.03%         32,000     3,522      11.01%
                                     ----------             ----------   -------                 ----------   -------
    Total interest-bearing
      liabilities..................   1,311,684     3.30%    1,286,976    48,089       3.74%      1,219,381    57,562       4.72%
                                                   -----                 -------      -----                   -------      -----
Non-interest-bearing liabilities...     120,955                109,811                               94,686
                                     ----------             ----------                           ----------
    Total liabilities..............   1,432,639              1,396,787                            1,314,067
                                     ----------             ----------                           ----------
Stockholders' equity...............      92,973                 97,693                               93,588
                                     ----------             ----------                           ----------
    Total liabilities and
      stockholders' equity.........  $1,525,612             $1,494,480                           $1,407,655
                                     ==========             ==========                           ==========
Net interest income................                   NA                 $37,514                              $37,334
                                                                         =======                              =======
Net interest rate spread(5)........                 2.55%                              2.44%                                2.56%
                                                   =====                              =====                                =====
Net interest margin(6).............                   NA                               2.71%                                2.86%
                                                                                      =====                                =====
Ratio of interest-earning assets to
  interest-bearing liabilities.....      107.42%                107.55%                              106.94%
                                     ==========             ==========                           ==========

<Caption>
                                      FOR THE YEAR ENDED DECEMBER 31,
                                     ----------------------------------
                                                    2000
                                     ----------------------------------
                                      AVERAGE                 AVERAGE
                                      BALANCE     INTEREST   YIELD/COST
                                     ----------   --------   ----------
                                           (DOLLARS IN THOUSANDS)
<S>                                  <C>          <C>        <C>
ASSETS:
Interest-earning assets:
  Investment securities(1).........  $   95,711   $ 6,481       6.77%
  Loan, net and loans held for
    sale(2)........................   1,036,224    80,960       7.81%
  Mortgage-backed securities(3)....      67,667     4,393       6.49%
                                     ----------   -------
    Total interest-earning
      assets.......................   1,199,602    91,834       7.66%
                                                  -------      -----
  Non-interest-earning assets......      95,930
                                     ----------
    Total assets...................  $1,295,532
                                     ==========
LIABILITIES AND STOCKHOLDERS'
  EQUITY:
Interest-bearing liabilities:
  Money market deposit accounts....  $   55,796     1,597       2.86%
  Savings accounts.................     160,118     4,476       2.80%
  NOW accounts.....................     119,070       899       0.76%
  Certificate accounts.............     420,031    24,753       5.89%
                                     ----------   -------
    Total..........................     755,015    31,725       4.20%
  Borrowed funds(4)................     366,450    22,764       6.21%
  Corporation-obligated mandatorily
    redeemable capital
    securities.....................      10,378     1,138      10.97%
                                     ----------   -------
    Total interest-bearing
      liabilities..................   1,131,843    55,627       4.91%
                                                  -------      -----
Non-interest-bearing liabilities...      73,111
                                     ----------
    Total liabilities..............   1,204,954
                                     ----------
Stockholders' equity...............      90,578
                                     ----------
    Total liabilities and
      stockholders' equity.........  $1,295,532
                                     ==========
Net interest income................               $36,207
                                                  =======
Net interest rate spread(5)........                             2.75%
                                                               =====
Net interest margin(6).............                             3.02%
                                                               =====
Ratio of interest-earning assets to
  interest-bearing liabilities.....      105.99%
                                     ==========
</Table>

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

(1) Includes investment securities available for sale and held to maturity,
    short-term investments, stock in FHLB-Boston and daily federal funds sold.

(2) Amount is net of deferred loan origination costs, construction loans in
    process, net unearned discount on loans purchased and allowance for loan
    losses and includes non-performing loans.

(3) Includes mortgage-backed securities available for sale and held to maturity.

(4) Interest paid on borrowed funds for the periods presented includes interest
    expense on FNMA deposits held in escrow accounts with the Company related to
    the Company's FNMA servicing, which, if such interest expense was excluded,
    would result in an average cost of borrowed funds of 4.98%, 5.69%, and 6.21%
    for the years ended December 31, 2002, 2001 and 2000, respectively.

(5) Net interest rate spread represents the difference between the weighted
    average yield on interest-earning assets and the weighted average cost of
    interest-bearing liabilities.

(6) Net interest margin represents net interest income as a percentage of
    average interest-earning assets.

                                        12
<PAGE>

RATE/VOLUME ANALYSIS

     The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by current volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.

<Table>
<Caption>
                                          YEAR ENDED DECEMBER 31, 2002     YEAR ENDED DECEMBER 31, 2001
                                                  COMPARED TO                       COMPARED TO
                                          YEAR ENDED DECEMBER 31, 2001     YEAR ENDED DECEMBER 31, 2000
                                         ------------------------------   -------------------------------
                                         INCREASE (DECREASE)              INCREASE (DECREASE)
                                               DUE TO                            DUE TO
                                         -------------------   --------   --------------------   --------
                                         VOLUME      RATE        NET       VOLUME      RATE        NET
                                         -------   ---------   --------   --------   ---------   --------
                                                                  (IN THOUSANDS)
<S>                                      <C>       <C>         <C>        <C>        <C>         <C>
Interest-earning assets:
  Investment securities................  $1,705    $ (3,041)   $(1,336)    $  404     $(1,268)   $  (864)
  Loans, net, and loans held for
     sale..............................   1,810     (10,306)    (8,496)     3,871      (2,917)       954
  Mortgage-backed securities...........   1,595      (1,056)       539      3,173        (201)     2,972
                                         ------    --------    -------     ------     -------    -------
     Total interest-earning assets.....   5,110     (14,403)    (9,293)     7,448      (4,386)     3,062
                                         ------    --------    -------     ------     -------    -------
Interest-bearing liabilities:
  Money market deposit accounts........     140        (574)      (434)       (24)       (193)      (217)
  Savings accounts.....................     609      (1,875)    (1,266)       407        (779)      (372)
  NOW accounts.........................      74        (362)      (288)        66        (230)      (164)
  Certificate accounts.................     (36)     (5,738)    (5,774)      (584)       (285)      (869)
                                         ------    --------    -------     ------     -------    -------
     Total.............................     788      (8,549)    (7,762)      (135)     (1,487)    (1,622)
Borrowed funds.........................   1,372      (3,090)    (1,718)     3,317      (2,144)     1,173
Corporation-obligated mandatorily
  redeemable capital securities........       0           7          7      2,372          12      2,384
                                         ------    --------    -------     ------     -------    -------
     Total interest-bearing
       liabilities.....................   2,159     (11,632)    (9,473)     5,554      (3,619)     1,935
                                         ------    --------    -------     ------     -------    -------
Net change in net interest income......  $2,951    $ (2,771)   $   180     $1,894     $  (767)   $ 1,127
                                         ======    ========    =======     ======     =======    =======
</Table>

  INTEREST EXPENSE

     Interest expense declined by $9.5 million, or 16.5%, for the year ended
December 31, 2002, to $48.1 million compared to $57.6 million for the year ended
December 31, 2001. The decline in interest expense for the year ended December
31, 2002 was due to reductions in interest expense on all types of savings
accounts and FHLB borrowed funds.

     Interest expense increased by $2.0 million, or 3.6%, for the year ended
December 31, 2001, to $57.6 million compared to $55.6 million for the year ended
December 31, 2000. The increase in interest expense for the year ended December
31, 2001 was due to higher interest expense on borrowed funds and the inclusion
of interest expense on the trust preferreds for the full year 2001, compared to
less than one-half year in 2000.

     Interest expense on deposit accounts declined by $7.8 million for the year
ended December 31, 2002, compared to the prior year due to the effects of lower
cost of funds, partially offset by interest expense on higher average balances.
Average deposit balances were $811.0 million for the year ended December 31,
2002, compared to average deposit balances of $767.5 million for the prior year.
The increased average balances for the year ended December 31, 2002, were
primarily attributable to growth of $25.9 million in the average balance of
savings accounts and growth of $12.7 million in NOW account average balances.
The overall average cost of deposit accounts declined from 3.92% for the year
ended December 31, 2001, to an average cost of 2.75% for the current year due to
the lower interest rate environment continuing throughout 2002.

     Interest expense on deposit accounts declined by $1.6 million for the year
ended December 31, 2001, compared to the year ended December 31, 2000, due to
the effects of lower cost of funds, partially offset
                                        13
<PAGE>

by interest expense on higher average balances. The increased average balances
for the year ended December 31, 2001, were primarily attributable to growth of
$14.5 million in the average balance of savings accounts and growth of $8.7
million in NOW account average balances, partially offset by a decline of $9.9
million in the average balance of certificate accounts.

     The average balance of certificate accounts amounted to $409.5 million for
the year ended December 31, 2002, essentially unchanged from the average balance
of $410.1 million for the prior year and $10.5 million lower than the $420.0
million average balance for the year ended December 31, 2000. The average cost
of certificate accounts declined by 140 basis points, to an average cost of
4.42% for the year ended December 31, 2002, compared to 5.82% for the prior year
and 5.89% for the year ended December 31, 2000.

     For the year ended December 31, 2002, average balances of regular savings
accounts and NOW accounts amounted to $200.6 million and $140.5 million,
respectively, compared to the prior year average balances of $174.7 million and
$127.8 million, respectively as customers continue to shun longer-term deposits.
The cost of funds of money market deposit, savings and NOW accounts declined by
95 basis points, 94 basis points and 26 basis points, respectively in the year
ended December 31, 2002, compared to the prior year.

     The cost of funds of money market deposit, savings and NOW accounts
declined by 35 basis points, 45 basis points and 18 basis points, respectively
in the year ended December 31, 2001, compared to the year ended December 31,
2000.

     The Company's cost of interest bearing liabilities has declined slower than
overall market rates as the high percentage of core deposits already bear low
interest rates and such rates and market conditions preclude further substantial
declines in the interest rate paid on these accounts. Interest rates on
certificates of deposit and advances from the FHLB can change to market rates
only as they mature.

     Borrowed funds consisted of FHLB advances and were used generally to fund
loan portfolio growth. Average balances of FHLB advances were $443.9 million
during the year ended December 31, 2002, an increase of $24.0 million from the
prior year average balance of $419.9 million. The average cost of borrowed funds
declined by 69 basis points, from 5.70% for the year ended December 31, 2001 to
an average of 5.01% for the current year. The average cost of borrowed funds has
declined slower than average deposit costs because the Company has utilized
longer-term advances as part of its management of interest rate risk.

     Average balances of FHLB advances for the year ended December 31, 2001,
increased by $53.4 million from the year ended December 31, 2000, average
balance of $366.5 million. The average cost of borrowed funds declined by 51
basis points, from 6.21% for the year ended December 31, 2000 to the 5.70% in
2001.

  PROVISION FOR LOAN LOSSES

     The provision for loan losses amounted to $1.4 million for the year ended
December 31, 2002, compared to $820,000 for the year ended December 31, 2001 and
$1.0 million for the year ended December 31, 2000. The increased provision in
the current year was based on management's evaluation of the growth and change
in composition of the Company's loan portfolio, existing real estate market
conditions, the level of charge-offs and classified assets. Total non-performing
loans increased to $5.5 million, or 0.49% of loans, net, at December 31, 2002
from $1.2 million, or 0.11% of loans, net, at December 31, 2001 and $956,000, or
0.09% of loans, net, at December 31, 2000.

     The Company recorded charge-offs of $1.4 million and recoveries of $359,000
during the year ended December 31, 2002, compared to charge-offs of $234,000 and
recoveries of $361,000 during 2001. Charge-offs were $454,000 and recoveries
were $181,000 during 2000. The allowance for loan losses as a percentage of
total loans was 1.13% at December 31, 2002, and 2001, and 1.07% at December 31,
2000. As a percentage of total non-performing loans, the allowance for loan
losses was 230% at December 31, 2002, compared to 1,065% a year earlier and
1,190% at December 31, 2000. See also "Asset Quality" included elsewhere herein.

  NON-INTEREST INCOME

     Total non-interest income declined to $14.9 million for the year ended
December 31, 2002, compared to $16.6 million for the year ended December 31,
2001, due primarily to lower loan processing and

                                        14
<PAGE>

servicing fees resulting from the OMSR impairment charges. Loan processing and
servicing fees were a negative $4.0 million for the year ended December 31, 2002
compared to a negative $275,000 for the year ended December 31, 2001. The
decline was due to $5.1 million in adjustments (in excess of normal
amortization) for the impairment of OMSRs, which were necessary due to
increasing levels of loan prepayments in the declining interest rate environment
through most of 2002. In evaluating the OMSRs, management adjusted the value due
to record volume of loan prepayments and the application of more rapid
prepayment speeds in valuing the remaining OMSRs. Further declines in market
interest rates, which affect loan prepayments and prepayment speeds, could
result in future additional impairment charges.

     Total non-interest income increased $2.2 million for the year ended
December 31, 2001, compared to the year ended December 31, 2000. Gain on sale of
loans, which increased from $9.0 million for the year ended December 31, 2000 to
$10.6 million for the year ended December 31, 2001, was the primary contributor
to such increase.

     Gain on sale of loans amounted to $12.7 million for the year ended December
31, 2002, an increase of $2.1 million compared to the year ended December 31,
2001. The increased gain on sale of loans resulted from a continuation of high
volumes of one- to four-family mortgage loan sales, made possible by the volume
of lending activity, especially fixed-rate one- to four-family mortgages, in the
current low interest rate environment. Included in the above gain on sale of
loans were gains on sale of manufactured housing loans, which amounted to $4.0
million for the year ended December 31, 2002, compared to $5.2 million for the
year ended December 31, 2001. The lower gain on sales of manufactured housing
loans is primarily due to recessionary conditions in the industry and various
factors, which adversely impacted the manufactured housing and recreational
vehicle loan market. If such market conditions persist, it may continue to
adversely affect the Company's manufactured housing loan sale activity and could
result in losses from such operations and/or lead to further impairment of
goodwill attributable to such operations.

     Deposit service fees increased from $2.5 million in the year ended December
31, 2001, to $3.0 million in the current year. The increase was primarily due to
increases in fees and higher levels of deposit account services activity.
Deposit service fees were $2.0 million for the year ended December 31, 2000.

     Other non-interest income was lower in the current year as the year ended
December 31, 2001, included a $273,000 gain on sale resulting from the Company's
interest in the sale of the NYCE bank automated teller machine clearing network
and a gain of $157,000 from the sale of BFS's former Billerica Office location.

  NON-INTEREST EXPENSE

     Total non-interest expense for the year ended December 31, 2002, was $47.3
million, compared to $38.3 million for the prior year, most of which increase
was due to the $7.0 million goodwill impairment charge. Total non-interest
expense for the year ended December 31, 2000, was $34.5 million. The increase in
2001 in non-interest expense was primarily due to increased expenses in
compensation and benefits, occupancy and equipment and other non-interest
expense.

     Compensation and benefits increased to $23.9 million for the current year,
compared to $21.7 million for the year ended December 31, 2001. The primary
reasons for the increase are normal year-over-year employee expense increases,
higher than usual expenses incurred for loan originations support and the
Company's accrual of approximately $500,000 for its defined benefit pension plan
(the "plan") during the second half of 2002. The Company had not been required
to make contributions to this plan for over a decade as the plan was in an
over-funded status. For the year ended December 31, 2000, compensation and
benefits were $20.1 million.

     For the year ended December 31, 2002, goodwill impairment was $7.0 million
($4.6 million, net after tax) compared to goodwill amortization of $1.4 million
for the year ended December 31, 2001. The goodwill impairment charge resulted
primarily from a valuation assessment of the Company's Forward Financial
operations. Such assessment considered the reduced volume of loan sales, the
recession in the manufactured housing industry and other factors. Effective
January 1, 2002, the Statement of Financial Accounting Standards Number 142
requires that goodwill no longer be amortized, but instead requires periodic
impairment testing as conditions warrant, (but at least annually) to determine
if impairment has occurred. If the level of manufactured housing loan sales
remain at current levels and the manufactured housing industry recession
continues for a longer period than expected, further goodwill impairment charges
may become necessary.

                                        15
<PAGE>

     During the current year the Company settled two lawsuits at a total cost of
$1.3 million. Other non-interest expense declined in the current year, compared
to last year as the prior year included higher outside professional fees and
other increased operating expenses.

     Occupancy and equipment expense increased by $481,000 for the year ended
December 31, 2001 compared to the year ended December 31, 2000, due in part to
higher depreciation expenses associated with office renovations as well as
expenses incurred by the addition of the new Woburn Office, which opened in May
2000.

     For the year ended December 31, 2002, other non-interest expense was $6.9
million compared to $7.5 million for the year ended December 31, 2001. This
decrease was primarily due to the year 2001 containing higher outside
professional fees and a variety of other increased expenses.

  INCOME TAXES

     Income tax expense for the year ended December 31, 2002, was $1.4 million
for an effective tax rate of 36.8% compared to $5.2 million for an effective tax
rate of 35.0% for the year ended December 31, 2001. The effective tax rate was
higher this year primarily due to higher non-deductible Employee Stock Option
Plan expenses, resulting from the higher market value of the Company's stock.
Income tax expense was $5.3 million for the year ended December 31, 2000,
resulting in an effective tax rate of 35.5%.

     The Company announced on March 6, 2003, that it will record a provision in
the first quarter of 2003 of approximately $4.6 million for additional state
taxes, including interest (approximately $3.0 million, net after any federal tax
deduction associated with such taxes and interest), relating to the deduction
for dividends received from real estate investment trust subsidiaries ("REITs")
for the 1999 through 2002 fiscal years, thus reducing earnings for the first
quarter of 2003 by the net after tax amount. The provision relates to new
legislation signed by the Governor of Massachusetts on March 5, 2003, that
amends Massachusetts' law to expressly disallow the deduction for dividends
received from a REIT. This amendment applies retroactively to tax years ending
on or after December 31, 1999. The Company believes that this new legislation
would apply to numerous financial institutions in Massachusetts. As a result of
the new legislation, the Company will also cease recording the tax benefits
associated with the dividend received deduction, effective for the 2003 tax
year. The Company believes that the legislation will be challenged, especially
the retroactive provisions, on constitutional and other grounds. The Company
would support such a challenge and otherwise intends to vigorously defend its
position.

FINANCIAL CONDITION

  CHANGES IN FINANCIAL CONDITION (ASSETS)

     The Company's total assets at December 31, 2002, were $1.526 billion,
compared to $1.471 billion at December 31, 2001, an increase of $54.7 million or
3.7%. Asset growth was primarily attributable to a $49.6 million increase in
investment securities available for sale, a majority of which were investments
in a mutual fund comprised of adjustable-rate mortgages. Total assets at
December 31, 2000, were $1.328 billion.

Cash and Cash Equivalents, and Investments

     Total cash and cash equivalents decreased by $21.3 million, or 22.2%, from
a balance of $96.0 million at December 31, 2001, to $74.7 million at December
31, 2002. The decrease was primarily due to a $22.0 million decrease in FHLB
overnight and federal funds sold. The current year balance is closer to normal,
whereas the balance at December 31, 2001, was larger than normal due to heavy
cash infusion from large sales of loans during the month of December 2001. Total
cash and cash equivalents were $50.7 million at December 31, 2000.

                                        16
<PAGE>

     The following table sets forth certain information regarding the carrying
amount and fair values of BostonFed's short-term investments and investment
securities at the dates indicated:

<Table>
<Caption>
                                                             AT DECEMBER 31,
                                       -----------------------------------------------------------
                                              2002                 2001                2000
                                       ------------------   ------------------   -----------------
                                       CARRYING    FAIR     CARRYING    FAIR     CARRYING    FAIR
                                        AMOUNT     VALUE     AMOUNT     VALUE     AMOUNT    VALUE
                                       --------   -------   --------   -------   --------   ------
                                                             (IN THOUSANDS)
<S>                                    <C>        <C>       <C>        <C>       <C>        <C>
Daily federal funds sold and
  short-term investments.............  $ 26,077    26,077    48,158     48,158     9,176     9,176
Investment securities:
  Held to maturity:
     U.S. Government obligations,
       federal agency obligations,
       and other obligations.........     2,524     2,576       554        598     2,304     2,328
                                       --------   -------   -------    -------    ------    ------
Total held to maturity...............     2,524     2,576       554        598     2,304     2,328
                                       --------   -------   -------    -------    ------    ------
  Available for sale:
     U.S. Government obligations,
       federal agency obligations,
       and other obligations.........    35,206    35,206    25,050     25,050    41,993    41,993
     Mortgage-related mutual funds...    61,499    61,499    21,149     21,149    17,424    17,424
     Other mutual funds(1)...........    13,824    13,824    17,046     17,046     1,278     1,278
     Marketable equity securities....     2,359     2,359        13         13     2,726     2,726
                                       --------   -------   -------    -------    ------    ------
     Total available for sale........   112,888   112,888    63,258     63,258    63,421    63,421
                                       --------   -------   -------    -------    ------    ------
Total investment securities..........  $141,489   141,541   111,970    112,014    74,901    74,925
                                       ========   =======   =======    =======    ======    ======
</Table>

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

(1) Consists of securities issued by institutional mutual funds which primarily
    invest in short-term U.S. Government securities and mortgage-related
    securities.

                                        17
<PAGE>

     The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of BostonFed's
short-term investments, debt securities and mortgage-backed securities as of
December 31, 2002.
<Table>
<Caption>
                                                            AT DECEMBER 31, 2002
                                     -------------------------------------------------------------------
                                                           MORE THAN ONE YEAR TO   MORE THAN FIVE YEARS
                                      ONE YEAR OR LESS          FIVE YEARS             TO TEN YEARS
                                     -------------------   ---------------------   ---------------------
                                                WEIGHTED               WEIGHTED                WEIGHTED
                                     CARRYING   AVERAGE    CARRYING     AVERAGE    CARRYING     AVERAGE
                                      AMOUNT     YIELD      AMOUNT       YIELD      AMOUNT       YIELD
                                     --------   --------   ---------   ---------   ---------   ---------
                                                           (DOLLARS IN THOUSANDS)
<S>                                  <C>        <C>        <C>         <C>         <C>         <C>
Daily federal funds sold and
  short-term investments...........  $26,070      0.99%     $     7      4.60%      $    --        --%
Debt securities:
  Held to maturity:
    U.S. Government obligations,
      federal agency obligations,
      and other obligations........      503      5.19        2,021      6.31            --        --
                                     -------                -------                 -------
      Total held to maturity.......      503      5.19        2,021      6.31            --        --
                                     -------                -------                 -------
  Available for sale:
    U.S. Government obligations,
      federal agency obligations,
      and other obligations........    2,521      5.31       11,068      5.20         7,075      2.94
                                     -------                -------                 -------
      Total debt securities
         available for sale........    2,521      5.31       11,068      5.20         7,075      2.94
                                     -------                -------                 -------
Total short-term investments and
  debt securities..................   29,094      1.44       13,096      5.37         7,075      2.94
                                     =======                =======                 =======
Mortgage-backed securities:
  Held to maturity:
    Ginnie Mae.....................       --        --          580      8.18           114      8.48
    Fannie Mae.....................       --        --           --        --            --        --
    Freddie Mac....................       --        --           --        --        13,552      5.66
    Privately issued collaterized
      mortgage obligations.........       --        --           --        --            --        --
                                     -------                -------                 -------
      Total held to maturity.......       --        --          580      8.18        13,666      5.68
  Available for sale:
    Ginnie Mae.....................       --        --           --        --            --        --
    Fannie Mae.....................       --        --           --        --            --        --
    Freddie Mac....................       --        --          279      6.88        16,477      5.55
    Privately issued collateralized
      mortgage obligations.........       --        --           --        --            --        --
                                     -------                -------                 -------
      Total held for sale..........       --        --          279      6.88        16,477      5.55
                                     -------                -------                 -------
Total mortgage-backed securities...  $    --        --%     $   859      7.76%      $30,143      5.61%
                                     =======                =======                 =======

<Caption>
                                               AT DECEMBER 31, 2002
                                     -----------------------------------------

                                     MORE THAN TEN YEARS          TOTAL
                                     -------------------   -------------------
                                                WEIGHTED              WEIGHTED
                                     CARRYING   AVERAGE    CARRYING   AVERAGE
                                      AMOUNT     YIELD      AMOUNT     YIELD
                                     --------   --------   --------   --------
                                              (DOLLARS IN THOUSANDS)
<S>                                  <C>        <C>        <C>        <C>
Daily federal funds sold and
  short-term investments...........  $     --       --%    $ 26,077     0.99%
Debt securities:
  Held to maturity:
    U.S. Government obligations,
      federal agency obligations,
      and other obligations........        --       --        2,524     6.09
                                     --------              --------
      Total held to maturity.......        --       --        2,524     6.09
                                     --------              --------
  Available for sale:
    U.S. Government obligations,
      federal agency obligations,
      and other obligations........    14,542     4.99       35,206     4.67
                                     --------              --------
      Total debt securities
         available for sale........    14,542     4.99       35,206     4.67
                                     --------              --------
Total short-term investments and
  debt securities..................    14,542     4.99       63,807     3.22
                                     ========              ========
Mortgage-backed securities:
  Held to maturity:
    Ginnie Mae.....................     4,217     6.50        4,911     6.74
    Fannie Mae.....................        --       --           --       --
    Freddie Mac....................     6,966     6.15       20,518     5.83
    Privately issued collaterized
      mortgage obligations.........        --                    --       --
                                     --------              --------
      Total held to maturity.......    11,183     6.28       25,429     6.00
  Available for sale:
    Ginnie Mae.....................     5,101     6.11        5,101     6.11
    Fannie Mae.....................    28,564     5.83       28,564     5.83
    Freddie Mac....................    63,114     5.10       79,870     5.20
    Privately issued collateralized
      mortgage obligations.........       980     6.52          980     6.52
                                     --------              --------
      Total held for sale..........    97,759     5.38      114,515     5.41
                                     --------              --------
Total mortgage-backed securities...  $108,942     5.47%    $139,944     5.52%
                                     ========              ========
</Table>

                                        18
<PAGE>

     Mortgage-backed securities available for sale increased by $19.6 million
due to purchases of collateralized mortgage-backed securities. Mortgage-backed
securities held to maturity declined by $15.4 million, from a balance of $40.8
million at December 31, 2001, to a balance of $25.4 million at December 31,
2002, due to rapid amortization and pre-payments precipitated by falling
interest rates.

     The following tables set forth BostonFed's mortgage-backed securities
activities for the periods indicated:

<Table>
<Caption>
                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                           --------------------------------
                                                              2002        2001       2000
                                                           ----------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                                        <C>          <C>        <C>
Beginning balance........................................  $ 135,744     70,655     29,481
  Purchases of mortgage-backed securities available for
  sale...................................................    133,799    101,843      1,986
Conversion of real estate loans to mortgage-backed
  securities held to maturity............................         --         --     50,975
  Less:
     Sale of mortgage-backed securities available for
       sale..............................................         --         --         --
     Principal repayments................................   (130,611)   (36,544)   (11,963)
     Change in unrealized gains (losses).................      1,182       (116)       225
     Accretion of premium, net of discount...............       (170)       (94)       (49)
                                                           ---------    -------    -------
Ending balance...........................................  $ 139,944    135,744     70,655
                                                           =========    =======    =======
</Table>

     The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated.

<Table>
<Caption>
                                                                        AT DECEMBER 31,
                             ------------------------------------------------------------------------------------------------------
                                           2002                                2001                               2000
                             ---------------------------------   ---------------------------------   ------------------------------
                             AMORTIZED   PERCENT                 AMORTIZED   PERCENT                 AMORTIZED   PERCENT     FAIR
                               COST      OF TOTAL   FAIR VALUE     COST      OF TOTAL   FAIR VALUE     COST      OF TOTAL    VALUE
                             ---------   --------   ----------   ---------   --------   ----------   ---------   --------   -------
                                                                     (DOLLARS IN THOUSANDS)
<S>                          <C>         <C>        <C>          <C>         <C>        <C>          <C>         <C>        <C>
Mortgage-backed securities
  and collateralized
  mortgage obligations:
Available for sale:
  Ginnie Mae...............  $  5,058       3.64%    $  5,101    $  6,237       4.59%    $  6,196     $    --         --%   $    --
  Fannie Mae...............    28,091      20.21       28,564      11,904       8.76       11,869       1,733       2.45      1,769
  Freddie Mac..............    79,424      57.15       79,870      62,952      46.30       62,634       4,394       6.21      4,367
  Privately issued
    collateralized mortgage
    obligations............       977       0.70          980      14,046      10.33       14,223       9,361      13.22      9,236
                             --------     ------     --------    --------     ------     --------     -------     ------    -------
Total available for sale...   113,550      81.70      114,515      95,139      69.98       94,922      15,488      21.88     15,372
                             --------     ------     --------    --------     ------     --------     -------     ------    -------
Held to maturity:
  Ginnie Mae...............     4,911       3.54        5,063       7,376       5.43        7,581      10,829      15.30     10,872
  Fannie Mae...............        --         --           --          45       0.03           47         146       0.21        147
  Freddie Mac..............    20,518      14.76       21,534      33,401      24.57       33,919      44,308      62.61     43,951
                             --------     ------     --------    --------     ------     --------     -------     ------    -------
Total held to maturity.....    25,429      18.30       26,597      40,822      30.02       41,547      55,283      78.12     54,970
                             --------     ------     --------    --------     ------     --------     -------     ------    -------
Total mortgage-backed
  securities and
  collateralized mortgage
  obligations..............  $138,979     100.00%    $141,112    $135,961     100.00%    $136,469     $70,771     100.00%   $70,342
                             ========     ======     ========    ========     ======     ========     =======     ======    =======
</Table>

Loans

     The growth in loans, net, was $15.6 million and was primarily due to
increased originations of construction and land and home equity loans, partially
offset by a reduction of $32.0 million in residential one- to four-family loans.
Loans, net, increased from a balance of $1.056 billion at December 31, 2001, to
a balance of $1.071 billion at December 31, 2002. The growth in the loans, net,
portfolio during the current year was less than the Company has experienced in
recent years due to the higher than usual prepayments resulting from
historically low mortgage interest rates and management's decision to sell a
substantial portion of loans originated.

     The Company was able to continue to diversify its loan portfolio and
increase the combined balances of construction and land, commercial real estate,
multi-family, equity and business loans by $41.6 million, from a combined
balance of $327.7 million at December 31, 2001, to a combined balance of $369.3
million at December 31, 2002.

                                        19
<PAGE>

     The following table sets forth the composition of BostonFed's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<Table>
<Caption>
                                                                               AT DECEMBER 31,
                                                    ---------------------------------------------------------------------
                                                            2002                    2001                    2000
                                                    ---------------------   ---------------------   ---------------------
                                                                 PERCENT                 PERCENT                 PERCENT
                                                      AMOUNT     OF TOTAL     AMOUNT     OF TOTAL     AMOUNT     OF TOTAL
                                                    ----------   --------   ----------   --------   ----------   --------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                 <C>          <C>        <C>          <C>        <C>          <C>
Mortgage loans:
  Residential:
    One-to four-family(1).........................  $  761,715     67.02%   $  787,267     70.30%   $  799,078     73.16%
    Multi-family..................................      21,056      1.85        25,904      2.31        19,447      1.78
  Commercial real estate..........................      96,526      8.49       107,767      9.62        89,371      8.18
  Construction and land...........................     124,071     10.92        99,337      8.87        92,561      8.48
  Non-mortgage loans:
  Home equity and improvement.....................      94,855      8.34        66,539      5.94        57,571      5.27
  Business........................................      32,792      2.88        28,103      2.51        26,525      2.43
  Other loans(2)..................................       5,685       .50         5,061      0.45         7,593      0.70
                                                    ----------    ------    ----------    ------    ----------    ------
    Total loans...................................   1,136,700    100.00%    1,119,978    100.00%    1,092,146    100.00%
                                                                  ======                  ======                  ======
Less:
  Allowance for loan losses.......................     (12,656)                (12,328)                (11,381)
  Construction loans in process...................     (24,832)                (30,264)                (33,869)
  Net unearned premium (discount) on loans
    purchased.....................................          36                      48                     (10)
  Deferred loan origination costs.................       3,722                   2,976                   2,365
                                                    ----------              ----------              ----------
Loans, net, and loans held for sale...............  $1,102,970              $1,080,410              $1,049,251
                                                    ==========              ==========              ==========

<Caption>
                                                                  AT DECEMBER 31,
                                                    -------------------------------------------
                                                            1999                   1998
                                                    ---------------------   -------------------
                                                                 PERCENT               PERCENT
                                                      AMOUNT     OF TOTAL    AMOUNT    OF TOTAL
                                                    ----------   --------   --------   --------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                 <C>          <C>        <C>        <C>
Mortgage loans:
  Residential:
    One-to four-family(1).........................  $  846,739     77.85%   $829,572     84.27%
    Multi-family..................................      22,017      2.02      22,889      2.33
  Commercial real estate..........................      75,999      6.99      48,951      4.97
  Construction and land...........................      77,079      7.09      41,608      4.23
  Non-mortgage loans:
  Home equity and improvement.....................      43,721      4.02      32,119      3.26
  Business........................................      17,815      1.64       3,618      0.37
  Other loans(2)..................................       4,231      0.39       5,571      0.57
                                                    ----------    ------    --------    ------
    Total loans...................................   1,087,601    100.00%    984,328    100.00%
                                                                  ======                ======
Less:
  Allowance for loan losses.......................     (10,654)               (8,500)
  Construction loans in process...................     (30,372)              (17,133)
  Net unearned premium (discount) on loans
    purchased.....................................          (7)                   (5)
  Deferred loan origination costs.................       2,200                 1,980
                                                    ----------              --------
Loans, net, and loans held for sale...............  $1,048,768              $960,670
                                                    ==========              ========
</Table>

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

(1) Includes mortgage loans held for sale of $30.2 million, $23.7 million, $11.0
    million, $16.2 million and $17.0 million at December 31, 2002, 2001, 2000,
    1999 and 1998, respectively.

(2) Includes consumer loans held for sale of $1.5 million, $944,000 and $1.8
    million at December 31, 2002, 2001 and 2000.

                                        20
<PAGE>

     Loan Maturity.  The following table shows certain information at December
31, 2002 regarding the dollar amount of loans maturing in BostonFed's portfolio
based on their contractual terms to maturity. The table does not include the
effect of prepayments or scheduled principal amortization.

<Table>
<Caption>
                                                         AT DECEMBER 31, 2002
                                 ---------------------------------------------------------------------
                                 ONE- TO
                                  FOUR-     MULTI-   COMMERCIAL    CONSTRUCTION    OTHER      TOTAL
                                  FAMILY    FAMILY   REAL ESTATE     AND LAND      LOANS      LOANS
                                 --------   ------   -----------   ------------   -------   ----------
                                                            (IN THOUSANDS)
<S>                              <C>        <C>      <C>           <C>            <C>       <C>
Amounts due:
  One year or less.............  $  4,491      148      1,146        105,932        3,514      115,231
                                 --------   ------     ------        -------      -------   ----------
  After one year:
  More than one year to three
     years.....................     3,096      424      3,506         18,003        4,861       29,890
  More than three years to five
     years.....................     6,351      260     10,961              -       12,302       29,874
  More than five years to 10
     years.....................    84,884    1,735     14,665              -      103,064      204,348
  More than 10 years to 20
     years.....................   114,288    8,697     20,303              -        4,639      147,927
  More than 20 years...........   548,605    9,792     45,945            136        4,952      609,430
                                 --------   ------     ------        -------      -------   ----------
     Total due after one
       year....................   757,224   20,908     95,380         18,139      129,818    1,021,469
                                 --------   ------     ------        -------      -------   ----------
     Total amount due..........  $761,715   21,056     96,526        124,071      133,332    1,136,700
                                 ========   ======     ======        =======      =======
       Less:
          Allowance for loan
            losses.............                                                                (12,656)
          Construction loans in
            process............                                                                (24,832)
          Net unearned discount
            on loans
            purchased..........                                                                     36
          Deferred loan
            origination
            costs..............                                                                  3,722
                                                                                            ----------
     Loans, net, and loans held
       for sale................                                                              1,102,970
     Loans held for sale.......                                                                (31,614)
                                                                                            ----------
     Loans, net................                                                             $1,071,356
                                                                                            ==========
</Table>

     The following table sets forth, at December 31, 2002, the dollar amount of
loans contractually due after December 31, 2003, and whether such loans have
fixed interest rates or adjustable interest rates.

<Table>
<Caption>
                                                             DUE AFTER DECEMBER 31, 2003
                                                          ---------------------------------
                                                           FIXED     ADJUSTABLE     TOTAL
                                                          --------   ----------   ---------
                                                                   (IN THOUSANDS)
<S>                                                       <C>        <C>          <C>
  Residential:
     One- to four-family................................  $288,330    468,894       757,224
     Multi-family.......................................     2,849     18,059        20,908
  Commercial real estate................................    22,551     72,829        95,380
  Construction and land.................................     4,911     13,228        18,139
  Other loans...........................................     3,619    126,199       129,818
                                                          --------    -------     ---------
       Total loans......................................  $322,260    699,209     1,021,469
                                                          ========    =======     =========
</Table>

     The Company originated $1.206 billion in mortgage loans during the year
ended December 31, 2002, and sold approximately $703 million of mortgage loans.
Total loan originations were $1.445 billion for the year ended December 31,
2002, compared to $1.148 billion for the prior year.

                                        21
<PAGE>

     The following table sets forth BostonFed's loan originations, purchases,
sales and principal repayments for the periods indicated:

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                 2002        2001        2000
                                                              ----------   ---------   ---------
                                                                        (IN THOUSANDS)
<S>                                                           <C>          <C>         <C>
Net loans:
Beginning balance...........................................  $1,055,798   1,036,435   1,032,594
Loans originated:
  One- to four-family.......................................   1,073,833     841,133     339,643
  Multi-family..............................................         900          --         508
  Commercial real estate....................................      64,054      35,333      22,092
  Construction and land.....................................      66,971      62,726      64,386
  Equity line of credit drawn...............................      89,609      56,511      46,633
  Business line of credit drawn.............................      94,222      82,206      29,046
  Manufactured housing, recreational vehicles and boats.....      47,184      60,530      81,715
  Other(1)..................................................       8,312       9,341       7,558
                                                              ----------   ---------   ---------
  Total loans originated....................................   1,445,085   1,147,780     601,581
  Loans purchased(2)........................................      16,232      25,129      25,243
                                                              ----------   ---------   ---------
     Total..................................................   2,517,115   2,209,344   1,659,418
Less:
  Principal repayments and other, net.......................    (661,043)   (548,547)   (282,327)
  Loan (charge-offs) recoveries, net........................      (1,022)        127        (273)
  Sale of loans.............................................    (750,988)   (580,514)   (325,762)
  Transfer of mortgage loans to real estate owned...........      (1,092)         --          --
                                                              ----------   ---------   ---------
  Loans, net and loans held for sale........................   1,102,970   1,080,410   1,051,056
  Loans held for sale.......................................     (31,614)    (24,612)    (14,621)
                                                              ----------   ---------   ---------
Loans, net..................................................  $1,071,356   1,055,798   1,036,435
                                                              ==========   =========   =========
</Table>

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

(1) Other loans primarily consist of business loans and other consumer loans.

(2) Includes loans purchased from correspondent financial institutions which are
    underwritten pursuant to BostonFed's policies and closed in the name of the
    financial institution but immediately purchased by BostonFed for its
    mortgage portfolio, mortgage banking activities, or for Community
    Reinvestment Act purposes.

ASSET QUALITY

     The following table sets forth information regarding non-performing assets,
which consist of non-performing loans and real estate owned ("REO"). In addition
to identifying non-performing loans, as discussed below, the Company identifies
loans that are characterized as impaired. Accordingly, loans categorized as
impaired include commercial real estate, multi-family, business loans and
restructured loans as well as other identified loans. Restructured loans are
impaired loans where one or more of the original contract terms have been
modified in a concession the Company would not otherwise consider but for
economic or other reasons pertaining to the debtor's difficulties. At December
31, 2002, non-performing loans totaled $5.5 million and impaired loans totaled
$8.4 million, consisting of commercial real estate loans, construction loans and
business loans. It is the policy of the Company to generally cease accruing
interest on loans 90 days or more past due and charging off all accrued
interest. For the years ended December 31, 2002, 2001, 2000, 1999, and 1998, the
amount of additional interest income that would have been recognized on
non-performing loans, if such loans had continued to perform in accordance with
their contractual terms, was $172,000, $32,000, $40,000, $(2,000) and $33,000,
respectively. For the same periods, the difference between the amount of
interest income which would have been recognized on

                                        22
<PAGE>

impaired loans if such loans were performing in accordance with their regular
terms and actual amounts recognized was $120,000, $0, $0, $2,000 and $1,000,
respectively.

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                              ---------------------------------------------------
                                               2002       2001       2000       1999       1998
                                              -------   --------   --------   --------   --------
                                                            (DOLLARS IN THOUSANDS)
<S>                                           <C>       <C>        <C>        <C>        <C>
Non-accrual loans:
  Residential real estate:
     One- to four-family....................  $ 2,397        983        418        721        784
  Commercial real estate....................       --         --         --         25         25
  Other loans...............................    3,100        175        538         --         --
                                              -------   --------   --------   --------   --------
     Total..................................    5,497      1,158        956        746        809
Real estate owned and other repossessed
  assets, net(1)............................    1,026         31        145        376         47
                                              -------   --------   --------   --------   --------
     Total non-performing assets............    6,523      1,189      1,101      1,122        856
Restructured loans..........................    5,318        203        206        210        213
                                              -------   --------   --------   --------   --------
Total risk elements.........................  $11,841      1,392      1,307      1,332      1,069
                                              =======   ========   ========   ========   ========
Allowance for loan losses as a percent of
  loans(2)..................................     1.13%      1.13       1.07       1.01       0.88
Allowance for loan losses as a percent of
  non-performing loans(3)...................   230.23   1,064.59   1,190.48   1,428.15   1,050.68
Non-performing loans as a percent of
  loans(2)(3)...............................     0.49       0.11       0.09       0.07       0.09
Non-performing assets as a percent of total
  assets(4).................................     0.43       0.08       0.08       0.09       0.08
</Table>

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

(1) Real estate owned and other repossessed assets are shown net of related
    valuation allowances.

(2) Loans include loans, net, and loans held for sale, excluding allowance for
    loan losses.

(3) Non-performing loans consist of all 90 days or more past due and other
    loans, which have been identified by BostonFed as presenting uncertainty
    with respect to the collectibility of interest or principal.

(4) Non-performing assets consist of non-performing loans, real estate owned and
    other repossessed assets.

     The following table sets forth delinquencies in BostonFed's loan portfolio
as of the dates indicated:

<Table>
<Caption>
                                               AT DECEMBER 31, 2002                          AT DECEMBER 31, 2001
                                    -------------------------------------------   -------------------------------------------
                                         60-89 DAYS          90 DAYS OR MORE           60-89 DAYS          90 DAYS OR MORE
                                    --------------------   --------------------   --------------------   --------------------
                                               PRINCIPAL              PRINCIPAL              PRINCIPAL              PRINCIPAL
                                     NUMBER     BALANCE     NUMBER     BALANCE     NUMBER     BALANCE     NUMBER     BALANCE
                                    OF LOANS   OF LOANS    OF LOANS   OF LOANS    OF LOANS   OF LOANS    OF LOANS   OF LOANS
                                    --------   ---------   --------   ---------   --------   ---------   --------   ---------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                 <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
Residential:
  One- to four-family.............     11       $1,321        11       $2,397        28       $3,726          6      $  983
Commercial real estate............      1        1,812        --           --         2          207         --          --
Construction and land.............     --           --         2        2,165         4        4,328         --          --
Other loans.......................      1           27         2          935        24          454          3         175
                                       --       ------        --       ------        --       ------       ----      ------
    Total.........................     13       $3,160        15       $5,497        58       $8,715          9      $1,158
                                       ==       ======        ==       ======        ==       ======       ====      ======
Delinquent loans to loans, net,
  and loans held for sale.........                0.29%                  0.49%                  0.81%                  0.11%
</Table>

                                        23
<PAGE>

<Table>
<Caption>
                                                                         AT DECEMBER 31, 2000
                                                              -------------------------------------------
                                                                   60-89 DAYS          90 DAYS OR MORE
                                                              --------------------   --------------------
                                                                         PRINCIPAL              PRINCIPAL
                                                               NUMBER     BALANCE     NUMBER     BALANCE
                                                              OF LOANS   OF LOANS    OF LOANS   OF LOANS
                                                              --------   ---------   --------   ---------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>         <C>        <C>
Residential:
  One- to four-family......................................       7       $1,276         4       $  418
  Multi-family.............................................      --           --        --           --
Commercial real estate.....................................       1          132        --           --
Construction and land......................................      --           --        --           --
Other loans................................................       3           71         6          538
                                                                 --       ------        --       ------
    Total..................................................      11       $1,479        10       $  956
                                                                 ==       ======        ==       ======
Delinquent loans to loans, net, and loans held for sale....                 0.14%                  0.09%
</Table>

     All of the impaired loans have been measured using the discounted cash flow
method or the fair value of the collateral method if the loan is collateral
dependent. During the year ended December 31, 2002, the average recorded value
of impaired loans was $4.3 million; $720,000 of interest income was recognized
and $840,000 of interest income would have been recognized under original terms.
The composition of impaired loans by type is shown below:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              --------------------
                                                               2002    2001   2000
                                                              ------   ----   ----
                                                                 (IN THOUSANDS)
<S>                                                           <C>      <C>    <C>
Impaired loans:
  Business..................................................  $2,063    --     --
  Construction..............................................   2,165    --     --
  Commercial real estate....................................   4,163   216    206
                                                              ------   ---    ---
  Total impaired loans......................................  $8,391   216    206
                                                              ======   ===    ===
</Table>

     The Company maintains an allowance for losses that are inherent in the
Company's loan portfolio. The allowance for loan losses is established through a
provision for loan losses charged to operations. Loan losses are charged against
the allowance when management determines that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are credited
to the allowance. At December 31, 2002, the Company had established $225,000 as
specific loss reserves (after charge-offs of $925,000) within the allowance for
loan losses, for certain impaired loans. There were no specific loss reserves in
the allowance for loan losses at December 31, 2001 and 2000.

     Management believes the allowance is adequate to absorb probable loan
losses. Management's methodology to estimate loss exposure inherent in the
portfolio includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on risk ratings assigned to
real estate related commercial, construction and multi-family and business and
industrial loans, loan payment status or loss experience and an unallocated
allowance that is maintained based on management's assessment of many factors
including trends in loan delinquencies and charge-offs, current economic
conditions and their effect on borrowers' ability to pay, underwriting standards
by loan type, mix and balance of the portfolio, and the performance of
individual loans in relation to contract terms. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance based on their judgments about information available to
them at the time of their examination.

     While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. Accordingly, the ultimate collectibility of a substantial portion of
the Company's loan portfolio is affected by changes in market conditions.

     Amounts provided for the years 2002, 2001 and 2000 were $1.4 million,
$820,000 and $1.0 million, respectively. The increase in the provision for the
year ended December 31, 2002, was due to increased levels of non-performing
loans and higher charge-off levels. During the year ended December 31, 2002,
there were recoveries of $359,000 credited to, and charge-offs of $1.4 million
taken against this allowance. The comparable amounts for the year ended December
31, 2001, were $361,000 in recoveries and

                                        24
<PAGE>

$234,000 in charge-offs. For the year ended December 31, 2000, charge-offs were
$454,000 and recoveries were $181,000. As of December 31, 2002, and 2001, the
Company's allowance for loan losses was 1.13% of total loans. Management
believes the current coverage ratio is reasonable and prudent, considering the
higher levels in the combined total of construction and land, commercial real
estate, home equity and improvement, multi-family and business loans. These
combined total balances amounted to $369.3 million and $327.7 million, or 34.5%
and 31.0%, respectively of the total loans, net, at December 31, 2002, and 2001.
The Company had non-performing loans of $5.5 million and $1.2 million at
December 31, 2002 and December 31, 2001, respectively. The Company will continue
to monitor and modify its allowance for loan losses as conditions dictate. While
management believes the Company's allowance for loan losses is sufficient to
cover losses inherent in its loan portfolio at this time, no assurances can be
given that the Company's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments
to the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of allowance for loan losses.

     The following table sets forth activity in BostonFed's allowance for loan
losses for the periods indicated.

<Table>
<Caption>
                                                        AT OR FOR THE YEARS ENDED DECEMBER 31,
                                                      ------------------------------------------
                                                       2002      2001     2000     1999    1998
                                                      -------   ------   ------   ------   -----
                                                                    (IN THOUSANDS)
<S>                                                   <C>       <C>      <C>      <C>      <C>
Balance at beginning of period......................  $12,328   11,381   10,654    8,500   6,600
Forward Financial allowance for loan losses at
  acquisition date..................................       --       --       --      170      --
Provision for loan losses...........................    1,350      820    1,000    1,626   1,642
Charge-offs:
  Real estate loans:
  Residential:
     One- to four-family............................       18      118      125       19      51
     Multi-family...................................       --       --       --        1       2
  Commercial........................................       --       --       --       --      75
  Construction......................................      410       --       --       --      --
  Other.............................................      953      116      329       36     131
                                                      -------   ------   ------   ------   -----
     Total charge-offs..............................    1,381      234      454       56     259
Recoveries..........................................      359      361      181      414     517
                                                      -------   ------   ------   ------   -----
Balance at end of period............................  $12,656   12,328   11,381   10,654   8,500
                                                      =======   ======   ======   ======   =====
Ratio of net charge-offs (net recoveries) during the
  period to average loans outstanding during the
  period............................................     0.09%   (0.01)    0.03    (0.04)  (0.03)
                                                      =======   ======   ======   ======   =====
</Table>

     As part of the Company's determination of the adequacy of the allowance for
loan losses, the Company monitors its loan portfolio and other assets through
its Asset Classification Committee. The Committee classifies loans depending on
risk of loss characteristics. The most severe classification before a charge-off
is required is "sub-standard." At December 31, 2002, 2001 and 2000, the Company
classified (including REO) $16.9 million, $2.8 million and $3.1 million as
sub-standard assets, respectively. Included in these amounts were $6.5 million,
$1.2 million, and $956,000 in non-performing assets, respectively. In the
opinion of management, the performing sub-standard loans evidence one or more
weaknesses or potential weaknesses and, depending on the regional economy and
other factors, may become non-performing assets in future periods. The Asset
Classification Committee meets quarterly to determine the adequacy of the
allowance for loan losses. Management believes that the allowance for loan
losses at December 31, 2002, was sufficient to provide for anticipated losses
inherent in the loan portfolio.

                                        25
<PAGE>

     The following tables set forth BostonFed's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.

<Table>
<Caption>
                                                                        AT DECEMBER 31,
                                                              ------------------------------------
                                                                              2002
                                                              ------------------------------------
                                                                        PERCENT OF    PERCENT OF
                                                                        ALLOWANCE    LOANS IN EACH
                                                                         TO TOTAL     CATEGORY TO
                                                              AMOUNT    ALLOWANCE     TOTAL LOANS
                                                              -------   ----------   -------------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                                           <C>       <C>          <C>
Residential.................................................  $ 2,635      20.82%        61.10%
Commercial real estate, construction and land...............    4,755      37.57         22.33
Commercial/Industrial.......................................    1,011       7.99          5.05
Other loans.................................................      705       5.57         10.74
Impaired loans..............................................      225       1.78           .78
Unallocated.................................................    3,325      26.27            --
                                                              -------     ------        ------
  Total allowance for loan losses...........................  $12,656     100.00%       100.00%
                                                              =======     ======        ======
</Table>

<Table>
<Caption>
                                                                          AT DECEMBER 31,
                                            ---------------------------------------------------------------------------
                                                            2001                                   2000
                                            ------------------------------------   ------------------------------------
                                                      PERCENT OF    PERCENT OF               PERCENT OF    PERCENT OF
                                                      ALLOWANCE    LOANS IN EACH             ALLOWANCE    LOANS IN EACH
                                                       TO TOTAL     CATEGORY TO               TO TOTAL     CATEGORY TO
                                            AMOUNT    ALLOWANCE     TOTAL LOANS    AMOUNT    ALLOWANCE     TOTAL LOANS
                                            -------   ----------   -------------   -------   ----------   -------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                         <C>       <C>          <C>             <C>       <C>          <C>
Residential:
  One- to-four family.....................  $ 2,925      23.73%        70.29%      $ 2,883      25.33%        73.17%
  Multi-family............................      184       1.49          2.31           252       2.21          1.78
Commercial real estate....................    2,308      18.72          9.62         1,905      16.74          8.18
Construction and land.....................    1,590      12.90          8.87         1,239      10.89          8.48
Other loans...............................    1,551      12.58          8.91         1,410      12.39          8.39
Unallocated...............................    3,770      30.58            --         3,692      32.44            --
                                            -------     ------        ------       -------     ------        ------
  Total allowance for loan losses.........  $12,328     100.00%       100.00%      $11,381     100.00%       100.00%
                                            =======     ======        ======       =======     ======        ======
</Table>

<Table>
<Caption>
                                                                          AT DECEMBER 31,
                                            ---------------------------------------------------------------------------
                                                            1999                                   1998
                                            ------------------------------------   ------------------------------------
                                                      PERCENT OF    PERCENT OF               PERCENT OF    PERCENT OF
                                                      ALLOWANCE    LOANS IN EACH             ALLOWANCE    LOANS IN EACH
                                                       TO TOTAL     CATEGORY TO               TO TOTAL     CATEGORY TO
                                            AMOUNT    ALLOWANCE     TOTAL LOANS    AMOUNT    ALLOWANCE     TOTAL LOANS
                                            -------   ----------   -------------   -------   ----------   -------------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                         <C>       <C>          <C>             <C>       <C>          <C>
Residential:
  One- to-four family....................   $ 2,872      26.96%        77.85%      $ 2,186      25.72%        84.27%
  Multi-family...........................       209       1.96          2.02           214       2.52          2.33
Commercial real estate...................     2,090      19.62          6.99           615       7.24          4.97
Construction and land....................     1,285      12.06          7.09             3       0.03          4.23
Other loans..............................     1,029       9.66          6.05           731       8.60          4.20
Unallocated..............................     3,169      29.74            --         4,751      55.89            --
                                            -------     ------        ------       -------     ------        ------
  Total allowance for loan losses........   $10,654     100.00%       100.00%      $ 8,500     100.00%       100.00%
                                            =======     ======        ======       =======     ======        ======
</Table>

CHANGES IN FINANCIAL CONDITION (LIABILITIES AND CAPITAL)

Deposit Accounts

     Deposit accounts increased by $75.8 million, or 8.6%, from a balance of
$884.5 million at December 31, 2001, to a balance of $960.3 million at December
31, 2002. Approximately $40.8 million of the growth was in wholesale-brokered
certificates of deposit. Thus, retail deposits increased by a total of $35.0
million as most of the Company's branch offices experienced moderate growth.

     Deposit accounts increased by $34.9 million from a balance of $849.6
million at December 31, 2000, to a balance of $884.5 million at December 31,
2001. Also, there was a net reduction of $26.6 million of

                                        26
<PAGE>

wholesale-brokered certificates of deposit. Thus, retail deposits increased by a
total of $61.5 million as most of the Company's branch offices experienced
moderate growth.

     The following table sets forth the distribution of BostonFed's average
deposit accounts for the periods indicated and the average cost on each category
of deposits presented.

<Table>
<Caption>
                                                                   FOR THE YEAR ENDED DECEMBER 31,
                                    ---------------------------------------------------------------------------------------------
                                                2002                            2001                            2000
                                    -----------------------------   -----------------------------   -----------------------------
                                               PERCENT                         PERCENT                         PERCENT
                                               OF TOTAL                        OF TOTAL                        OF TOTAL
                                    AVERAGE    AVERAGE    AVERAGE   AVERAGE    AVERAGE    AVERAGE   AVERAGE    AVERAGE    AVERAGE
                                    BALANCE    DEPOSITS    COST     BALANCE    DEPOSITS    COST     BALANCE    DEPOSITS    COST
                                    --------   --------   -------   --------   --------   -------   --------   --------   -------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                 <C>        <C>        <C>       <C>        <C>        <C>       <C>        <C>        <C>
Money market deposit accounts.....  $ 60,530      6.65%    1.56     $ 54,965      6.45%    2.51     $ 55,796      6.81%    2.86
Savings accounts..................   200,552     22.02     1.42      174,651     20.48     2.35      160,118     19.55     2.80
NOW accounts......................   140,470     15.42     0.32      127,779     14.98     0.58      119,070     14.54     0.76
Non-interest-bearing accounts.....    99,694     10.95       --       85,209      9.99       --       64,176      7.83       --
                                    --------    ------              --------    ------              --------    ------
    Total.........................   501,246     55.04     0.84      442,604     51.90     1.41      399,160     48.73     1.75
                                    --------    ------              --------    ------              --------    ------
Certificate accounts:
  Less than six months............    59,121      6.49     2.55       57,846      6.78     4.61       25,127      3.07     5.18
  Over six through 12 months......    75,799      8.32     3.36       71,557      8.39     5.01       29,967      3.66     5.41
  Over 12 through 36 months.......   214,215     23.52     5.14      229,028     26.87     6.41      317,884     38.80     6.10
  Over 36 months..................    14,901      1.64     5.45        7,527      0.88     6.20        4,952      0.60     6.12
  IRA/KEOGH (various terms).......    45,457      4.99     4.89       44,161      5.18     5.61       42,101      5.14     5.53
                                    --------    ------              --------    ------              --------    ------
    Total certificate accounts....   409,493     44.96     4.42      410,119     48.10     5.82      420,031     51.27     5.89
                                    --------    ------              --------    ------              --------    ------
      Total average deposits......  $910,739    100.00%    2.45     $852,723    100.00%    3.53     $819,191    100.00%    3.87
                                    ========    ======              ========    ======              ========    ======
</Table>

     The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 2002.

<Table>
<Caption>
                                     PERIOD TO MATURITY FROM DECEMBER 31, 2002
                           -------------------------------------------------------------         AT DECEMBER 31,
                           LESS THAN    ONE TO       TWO TO       THREE TO     FOUR TO     ---------------------------
                           ONE YEAR    TWO YEARS   THREE YEARS   FOUR YEARS   FIVE YEARS    2002      2001      2000
                           ---------   ---------   -----------   ----------   ----------   -------   -------   -------
                                                                 (IN THOUSANDS)
<S>                        <C>         <C>         <C>           <C>          <C>          <C>       <C>       <C>
Certificate accounts:
  0 to 3.00%.............  $124,198      5,214          776            --           --     130,188    23,181        --
  3.01 to 4.00%..........    52,714     47,122       12,375         1,468        2,215     115,894    78,072        --
  4.01 to 5.00%..........    10,630      8,265       22,630         9,503       13,932      64,960    87,419    25,239
  5.01 to 6.00%..........     6,596      1,466       10,806         8,201          901      27,970    73,638   148,795
  6.01 to 7.00%..........    16,605     22,590        4,481         5,521           --      49,197    97,211   206,138
  7.01 to 8.00%..........    17,155     14,573        2,182            --           --      33,910    36,592    36,554
                           --------     ------       ------        ------       ------     -------   -------   -------
Total....................  $227,898     99,230       53,250        24,693       17,048     422,119   396,113   416,726
                           ========     ======       ======        ======       ======     =======   =======   =======
</Table>

Federal Home Loan Bank Advances and other Borrowings

     FHLB advances and other borrowings decreased $22.4 million to a balance of
$426.6 million at December 31, 2002, compared to $449.0 million at December 31,
2001. FHLB advances and other borrowings increased $104.7 million during the
year ended December 31, 2001, from $344.3 million at December 31, 2000.

                                        27
<PAGE>

     The following tables set forth certain information regarding BostonFed's
borrowed funds at or for the periods ended on the dates indicated:

<Table>
<Caption>
                                                                AT OR FOR THE YEAR ENDED
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                2002      2001      2000
                                                              --------   -------   -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Federal Home Loan Bank advances:
  Average balance outstanding...............................  $443,931   419,867   363,771
  Maximum amount outstanding at any month-end during the
     period.................................................   461,877   467,000   383,954
  Balance outstanding at end of period......................   426,560   449,000   344,334
  Weighted average interest rate during the period..........      4.98%     5.69      6.21
  Weighted average interest rate at end of period...........      4.38      5.29      6.19
</Table>

<Table>
<Caption>
                                                                AT OR FOR THE YEAR ENDED
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                2002      2001      2000
                                                              --------   -------   -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>       <C>
Other Borrowed Money:
  Average balance outstanding...............................       $--        --     2,679
  Maximum amount outstanding at any month-end during the
     period.................................................        --        --     5,000
  Balance outstanding at end of period......................        --        --        --
  Weighted average interest rate during the period..........        --%       --      9.97
  Weighted average interest rate at end of period...........        --        --        --
</Table>

     Total stockholders' equity was $93.0 million at December 31, 2002, or
$21.17 per share, compared to $93.4 million, or $21.39 per share, at December
31, 2001. Stockholders' equity was essentially unchanged during the year ended
December 31, 2002 as the contributions from net income, the amortization of the
Stock-based Incentive Plans, the Employee Stock Ownership Plan ("ESOP"),
exercise of stock options and the change in market valuation, net of taxes, of
the available-for-sale securities portfolio were offset by the completion of the
ninth and commencement of the tenth 5% stock repurchase programs and dividends
paid. The stockholders' equity to total assets ratio of the Company was 6.1% and
6.3% at December 31, 2002 and 2001, respectively.

     Total stockholders' equity was $93.4 million at December 31, 2001, or
$21.39 per share, compared to $89.9 million, or $19.82 per share, at December
31, 2000. Stockholders' equity increased during the year ended December 31, 2001
due to the combined effects of net income and the amortization of the Stock-
based Incentive Plans, the Employee Stock Ownership Plan ("ESOP"), exercise of
stock options and the change in market valuation, net of taxes, of the available
for sale securities portfolio, offset by the completion of the eighth and
commencement of the ninth 5% stock repurchase programs and dividends paid. The
stockholders' equity to total assets ratio of the Company was 6.3% and 6.8% at
December 31, 2001 and 2000, respectively.

MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK

     One of the principal market risks affecting the Company is interest rate
risk. The objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements, and performance
objectives, and to manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established a management
Asset/Liability Committee that is responsible for reviewing the Company's asset/
liability policies and interest rate risk position. The Committee reports trends
and interest rate risk position to the Board of Directors on a quarterly basis.
The extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.

     The Company has utilized the following strategies to manage interest rate
risk: (1) emphasizing the origination and retention of adjustable-rate mortgage
loans; (2) generally selling in the secondary market substantially all
fixed-rate mortgage loans originated with terms of 15 years or greater while
generally retaining the servicing rights thereof; (3) primarily investing in
investment securities or mortgage-backed

                                        28
<PAGE>

securities with adjustable interest rates or if interest rates are fixed, then
the duration of the instrument is generally less than five years; and (4)
attempting to reduce the overall interest rate sensitivity of liabilities by
emphasizing longer-term deposits such as wholesale brokered deposits and
utilizing longer term FHLB advances to replace short-term, rate sensitive,
retail deposits. A portion of the FHLB advances may be called depending on the
level of interest rates relative to the interest rate being charged at the
applicable call date. Accordingly, if interest rates rise sufficient to trigger
the call feature, the Company's net interest margin may be negatively impacted
if called advances are replaced by new, higher cost advances.

     The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. These differences are
a primary component of the risk to net interest income. 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 the amount of interest
rate sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a positive gap position would be in a better position to invest
in higher yielding assets which, consequently, may result in the yield on its
assets increasing at a pace more closely matching the increase in the cost of
its interest-bearing liabilities than if it had a negative gap. During a period
of falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap which,
consequently, may tend to restrain the growth of, or reduce, its net interest
income.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2002, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The Gap Table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 2002, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three-month period and
subsequent selected time intervals. Annual prepayment rates for adjustable-rate
and fixed-rate residential loans are assumed to be 18.9% and 18.6%,
respectively. Annual prepayment rates for adjustable-rate and fixed-rate
mortgage-backed securities are assumed to be 28.2% and 13.4%, respectively.
Money market deposit accounts are assumed to be immediately rate-sensitive,
while passbook accounts and negotiable order of withdrawal ("NOW") accounts are
assumed to have annual decay rates of 12% and 18%, respectively. These
assumptions may or may not be indicative of actual prepayment and withdrawals
experienced by the Company. The table does not necessarily indicate the impact
of general interest rate movements on the Company's net interest income because
the actual repricing dates of various assets and liabilities are subject to
customer discretion and competitive and other pressures and, therefore, actual
experience may vary from that indicated.

                                        29
<PAGE>

     The following table shows the gap position of the Company at December 31,
2002 and 2001:

<Table>
<Caption>
                                                     MORE THAN     MORE THAN    MORE THAN   MORE THAN
                                         3 MONTHS   3 MONTHS TO   6 MONTHS TO   1 YEAR TO   3 YEARS TO   MORE THAN
                                         OR LESS     6 MONTHS       1 YEAR       3 YEARS     5 YEARS      5 YEARS    TOTAL AMOUNT
                                         --------   -----------   -----------   ---------   ----------   ---------   ------------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                      <C>        <C>           <C>           <C>         <C>          <C>         <C>
Interest-earning assets
Short-term investments.................  $ 26,006    $      3      $     61     $      7     $      0    $       0    $   26,077
Investment securities..................   108,775           0           500        2,020        2,054        2,063       115,412
Fixed rate loans(1)....................    26,402      19,515        35,566       88,783       65,510       49,675       285,451
Adjustable rate loans(1)...............   296,203      45,031       100,456      226,141      156,453          394       824,678
Mortgage-backed securities.............    11,880       7,854        13,911       44,615       29,845       31,839       139,944
Stock in FHLB-Boston...................    24,552           0             0            0            0            0        24,552
                                         --------    --------      --------     --------     --------    ---------    ----------
    Total interest-earning assets......   493,818      72,403       150,494      361,566      253,862       83,971     1,416,114
                                         --------    --------      --------     --------     --------    ---------    ----------
Interest-bearing liabilities
Money market deposit accounts..........    62,530           0             0            0            0            0        62,530
Savings accounts.......................     9,323       7,748        15,495       61,980       61,980       61,607       218,133
NOW accounts...........................     6,793       6,764        13,528       54,113       54,113       15,031       150,342
Certificate accounts...................    58,324      67,141       127,263      128,276       41,115            0       422,119
FHLB advances..........................    46,043      52,129        79,757       85,406       75,225       88,000       426,560
Preferred Trust........................         0           0             0            0            0       32,000        32,000
                                         --------    --------      --------     --------     --------    ---------    ----------
    Total interest-bearing
     liabilities.......................   183,013     133,782       236,043      329,775      232,433      196,638     1,311,684
                                         --------    --------      --------     --------     --------    ---------    ----------
Interest-earning assets less
  interest-bearing liabilities.........  $310,805    $(61,379)     $(85,549)    $ 31,791     $ 21,429    $(112,667)   $  104,430
                                         ========    ========      ========     ========     ========    =========    ==========
Cumulative interest rate sensitivity
  gap December 31, 2002................  $310,805    $249,426      $163,877     $195,668     $217,097    $ 104,430    $  104,430
                                         ========    ========      ========     ========     ========    =========    ==========
Cumulative interest rate gap as a
  percentage of total assets at
  December 31, 2002....................     20.37%      16.35%        10.74%       12.83%       14.23%        6.85%
Cumulative interest rate gap as a
  percentage of total interest-earning
  assets at December 31, 2002..........     21.95%      17.61%        11.57%       13.82%       15.33%        7.37%
Cumulative interest-earning assets as a
  percentage of cumulative
  interest-bearing liabilities at
  December 31, 2002....................    269.83%     178.73%       129.64%      122.17%      119.47%      107.96%
Cumulative interest rate sensitivity
  gap December 31, 2001................  $153,189    $102,816      $100,281     $179,840     $278,875    $ 108,762    $  108,762
                                         ========    ========      ========     ========     ========    =========    ==========
Cumulative interest rate gap as a
  percentage of total assets at
  December 31, 2001....................     10.41%       6.99%         6.82%       12.23%       18.96%        7.39%
Cumulative interest rate gap as a
  percentage of total interest-earning
  assets at December 31, 2001..........     11.23%       7.54%         7.35%       13.19%       20.45%        7.98%
Cumulative interest-earning assets as a
  percentage of cumulative
  interest-bearing liabilities at
  December 31, 2001....................    156.98%     125.25%       117.34%      120.10%      127.65%      108.67%
</Table>

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

(1) Includes total loans net of non-performing loans.

                                        30
<PAGE>

     Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to 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 loans, have
features, which restrict changes in interest rates both on a short-term basis
and over the life of the asset. Further, in the event of change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.

     The Company's interest rate sensitivity is also monitored by management
through the use of a model, which internally generates estimates of the change
in net portfolio value ("NPV") over a range of interest rate change scenarios.
NPV is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The Company's Board of Directors has established certain minimum
NPV limits by interest rate shock. These approved limits are included in the
following table. The Company is operating above these minimum limits imposed by
the Board of Directors. The OTS also produces a similar analysis using its own
model, based upon data submitted on the Company's quarterly Thrift Financial
Reports for BFS, the results of which may vary from the Company's internal model
primarily due to differences in assumptions utilized between the Company's
internal model and the OTS model, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. For purposes of the NPV table,
prepayment speeds similar to those used in the Gap table were used, reinvestment
rates were those in effect for similar products currently being offered and
rates on core deposits were modified to reflect recent trends. The following
table sets forth the Company's NPV as of December 31, 2002 and 2001, as
calculated by the Company.

<Table>
<Caption>
                                                NET PORTFOLIO VALUE AS OF DECEMBER 31, 2002
INTEREST RATES                                 ---------------------------------------------
IN BASIS POINTS                                   $         $        %       NPV     BOARD
(RATE SHOCK)                                   AMOUNT    CHANGE    CHANGE   RATIO   LIMITS %
---------------                                -------   -------   ------   -----   --------
                                                           (DOLLAR IN THOUSANDS)
<S>                                            <C>       <C>       <C>      <C>     <C>
300..........................................   98,577   (11,935)  (10.8)    6.7      4.1
200..........................................  104,704    (5,808)   (5.3)    7.0      5.1
100..........................................  112,431     1,919     1.7     7.4      6.1
Static.......................................  110,512                       7.1
(100)........................................  102,891    (7,621)   (6.9)    6.6      6.1
(200)........................................   90,720   (19,792)  (17.9)    5.7      5.1
(300)........................................   77,466   (33,046)  (29.9)    4.9      4.1
</Table>

<Table>
<Caption>
                                                NET PORTFOLIO VALUE AS OF DECEMBER 31, 2001
INTEREST RATES                                 ---------------------------------------------
IN BASIS POINTS                                   $         $        %       NPV     BOARD
(RATE SHOCK)                                   AMOUNT    CHANGE    CHANGE   RATIO   LIMITS %
---------------                                -------   -------   ------   -----   --------
                                                           (DOLLAR IN THOUSANDS)
<S>                                            <C>       <C>       <C>      <C>     <C>
300..........................................   95,516   (20,432)  (17.6)    6.9      4.9
200..........................................  104,623   (11,325)   (9.8)    7.4      5.9
100..........................................  112,616    (3,332)   (2.9)    7.8      6.9
Static.......................................  115,948                       7.9
(100)........................................  113,002    (2,946)   (2.5)    7.6      6.9
(200)........................................  111,260    (4,688)   (4.0)    7.3      5.9
(300)........................................  103,611   (12,337)  (10.6)    6.8      4.9
</Table>

     As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions, which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Company's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not

                                        31
<PAGE>

provide a precise forecast of the effect of changes in market interest rates on
the Company's net interest income and will differ from actual results.

     During 2002, the Company continued to follow its past practice of selling,
while generally retaining the servicing rights, certain fixed-rate and
adjustable-rate mortgage loans which were sold as whole loans. In conjunction
with this mortgage banking activity, the Company uses forward contracts in order
to reduce exposure to interest rate risk. The amount of forward coverage of the
"pipeline" of mortgages is set on a day-to-day basis by an operating officer,
within policy guidelines, based on the Company's assessment of the general
direction of interest rates and the levels of mortgage origination activity.
Forward Financial originates and sells, servicing released, substantially all of
its consumer loans to various purchasers ("client lenders"). The client lenders
impose their underwriting standards and if they consider an application
satisfactory and accept it, the loan is approved for closing. In this manner,
Forward Financial eliminates its exposure to interest rate risk with respect to
loans sold as well as nearly all the credit risk.

LIQUIDITY AND CAPITAL RESOURCES

     The primary source of cash flow for the Company is dividend payments from
BFS and BNB, sales and maturities of investment securities and, to a lesser
extent, earnings on deposits and dividends on equity securities held by the
Company. Dividend payments by BFS and BNB have primarily been used to fund stock
repurchase programs, pay dividends to stockholders, interest on trust preferred
securities and other operating expenses of the Company. The ability of BFS and
BNB to pay dividends and other capital distributions to the Company is generally
limited by OTS and OCC regulations, respectively. Additionally, the OTS and OCC
may prohibit the payment of dividends that are otherwise permissible by
regulation for safety and soundness reasons. As of December 31, 2002, BFS and
BNB had $18.9 million of dividends that could be paid to the Company without
regulatory approval and the Company had $6.5 million of securities available for
sale and $7.1 million of cash and cash equivalents. Any dividend by BFS or BNB
beyond its current year net income combined with retained net income of the
preceding two years would require notification to or approval of the OTS or the
OCC. To the extent BFS or BNB were to apply for a dividend distribution to the
Company in excess of the regulatory permitted dividend amounts, no assurances
can be made such application would be approved by the regulatory authorities.

     The Banks' primary sources of funds are deposits, (including brokered
deposits), principal and interest payments on loans, sales of loans,
investments, mortgage-backed and related securities and FHLB advances. While
maturities and scheduled amortization of loans are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. Management has maintained
adequate liquidity so that it may invest any excess liquidity in higher yielding
interest-earning assets or use such funds to repay higher cost FHLB advances.
Neither the OTS nor the OCC provide specific guidance for liquidity ratios for
BFS and BNB, respectively, but do require the Banks to maintain reasonable and
prudent liquidity levels. Management believes such levels are being maintained.

     The Company's and Banks' most liquid assets are cash, overnight federal
funds sold, short-term investments and investments available for sale. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period.

     Liquid assets for the period indicated consisted of the following:

<Table>
<Caption>
                                                         DECEMBER 31, 2002   DECEMBER 31, 2001
                                                         -----------------   -----------------
<S>                                                      <C>                 <C>
Cash and cash equivalents..............................      $ 74,672            $ 95,957
Investment securities available for sale...............       112,888              63,258
Mortgage-backed securities available for sale..........       114,515              94,922
Loans held for sale....................................        31,614              24,612
                                                             --------            --------
     Total liquid assets...............................      $333,689            $278,749
                                                             ========            ========
</Table>

     The Banks have other sources of liquidity if a need for additional funds
arises, including FHLB advances and wholesale-brokered deposits and repurchase
agreements (collateralized borrowings). At December 31, 2002, the Banks had
$426.6 million in advances outstanding from the FHLB and had, with existing
collateral, an additional $106.1 million in overall borrowing capacity from the
FHLB. Borrowing capacity can also be increased upon the delivery of mortgage
notes on non owner-occupied one- to four-family loans, multi-family and
commercial loans. The Banks generally avoid paying the highest deposit

                                        32
<PAGE>

rates in their market and accordingly utilize alternative sources of funds such
as FHLB advances and wholesale brokered deposits to supplement cash flow needs.

     At December 31, 2002, the Banks had commitments to originate loans, unused
outstanding lines of credit and standby letters of credit, totaling $237.9
million.

     The following table lists the outstanding commitments by expiration date
(in thousands):

<Table>
<Caption>
                                         TOTAL      UNDER
                                      COMMITMENTS   1 YEAR   1-3 YEARS   4-5 YEARS   OVER 5 YEARS
                                      -----------   ------   ---------   ---------   ------------
<S>                                   <C>           <C>      <C>         <C>         <C>
To originate mortgage loans.........   $ 84,941     84,941        --          --            --
To originate business loans.........      1,607      1,607        --          --            --
Home equity lines...................    129,724        433     2,978      10,277       116,036
Business lines......................     18,457      1,434        --          --        17,023
Standby letters of credit...........      3,120      2,660       178          --           282
                                       --------     ------     -----      ------       -------
     Total..........................   $237,849     91,075     3,156      10,277       133,341
                                       ========     ======     =====      ======       =======
</Table>

     The following table sets forth contractual obligations by due periods (in
thousands):

<Table>
<Caption>
                                                   UNDER
                                         TOTAL     1 YEAR   1-3 YEARS   4-5 YEARS   OVER 5 YEARS
                                        --------   ------   ---------   ---------   ------------
<S>                                     <C>        <C>      <C>         <C>         <C>
Long-term debt........................  $426,560   177,500   85,367      75,693        88,000
Corporation obligated mandatorily
  redeemable capital securities.......    32,000                                       32,000
Operating leases......................     7,167    1,342     2,090       2,090         1,645
                                        --------   ------     -----      ------       -------
Total obligations.....................  $465,727   178,842   87,457      77,783       121,645
                                        ========   ======     =====      ======       =======
</Table>

     The Banks anticipate that they will have sufficient funds available to meet
their current loan origination commitments. Certificate accounts, which are
scheduled to mature in less than one year from December 31, 2002, totaled $227.9
million. The Banks expect that a substantial majority of the maturing
certificate accounts will be retained by the Banks at maturity.

     At the time of conversion, BFS established a liquidation account in an
amount equal to its retained earnings as of June 30, 1995. The liquidation
account is reduced to the extent that eligible account holders reduce their
qualifying deposits. BFS is not permitted to declare or pay dividends on its
capital stock, or repurchase any of its outstanding stock, if the effect thereof
would cause its stockholders' equity to be reduced below the amount required for
the liquidation account or applicable regulatory capital requirements. The
balance of the liquidation account at December 31, 2002, was approximately $5.3
million.

     The Company is required to maintain a ratio of capital to assets, on a
consolidated basis, which is substantially equal to that required to be
maintained by the Banks. At December 31, 2002, the consolidated Generally
Accepted Accounting Principles ("GAAP") capital to assets ratio of the Company
was 6.1% and its regulatory capital levels exceeded the minimum regulatory
capital requirements for the Company. As of December 31, 2002, BFS exceeded all
of its regulatory capital requirements with tangible, core, risk-based tier 1,
and risk-based total capital ratios of 6.6%, 6.6%, 10.0% and 11.2%,
respectively, compared to the minimum regulatory requirements for adequately
capitalized levels of 2.0%, 4.0%, 4.0% and 8.0%, respectively. BNB also exceeded
the minimum regulatory capital requirements for adequately capitalized levels
with leverage capital, risk-based tier 1 capital and risk-based total capital
ratios of 6.0%, 12.6% and 13.8%, respectively, compared to the minimum
regulatory requirements for adequately capitalized levels of 4.0%, 4.0% and
8.0%, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Statement No. 144 provides
additional implementation guidance and supercedes Statement No. 121, Accounting
for the Impairment of Long-Lived assets and for Long-Lived Assets to Be Disposed
Of. It is effective for financial statements issued for fiscal years beginning
after December 15, 2001. Statement No. 144 was adopted on January 1, 2002, with
no impact on the financial condition or results of operations.

                                        33
<PAGE>

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. SFAS 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123
transition rule creates in the year of adoption. Companies can choose to elect a
method that will provide for comparability amongst years reported. In addition,
this Statement amends the disclosure requirement of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
fair value based method of accounting for stock-based employee compensation and
the effect of the method used on reported results.

     FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, considers standby letters of credit, excluding commercial letters of
credit and other lines of credit, a guarantee of the Company. The Company enters
into a standby letter of credit to guarantee performance of a customer to a
third party. These guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved is represented by the
contractual amounts of those instruments. Under the standby letters of credit,
the Company is required to make payments to the beneficiary of the letters of
credit upon request by the beneficiary so long as all performance criteria have
been met. Most guarantees extend up to one year. At December 31, 2002, the
maximum potential amount of future payments is $3.1 million. The collateral
obtained is determined based upon management's credit evaluation of the customer
and may include cash, accounts receivable, inventory, property, plant, and
equipment and income-producing real estate. The recourse provisions of the
agreements allow the Company to collect the cash used to collateralize the
agreement. If another business asset is used as collateral and cash is not
available, the Company creates a loan from the customer with the same criteria
as its other lending activities. The Company's maximum potential loss of $3.1
million is covered by collateral. The fair value of the guarantees at December
31, 2002, and 2001, were not material nor reflected on the balance sheet.

                                        34
<PAGE>

                      [THIS PAGE INTENTIONALLY LEFT BLANK]

                                        35
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
BostonFed Bancorp, Inc.:

     We have audited the accompanying consolidated balance sheets of BostonFed
Bancorp, Inc. and its subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BostonFed
Bancorp, Inc. and its subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

     As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.

(KPMG LLP LOGO)

Boston, Massachusetts
January 24, 2003, except for Note 11, as to which the date is March 6, 2003

                                       F-1
<PAGE>

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001

<Table>
<Caption>
                                                                  2002            2001
                                                              -------------   ------------
                                                              (IN THOUSANDS, EXCEPT SHARE
                                                                 AND PER SHARE AMOUNTS)
<S>                                                           <C>             <C>
                                          ASSETS
Cash and due from banks (note 1)............................   $   48,595         47,799
Federal funds sold..........................................       25,900         47,888
Certificates of deposit.....................................          177            270
                                                               ----------      ---------
     Total cash and cash equivalents........................       74,672         95,957
Investment securities available for sale (amortized cost of
  $112,056 for 2002 and $62,868 for 2001) (note 3)..........      112,888         63,258
Investment securities held to maturity (fair value of $2,576
  for 2002 and $598 for 2001) (note 4)......................        2,524            554
Mortgage-backed securities available for sale (amortized
  cost of $113,550 for 2002 and $95,139 for 2001) (note
  3)........................................................      114,515         94,922
Mortgage-backed securities held to maturity (fair value of
  $26,597 for 2002 and $41,547 for 2001) (note 4)...........       25,429         40,822
Loans held for sale.........................................       31,614         24,612
Loans, net of allowance for loan losses of $12,656 for 2002
  and $12,328 for 2001 (notes 5 and 6)......................    1,071,356      1,055,798
Accrued interest receivable (note 7)........................        6,470          6,317
Stock in FHLB of Boston, at cost (note 10)..................       24,552         24,208
Bank-owned life insurance...................................       24,316         23,078
Premises and equipment, net (note 8)........................       10,133         10,295
Real estate owned...........................................        1,026             --
Goodwill (note 1)...........................................       10,776         17,776
Deferred income tax asset, net (note 11)....................        2,633            854
Prepaid expenses and other assets...........................       12,708         12,415
                                                               ----------      ---------
     Total assets...........................................   $1,525,612      1,470,866
                                                               ==========      =========
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Deposit accounts (note 9).................................   $  960,278        884,516
  Federal Home Loan Bank advances and other borrowings (note
     10)....................................................      426,560        449,000
  Corporation obligated mandatorily redeemable capital
     securities (note 13)...................................       32,000         32,000
  Advance payments by borrowers for taxes and insurance.....        2,317          2,614
  Accrued expenses and other liabilities....................       11,484          9,348
                                                               ----------      ---------
     Total liabilities......................................    1,432,639      1,377,478
                                                               ----------      ---------
Commitments and contingencies (notes 3, 4, 5, 8, 14 and 15)
Stockholders' equity (notes 2 and 12):
  Preferred stock, $.01 par value. Authorized 1,000,000
     shares; none issued....................................           --             --
  Common stock, $.01 par value. Authorized 17,000,000
     shares; 6,589,617 shares issued for 2002 and 2001......           66             66
  Additional paid-in capital................................       69,281         68,259
  Retained earnings.........................................       64,242         64,702
  Accumulated other comprehensive income....................        1,096            105
  Treasury stock, at cost (2,164,269 and 2,138,964 shares
     for 2002 and 2001, respectively).......................      (41,698)       (39,158)
  Unallocated ESOP shares...................................           --           (529)
  Unearned stock-based incentive plan.......................          (14)           (57)
                                                               ----------      ---------
     Total stockholders' equity.............................       92,973         93,388
                                                               ----------      ---------
     Total liabilities and stockholders' equity.............   $1,525,612      1,470,866
                                                               ==========      =========
</Table>

          See accompanying notes to consolidated financial statements.
                                       F-2
<PAGE>

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<Table>
<Caption>
                                                               2002      2001     2000
                                                              -------   ------   ------
                                                                (IN THOUSANDS, EXCEPT
                                                                 PER SHARE AMOUNTS)
<S>                                                           <C>       <C>      <C>
Interest income:
  Loans (note 5)............................................  $73,418   81,914   80,960
  Investment securities.....................................    4,011    5,150    6,024
  Mortgage-backed securities................................    7,904    7,365    4,393
  Federal funds sold........................................      270      467      457
                                                              -------   ------   ------
     Total interest income..................................   85,603   94,896   91,834
                                                              -------   ------   ------
Interest expense:
  Deposit accounts (note 9).................................   22,341   30,103   31,725
  Borrowed funds (note 10)..................................   22,219   23,937   22,764
  Corporation obligated mandatorily redeemable capital
     securities distributions (note 13).....................    3,529    3,522    1,137
                                                              -------   ------   ------
     Total interest expense.................................   48,089   57,562   55,626
                                                              -------   ------   ------
     Net interest income....................................   37,514   37,334   36,208
Provision for loan losses (note 6)..........................    1,350      820    1,000
                                                              -------   ------   ------
     Net interest income after provision for loan losses....   36,164   36,514   35,208
                                                              -------   ------   ------
Non-interest income:
  Gain on sale of loans.....................................   12,657   10,625    9,009
  Deposit service fees......................................    3,038    2,476    1,961
  Income from bank-owned life insurance (note 12)...........    1,238    1,255    1,267
  Loan processing and servicing fees (note 5)...............   (3,989)    (275)     661
  Gain on sale of investments (note 3)......................      387      690        5
  Other.....................................................    1,560    1,828    1,451
                                                              -------   ------   ------
     Total non-interest income..............................   14,891   16,599   14,354
                                                              -------   ------   ------
Non-interest expense:
  Compensation and benefits (note 12).......................   23,940   21,674   20,073
  Occupancy and equipment...................................    4,883    4,737    4,256
  Data processing...........................................    1,775    1,685    1,513
  Advertising expense.......................................    1,141    1,032    1,051
  Deposit insurance premiums................................      159      167      164
  Real estate operations....................................      200        7     (257)
  Goodwill impairment and amortization (note 1).............    7,000    1,418    1,406
  Legal settlements.........................................    1,250       --       --
  Other.....................................................    6,932    7,528    6,302
                                                              -------   ------   ------
     Total non-interest expense.............................   47,280   38,248   34,508
                                                              -------   ------   ------
     Income before income taxes.............................    3,775   14,865   15,054
Income tax expense (note 11)................................    1,387    5,209    5,344
                                                              -------   ------   ------
     Net income.............................................  $ 2,388    9,656    9,710
                                                              =======   ======   ======
Basic earnings per share....................................  $  0.54     2.18     2.07
Diluted earnings per share..................................  $  0.51     2.05     2.01
Weighted average shares outstanding -- basic................    4,413    4,436    4,700
Weighted average shares outstanding -- dilutive.............    4,676    4,702    4,827
</Table>

          See accompanying notes to consolidated financial statements.
                                       F-3
<PAGE>

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
                                     INCOME
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
<Table>
<Caption>

                                                                                                     ACCUMULATED
                                                       SHARES OF            ADDITIONAL                  OTHER
                                                        COMMON     COMMON    PAID-IN     RETAINED   COMPREHENSIVE
                                                         STOCK     STOCK     CAPITAL     EARNINGS   (LOSS) INCOME
                                                       ---------   ------   ----------   --------   -------------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>         <C>      <C>          <C>        <C>
Balance at December 31, 1999.........................    6,590      $66       67,198      50,481       (1,485)
  Common stock repurchased (332 shares at an average
    price of $17.71 per share).......................       --       --           --          --           --
  Stock options exercised (8 shares at an average
    price of $13.06 per share, net of tax benefit)...       --       --           (8)         --           --
  Cash dividends declared and paid ($.52 per
    share)...........................................       --       --           --      (2,495)          --
  Reduction in unallocated ESOP shares charged to
    expense..........................................       --       --           --          --           --
  Appreciation in fair value of shares charged to
    expense for compensation plans...................       --       --          348          --           --
  Earned portion of SIP shares charged to expense....       --       --           --          --           --
  Comprehensive income:
    Changes in net unrealized gain in investments
      available for sale, net........................       --       --           --          --        1,573
  Net income.........................................       --       --           --       9,710           --
    Comprehensive income.............................
                                                         -----      ---       ------      ------       ------
Balance at December 31, 2000.........................    6,590       66       67,538      57,696           88
  Common stock repurchased (308 shares at an average
    price of $22.45 per share).......................       --      $--           --          --           --
  Stock options exercised (110 shares at an average
    price of $12.51 per share, net of tax benefit)...       --       --         (256)         --           --
  Cash dividends declared and paid ($.58 per
    share)...........................................       --       --           --      (2,650)          --
  Reduction in unallocated ESOP shares charged to
    expense..........................................       --       --           --          --           --
  Appreciation in fair value of shares charged to
    expense for compensation plans...................       --       --          684          --           --
  Earned portion of SIP shares charged to expense....       --       --           --          --           --
  Tax benefit on SIP distribution....................       --       --          293          --           --

<Caption>
                                                                                UNEARNED
                                                                                 STOCK-
                                                                                  BASED
                                                                  UNALLOCATED   INCENTIVE       TOTAL
                                                       TREASURY      ESOP         PLAN      STOCKHOLDERS'
                                                        STOCK       SHARES       ("SIP")       EQUITY
                                                       --------   -----------   ---------   -------------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>        <C>           <C>         <C>
Balance at December 31, 1999.........................  (28,532)     (1,663)       (361)        85,704
  Common stock repurchased (332 shares at an average
    price of $17.71 per share).......................   (5,886)         --          --         (5,886)
  Stock options exercised (8 shares at an average
    price of $13.06 per share, net of tax benefit)...      137          --          --            129
  Cash dividends declared and paid ($.52 per
    share)...........................................       --          --          --         (2,495)
  Reduction in unallocated ESOP shares charged to
    expense..........................................       --         605          --            605
  Appreciation in fair value of shares charged to
    expense for compensation plans...................       --          --          --            348
  Earned portion of SIP shares charged to expense....       --          --         225            225
  Comprehensive income:
    Changes in net unrealized gain in investments
      available for sale, net........................       --          --          --          1,573
  Net income.........................................       --          --          --          9,710
                                                                                               ------
    Comprehensive income.............................                                          11,283
                                                       -------      ------        ----         ------
Balance at December 31, 2000.........................  (34,281)     (1,058)       (136)        89,913
  Common stock repurchased (308 shares at an average
    price of $22.45 per share).......................   (6,907)         --          --         (6,907)
  Stock options exercised (110 shares at an average
    price of $12.51 per share, net of tax benefit)...    2,030          --          --          1,774
  Cash dividends declared and paid ($.58 per
    share)...........................................       --          --          --         (2,650)
  Reduction in unallocated ESOP shares charged to
    expense..........................................       --         529          --            529
  Appreciation in fair value of shares charged to
    expense for compensation plans...................       --          --          --            684
  Earned portion of SIP shares charged to expense....       --          --          79             79
  Tax benefit on SIP distribution....................       --          --          --            293
</Table>

                                       F-4
<PAGE>
<Table>
<Caption>

                                                                                                     ACCUMULATED
                                                       SHARES OF            ADDITIONAL                  OTHER
                                                        COMMON     COMMON    PAID-IN     RETAINED   COMPREHENSIVE
                                                         STOCK     STOCK     CAPITAL     EARNINGS   (LOSS) INCOME
                                                       ---------   ------   ----------   --------   -------------
                                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>         <C>      <C>          <C>        <C>
  Comprehensive income:
    Changes in net unrealized gain in investments
      available for sale, net........................       --       --           --          --           17
  Net income.........................................       --       --           --       9,656           --
    Comprehensive income.............................
                                                         -----      ---       ------      ------       ------
Balance at December 31, 2001.........................    6,590       66       68,259      64,702          105
  Common stock repurchased (217 shares at an average
    price of $28.21 per share).......................       --      $--           --          --           --
  Stock options exercised (191 shares at an average
    price of $14.86 per share, net of tax benefit)...       --       --         (725)         --           --
  Cash dividends declared and paid ($.63 per
    share)...........................................       --       --           --      (2,848)          --
  Reduction in unallocated ESOP shares charged to
    expense..........................................       --       --           --          --           --
  Appreciation in fair value of shares charged to
    expense for compensation plans...................       --       --          969          --           --
  Earned portion of SIP shares charged to expense....       --       --           --          --           --
  Tax benefit on SIP distribution....................       --       --          778          --           --
  Comprehensive income:
    Changes in net unrealized gain in investments
      available for sale, net........................       --       --           --          --          991
  Net income.........................................       --       --           --       2,388           --
    Comprehensive income.............................
                                                         -----      ---       ------      ------       ------
Balance at December 31, 2002.........................    6,590      $66       69,281      64,242        1,096
                                                         =====      ===       ======      ======       ======

<Caption>
                                                                                UNEARNED
                                                                                 STOCK-
                                                                                  BASED
                                                                  UNALLOCATED   INCENTIVE       TOTAL
                                                       TREASURY      ESOP         PLAN      STOCKHOLDERS'
                                                        STOCK       SHARES       ("SIP")       EQUITY
                                                       --------   -----------   ---------   -------------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>        <C>           <C>         <C>
  Comprehensive income:
    Changes in net unrealized gain in investments
      available for sale, net........................       --          --          --             17
  Net income.........................................       --          --          --          9,656
                                                                                               ------
    Comprehensive income.............................                                           9,673
                                                       -------      ------        ----         ------
Balance at December 31, 2001.........................  (39,158)       (529)        (57)        93,388
  Common stock repurchased (217 shares at an average
    price of $28.21 per share).......................   (6,109)         --          --         (6,109)
  Stock options exercised (191 shares at an average
    price of $14.86 per share, net of tax benefit)...    3,569          --          --          2,844
  Cash dividends declared and paid ($.63 per
    share)...........................................       --          --          --         (2,848)
  Reduction in unallocated ESOP shares charged to
    expense..........................................       --         529          --            529
  Appreciation in fair value of shares charged to
    expense for compensation plans...................       --          --          --            969
  Earned portion of SIP shares charged to expense....       --          --          43             43
  Tax benefit on SIP distribution....................       --          --          --            778
  Comprehensive income:
    Changes in net unrealized gain in investments
      available for sale, net........................       --          --          --            991
  Net income.........................................       --          --          --          2,388
                                                                                               ------
    Comprehensive income.............................                                           3,379
                                                       -------      ------        ----         ------
Balance at December 31, 2002.........................  (41,698)         --         (14)        92,973
                                                       =======      ======        ====         ======
</Table>

          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<Table>
<Caption>
                                                                2002        2001       2000
                                                              ---------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>         <C>        <C>
Net cash flows from operating activities:
  Net income................................................  $   2,388      9,656      9,710
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation, amortization, impairment and accretion,
       net..................................................      8,862      2,817      2,670
     Earned SIP shares......................................         43         79        225
     Reduction in unallocated ESOP shares...................        529        529        605
     Appreciation in fair value of shares charged to expense
       for compensation plans...............................        969        684        348
     Income from bank-owned life insurance..................     (1,238)    (1,255)    (1,267)
     Provision for loan losses..............................      1,350        820      1,000
     Provision for valuation allowance for real estate
       owned................................................        200         --          7
     Loans originated for sale..............................   (757,990)  (592,310)  (259,134)
     Proceeds from sale of loans............................    763,645    591,139    271,501
     Gain on sale of investment securities..................       (387)      (690)        (5)
     Deferred income tax (benefit) expense..................     (2,383)       571        221
     Gain on sale of real estate acquired through
       foreclosure..........................................         --         --         (4)
     Gain on sale of loans..................................    (12,657)   (10,625)    (9,009)
     Gain on sale of office premises........................         --       (217)        --
     Increase (decrease) in accrued interest receivable.....       (153)     1,058     (1,108)
     Increase (decrease) in prepaid expenses and other
       assets...............................................        456     (1,904)    (1,993)
     Increase in accrued expenses and other liabilities.....      2,136        128      1,418
                                                              ---------   --------   --------
       Net cash provided by operating activities............      5,770        480     15,185
                                                              ---------   --------   --------
Cash flows from investing activities:
  Net cash paid for acquisitions............................         --         --       (975)
  Proceeds from sales of investment securities available for
     sale...................................................     12,121     26,743         46
  Proceeds from maturities of investment securities
     available for sale.....................................      2,003     25,412      6,000
  Proceeds from maturities of investment securities held to
     maturity...............................................         25      1,750         --
  Purchase of investment securities available for sale......    (64,647)   (52,053)   (14,904)
  Purchase of investment securities held to maturity........     (1,996)        --         --
  Purchase of mortgage-backed securities available for
     sale...................................................   (133,799)  (101,843)    (1,986)
  Principal repayments of investments securities
     available-for-sale.....................................      1,606      1,217        628
  Principal repayments on mortgage-backed securities held to
     maturity...............................................     15,380     14,439      9,620
  Principal repayments on mortgage-backed securities
     available for sale.....................................    115,231     22,105      2,343
  Increase in portfolio loans, net..........................    (18,000)   (20,183)   (55,816)
  Purchase of FHLB stock....................................       (344)    (3,559)      (338)
  Purchases of premises and equipment.......................     (1,413)    (1,663)    (3,743)
  Proceeds from sale of real estate owned...................         --        147        314
  Proceeds from sale of office premises.....................         --        790         --
  Additional investment in real estate owned................       (134)        (2)       (86)
                                                              ---------   --------   --------
       Net cash used in investing activities................    (73,967)   (86,700)   (58,897)
                                                              ---------   --------   --------
                                                                                  (Continued)
</Table>

                                       F-6
<PAGE>

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

<Table>
<Caption>
                                                                2002        2001       2000
                                                              ---------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>         <C>        <C>
Cash flows from financing activities:
  Increase in deposits accounts.............................  $  75,762     34,869     79,598
  Proceeds from corporation obligated mandatorily redeemable
     capital securities.....................................         --         --     32,000
  Proceeds from Federal Home Loan Bank advances.............    380,356    510,078    476,199
  Repayments of Federal Home Loan Bank advances.............   (402,796)  (405,412)  (516,365)
  Proceeds from other borrowings............................         --         --      1,945
  Repayments of other borrowings............................         --         --     (5,000)
  Decrease in advanced payments by borrowers for taxes and
     insurance..............................................       (297)      (250)      (434)
  Cash dividends paid.......................................     (2,848)    (2,650)    (2,495)
  Common stock repurchased..................................     (6,109)    (6,907)    (5,886)
  Stock options exercised...................................      2,844      1,774        129
                                                              ---------   --------   --------
       Net cash provided by financing activities............     46,912    131,502     59,691
                                                              ---------   --------   --------
       Net (decrease) increase in cash and cash
          equivalents.......................................    (21,285)    45,282     15,979
Cash and cash equivalents at beginning of year..............     95,957     50,675     34,696
                                                              ---------   --------   --------
Cash and cash equivalents at end of year....................  $  74,672     95,957     50,675
                                                              =========   ========   ========
Supplemental disclosure of cash flow information:
  Payments during the year for:
     Interest...............................................  $  48,515     54,187     55,475
     Taxes..................................................      3,342      4,824      4,567
Supplemental schedule of noncash investing activities:
  Transfers of mortgage loans to real estate owned..........      1,092         --         --
  Conversion of real estate loans to mortgage-backed
     securities held to maturity............................         --         --     50,975
</Table>

          See accompanying notes to consolidated financial statements.
                                       F-7
<PAGE>

                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)

     BostonFed Bancorp, Inc. (the "Company") is a bank holding company which is
headquartered in Burlington, Massachusetts and provides a variety of loan and
deposit services to its customers through a network of banking and finance
locations. The Company's deposit gathering is concentrated in the communities
surrounding its banking offices located in the greater Boston metropolitan area
municipalities of Arlington, Bedford, Billerica, Boston, Burlington, Chelsea,
Lexington, Peabody, Revere, Wellesley and Woburn.

     The Company is subject to competition from other financial institutions
including commercial banks, other savings banks, credit unions, mortgage banking
companies and other financial service providers. The Company is subject to the
regulations of, and periodic examination by the Federal Reserve Bank (FRB).
Boston Federal Savings Bank ("BFS"), a federally-chartered stock savings bank,
is subject to the regulations of, and periodic examination by, the Office of
Thrift Supervision ("OTS"). Broadway National Bank ("BNB"), a national chartered
commercial bank, is subject to the regulations of, and periodic examination by
the Office of the Comptroller of the Currency ("OCC"). The Federal Deposit
Insurance Corporation ("FDIC") insures the deposits of BFS through the Savings
Association Insurance Fund ("SAIF") and insures the deposits of BNB through the
Bank Insurance Fund ("BIF").

     The Company acquired BNB effective the close of business February 7, 1997,
which was accounted for using the purchase method of accounting. The Company
acquired Diversified Ventures, Inc. d/b/a Forward Financial Company ("Forward
Financial") and Ellsmere Insurance Agency, Inc. ("Ellsmere") effective the close
of business December 7, 1999, which were also accounted for using the purchase
method. Forward originates loans primarily directly with customers purchasing or
refinancing manufactured homes, recreational vehicles, and boats and
subsequently sells substantially all such loans. Forward Financial is a
subsidiary of BFS and Ellsmere is a subsidiary of BNB.

     In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets, and income and expense for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses, valuation of originated mortgage servicing rights ("OMSRs") and
goodwill impairment evaluation.

  (A) PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: Boston Federal Savings Bank, Broadway
National Bank, B.F. Funding Corporation ("B.F. Funding"), BFD Preferred Capital
Trust I, and BFD Preferred Capital Trust II.

     Boston Federal Savings Bank includes its wholly owned subsidiaries,
including Forward Financial Company. Broadway National Bank includes its wholly
owned subsidiaries, including Ellsmere Insurance Agency, Inc. B.F. Funding is a
business corporation formed at the direction of the Company under the laws of
the Commonwealth of Massachusetts on August 25, 1995. B.F. Funding was
established to lend funds to a Company sponsored employee stock ownership plan
trust for the purchase of stock at the initial public offering. BFD Preferred
Capital Trust I is a statutory business trust created under the laws of New York
and BFD Preferred Capital Trust II is a statutory business trust created under
the laws of Delaware. All significant intercompany accounts and transactions
have been eliminated in consolidation. Certain amounts previously reported have
been reclassified to conform to the current year's presentation.

  (B) CASH AND DUE FROM BANKS

     BFS and BNB are required to maintain cash and reserve balances with the
Federal Reserve Bank. Such reserve is calculated based upon certain deposit
levels and amounted to $14,383 and $1,098 at BFS and BNB, respectively, at
December 31, 2002. The reserves for BFS and BNB at December 31, 2001, were
$15,974 and $2,585, respectively.

                                       F-8
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (C) INVESTMENT AND MORTGAGE-BACKED SECURITIES

     Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and reported at amortized
cost; debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading and reported
at fair value, with unrealized gains and losses included in earnings; and debt
and equity securities not classified as either held to maturity or trading are
classified as available for sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of related income taxes.

     Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income by use of the interest method adjusted for
prepayments. If a decline in fair value below the amortized cost basis of an
investment or mortgage-backed security is judged to be other than temporary, the
cost basis of the investment is written down to fair value as a new cost basis
and the amount of the write-down is included as a charge against income. Gains
and losses on the sale of investment and mortgage-backed securities are
recognized at the time of sale on a specific identification basis.

  (D) LOANS

     Loans are reported at the principal amount outstanding, reduced by
unamortized discounts and net deferred loan origination fees. Loans held for
sale are carried at the lower of aggregate cost or market value, considering
loan production and sales commitments and deferred fees. Generally, all longer
term (typically mortgage loans with terms in excess of fifteen years) fixed-rate
residential one to four family mortgage loans are originated for sale and
adjustable-rate loans are originated both for portfolio and for sale.
Occasionally, the Company originates long-term fixed-rate loans, which are
designated for portfolio at the time of origination. Discounts and premiums on
loans are recognized as income using the interest method over the remaining
contractual term to maturity of the loans, adjusted for prepayments.

     Loan origination fees are offset with related direct incremental loan
origination costs and the resulting net amount is deferred and amortized to
interest income over the contractual life of the associated loan using the
interest method. Net deferred amounts on loans sold are included in determining
the gain or loss on the sale when the related loans are sold.

     The Company sells mortgage loans for cash proceeds approximately equal to
the principal amount of loans sold, but with yields to investors that reflect
current market rates. Gain or loss is recognized at the time of sale.

     Capitalized mortgage servicing rights are recognized, based on the
allocated fair value of the rights to service mortgage loans for others.
Mortgage servicing rights are amortized to loan processing and servicing fee
income using a method which approximates the level yield method in proportion
to, and over the period of, estimated net servicing income. Mortgage servicing
rights are assessed for impairment based on the fair value of those rights.
Prepayment experience on mortgage servicing rights is reviewed periodically and,
when actual repayments exceed estimated prepayments, the balance of the
mortgage-servicing asset is adjusted by an impairment charge to earnings through
a valuation allowance. The risk characteristics of the underlying loans used to
measure impairment include interest rate and loan origination date.

     Accrual of interest on loans is generally discontinued when collectibility
of principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days or more. Interest received on nonaccrual
loans is applied against the principal balance and all amortization of deferred
fees is discontinued. Accrual is generally not resumed until the loan is brought
current, the loan becomes well secured and in the process of collection and, in
either case, when concern no longer exists as to the collectibility of principal
or interest.

  (E) ALLOWANCE FOR LOAN LOSSES

     The Company maintains an allowance for losses that are inherent in the
Company's loan portfolio. The allowance for loan losses is established through a
provision for loan losses charged to operations. Loan losses are charged against
the allowance when management determines that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are credited
to the allowance.

                                       F-9
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Management believes the allowance is adequate to absorb probable loan
losses. Management's methodology to estimate loss exposure inherent in the
portfolio includes an analysis of individual loans deemed to be impaired,
reserve allocations for various loan types based on payment status or loss
experience and an unallocated allowance that is maintained based on management's
assessment of many factors including trends in loan delinquencies and
charge-offs, current economic conditions and their effect on borrowers' ability
to pay, underwriting standards by loan type, mix and balance of the portfolio,
and the performance of individual loans in relation to contract terms. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for losses. Such agencies
may require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.

     While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. Accordingly, the ultimate collectibility of a substantial portion of
the Company's loan portfolio is affected by changes in market conditions.

     Impaired loans are multi-family, commercial real estate, construction and
business loans, for which it is probable that the Company will not be able to
collect all amounts due in accordance with the contractual terms of the loan
agreement. Impaired loans, except those loans that are accounted for at fair
value or at lower of cost or fair value, are accounted for at the present value
of the expected future cash flows discounted at the loan's effective interest
rate, or as a practical expedient in the case of collateral dependent loans, the
lower of the fair value of the collateral or the recorded amount of the loan.
Management considers the payment status, net worth and earnings potential of the
borrower, and the value and cash flow of the collateral as factors to determine
if a loan will be paid in accordance with its contractual terms. Management does
not set any minimum delay of payments as a factor in reviewing for impaired
classification. Impaired loans are charged off when management believes that the
collectibility of the loan's principal is remote. Classification of a loan as
in-substance foreclosure is made only when a lender is in substantive possession
of the collateral.

  (f) GOODWILL

     On January 1, 2002, the Company adopted SFAS 142, Goodwill and Other
Intangible Assets ("SFAS 142"). This statement addresses the method of
identifying goodwill and other intangible assets acquired in a business
combination and eliminated amortization of further goodwill. The statement
requires an annual (or more often in certain circumstances) evaluation of
goodwill balances for impairment. As a result of the Company's adoption of SFAS
142, the Company periodically assesses the carrying value of goodwill to
determine whether there is any impairment. Given the continued downturn in the
manufactured housing industry, budgeted sales targets were not met and budget
forecasts were revised. The negative trends caused the Company to perform a
discounted cash flow analysis, utilizing lowered expectations, and determined
that an impairment loss was evident. During the third quarter of 2002, the
Company recorded a $7.0 million write-down of goodwill associated with the
purchase of Forward Financial, reducing the goodwill associated with that
transaction to $7.8 million. At December 31, 2002 and 2001, total goodwill was
$10.8 million and $17.8 million, respectively.

                                       F-10
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table adjusts net income and earnings per share for 2001 and
2000 as if SFAS 142 had been adopted at the beginning of 2000.

<Table>
<Caption>
                                                               2002     2001     2000
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Reported net income.........................................  $2,388    9,656    9,710
Add back goodwill amortization (net of tax).................      --      938      931
                                                              ------   ------   ------
Adjusted net income.........................................  $2,388   10,594   10,641
                                                              ======   ======   ======
Basic earnings per share....................................  $  .54     2.18     2.07
Goodwill amortization (net of tax)..........................      --      .21      .19
                                                              ------   ------   ------
Adjusted basic earnings per share...........................  $  .54     2.39     2.26
                                                              ======   ======   ======
Diluted earnings per share..................................  $  .51     2.05     2.01
Goodwill amortization (net of tax)..........................      --      .20      .19
                                                              ------   ------   ------
Adjusted diluted earnings per share.........................  $  .51     2.25     2.20
                                                              ======   ======   ======
</Table>

  (g) PREMISES AND EQUIPMENT

     Premises and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets (3 to 40 years). Amortization
of leasehold improvements is provided over the life of the related leases by use
of the straight-line method. Rental income on leased facilities is included as a
reduction of occupancy and equipment expense.

  (h) INCOME TAXES

     Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Company's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Company's deferred tax asset is reviewed periodically
and adjustments to such asset are recognized as deferred income tax expense or
benefit based on management's judgments relating to the realizability of such
asset. A valuation allowance related to deferred tax assets is recognized when,
in management's judgment, it is more likely than not that all, or a portion, of
such deferred tax assets will not be realized.

  (i) PENSION

     Pension cost is recognized over the employees' approximate service period.

  (j) EMPLOYEE BENEFITS

     The Company measures compensation cost for stock-based compensation plans
using the intrinsic value method. Intrinsic value is measured as the difference
between the exercise price of options granted and the fair market value of the
Company's stock at the grant date. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.

                                       F-11
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Had the Company determined compensation expense consistent with the fair
value approach, the Company's net income and earnings per share would have been
reduced to the proforma amounts indicated below for the years ended December 31:

<Table>
<Caption>
                                                               2002    2001    2000
                                                              ------   -----   -----
<S>                                                           <C>      <C>     <C>
Net income as reported......................................  $2,388   9,656   9,710
Deduct: Total stock-based employee compensation expense
  determined under fair value based method for all awards,
  net of related tax effect.................................    (145)   (301)   (544)
                                                              ------   -----   -----
Pro forma net income........................................   2,243   9,355   9,166
                                                              ======   =====   =====
Basic earnings per share as reported........................     .54    2.18    2.07
Diluted earnings per share as reported......................     .51    2.05    2.01
Pro forma basic earnings per share..........................     .51    2.11    1.95
Pro forma diluted earnings per share........................     .48    1.99    1.90
</Table>

     The per share weighted average fair value of stock options granted during
2002 was $6.03 per share determined using the Black-Scholes option pricing model
with the following weighted average assumptions:

<Table>
<Caption>
                                                              2002    2001    2000
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Expected dividend yield.....................................   2.50%   2.75%   3.00%
Risk-free interest rate.....................................   3.07%   4.85%   5.95%
Expected volatility.........................................  26.96%  33.66%  29.79%
Expected life (years).......................................    5.0     6.5     5.8
</Table>

  (k) TRANSFERS AND SERVICING OF ASSETS AND EXTINGUISHMENTS OF LIABILITIES

     The Company accounts and reports for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. This approach
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. After a transfer of financial assets, the Company
recognizes all financial and servicing assets it controls and liabilities it has
incurred and derecognizes financial assets it no longer controls and liabilities
that have been extinguished. This financial components approach focuses on the
assets and liabilities that exist after the transfer. Many of these assets and
liabilities are components of financial assets that existed prior to the
transfer. If a transfer does not meet the criteria for a sale, the Company
accounts for a transfer as a secured borrowing with a pledge of collateral.

  (l) EARNINGS PER SHARE

     Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year, adjusted
for the weighted average number of unallocated shares held by the Employee Stock
Ownership Plan (ESOP) and the 1996 Stock-Based Incentive Plan (SIP). Diluted
earnings per share reflects the effect on weighted average shares outstanding of
the number of additional shares outstanding if dilutive stock options were
converted into common stock using the treasury stock method.

     A reconciliation of the weighted average shares outstanding for the years
ended December 31 follows:

<Table>
<Caption>
                                                               2002    2001    2000
                                                              ------   -----   -----
<S>                                                           <C>      <C>     <C>
Basic shares................................................  $4,413   4,436   4,700
Dilutive impact of stock options............................     263     266     127
                                                              ------   -----   -----
  Diluted shares............................................  $4,676   4,702   4,827
                                                              ======   =====   =====
</Table>

     At December 31, 2002, there were 13,500 option shares with an exercise
price of $27.51, which were not considered dilutive for purposes of earnings per
share calculations.

                                       F-12
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (m) COMPREHENSIVE INCOME

     Comprehensive income represents the change in equity of the Company during
a period from transactions and other events and circumstances from
non-shareholder sources. It includes all changes in equity during a period
except those resulting from investments by and distributions to shareholders.
The following table shows the components of other comprehensive income for the
years ended December 31:

<Table>
<Caption>
                                                               2002    2001     2000
                                                              ------   -----   ------
<S>                                                           <C>      <C>     <C>
Net income..................................................  $2,388   9,656    9,710
Other comprehensive income, net of tax:
  Unrealized gains on securities:
     Unrealized holding gains arising during the period, net
       of tax of $(755), $(413), and $(561) for 2002, 2001,
       and 2000, respectively...............................   1,227     466    1,576
     Reclassification adjustment for (gains) included in net
       income, net of taxes of $151, $241, and $2 for 2002,
       2001 and 2000, respectively..........................    (236)   (449)      (3)
                                                              ------   -----   ------
                                                                 991      17    1,573
                                                              ------   -----   ------
       Comprehensive income.................................  $3,379   9,673   11,283
                                                              ======   =====   ======
</Table>

  (n) RECENT ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Statement No. 144 provides
additional implementation guidance and supercedes Statement No. 121, Accounting
for the Impairment of Long-Lived assets and for Long-Lived Assets to Be Disposed
Of. It is effective for financial statements issued for fiscal years beginning
after December 15, 2001. Statement No. 144 was adopted on January 1, 2002, with
no impact on the financial condition or results of operations.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. SFAS 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123
transition rule creates in the year of adoption. Companies can choose to elect a
method that will provide for comparability amongst years reported. In addition,
this Statement amends the disclosure requirement of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
fair value based method of accounting for stock-based employee compensation and
the effect of the method used on reported results.

     FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, considers standby letters of credit, excluding commercial letters of
credit and other lines of credit, a guarantee of the Company. The Company enters
into a standby letter of credit to guarantee performance of a customer to a
third party. These guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved is represented by the
contractual amounts of those instruments. Under the standby letters of credit,
the Company is required to make payments to the beneficiary of the letters of
credit upon request by the beneficiary so long as all performance criteria have
been met. Most guarantees extend up to one year. At December 31, 2002, the
maximum potential amount of future payments is $3.1 million. The collateral
obtained is determined based upon management's credit evaluation of the customer
and may include cash, accounts receivable, inventory, property, plant, and
equipment and income-producing real estate. The recourse provisions of the
agreements allow the Company to collect the cash used to collateralize the
agreement. If another business asset is used as collateral and cash is not
available, the Company creates a loan from the customer with the same criteria
as its other lending activities. The Company's maximum potential loss of $3.1
million is covered by collateral. The fair value of the guarantees at December
31, 2002, and 2001 were not material nor reflected on the balance sheet.

                                       F-13
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)

     The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory requirements.

     In addition to the 17,000,000 authorized shares of common stock, the
Company has authorized 1,000,000 shares of preferred stock with a par value of
$0.01 per share (the Preferred Stock). The Board of Directors is authorized,
subject to any limitations by law, to provide for the issuance of the shares of
preferred stock in series, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. As of December 31, 2002 and
2001, there were no shares of preferred stock issued.

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

     Quantitative measures established by regulation to ensure capital adequacy
require BFS and BNB to maintain minimum amounts and ratios (set forth in the
table below) of risk-weighted, core and tangible capital (as defined).
Management represents, as of December 31, 2002, that BFS and BNB meet all
capital adequacy requirements to which they are subject.

     As of December 31, 2002, BFS and BNB are categorized as "well capitalized"
based on the most recent notifications from the OTS and OCC, based on regulatory
definitions. Under "capital adequacy" guidelines and the regulatory framework to
be categorized as "well capitalized" BFS and BNB must maintain minimum
risk-weighted capital, core capital, leverage, and tangible ratios as set forth
in the table. These regulatory capital requirements are set forth in terms of
(1) Risk-based Total Capital (Total Capital to Risk Weighted Assets), (2) Core
Capital (Tier I Capital to Adjusted Tangible Assets), (3) Risk-based Tier I
Capital (Tier I Capital to Risk Weighted Assets), (4) Tangible Capital (Tier I
Capital to Tangible Assets), and (5) Leverage Capital (Tier I Capital to Average
Assets).

                                       F-14
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company's, BFS's and BNB's actual capital amounts and ratios are
presented in the table below.

<Table>
<Caption>
                                                                                       TO BE WELL
                                                                    FOR CAPITAL     CAPITALIZED UNDER
                                                                     ADEQUACY          REGULATORY
                                                    ACTUAL           PURPOSES          DEFINITIONS
                                               ----------------   ---------------   -----------------
                                                AMOUNT    RATIO   AMOUNT    RATIO    AMOUNT    RATIO
                                               --------   -----   -------   -----   --------   ------
                                                               (DOLLARS IN THOUSANDS)
<S>                                            <C>        <C>     <C>       <C>     <C>        <C>
As of December 31, 2002:
  Risk-based Total Capital
     Company Consolidated....................  $125,270   12.9%   $78,018    8.0%   $97,523     10.0%
     BFS.....................................   100,678   11.2     71,886    8.0     89,857     10.0
     BNB.....................................    11,174   13.8      6,464    8.0      8,080     10.0
  Core Capital:
     BFS.....................................    89,441    6.6     54,102    4.0     67,628      5.0
  Risk-based Tier I Capital:
     Company Consolidated....................   111,691   11.5     39,009    4.0     58,514      6.0
     BFS.....................................    89,441   10.0     35,943    4.0     53,914      6.0
     BNB.....................................    10,172   12.6      3,232    4.0      4,848      6.0
  Tangible Capital:
     BFS.....................................    89,441    6.6     27,051    2.0     67,628      5.0
  Leverage Capital:
     Company Consolidated....................   111,691    7.4     60,820    4.0     76,025      5.0
     BNB.....................................    10,172    6.0      6,750    4.0      8,437      5.0
As of December 31, 2001:
Risk-based Total Capital
     Company Consolidated....................  $118,631   13.4%   $70,699    8.0%   $88,374     10.0%
     BFS.....................................    90,800   11.7     62,294    8.0     77,868     10.0
     BNB.....................................    10,515   13.4      6,273    8.0      7,841     10.0
Core Capital:
     BFS.....................................    81,059    6.3     51,565    4.0     64,456      5.0
Risk-based Tier I Capital:
     Company Consolidated....................   106,683   12.1     35,350    4.0     53,024      6.0
     BFS.....................................    81,059   10.4     31,147    4.0     46,721      6.0
     BNB.....................................     9,553   12.2      3,136    4.0      4,705      6.0
Tangible Capital:
     BFS.....................................    81,059    6.3     25,782    2.0     64,456      5.0
Leverage Capital:
     Company Consolidated....................   106,683    7.4     58,081    4.0     72,601      5.0
     BNB.....................................     9,553    5.9      6,506    4.0      8,132      5.0
</Table>

     At December 31, 2002 and 2001, the consolidated capital to assets ratios
were 6.1% and 6.3%, respectively, as measured by generally accepted accounting
principles. During 2002, the Company's Board of Directors approved the tenth 5%
repurchase program in the amount of 222,971 shares of its outstanding common
shares. The Company plans to hold the repurchased shares as treasury stock to be
used for general company purposes. During the year ended December 31, 2002,
35,587 shares were repurchased under the current program and 180,955 shares
under the previous program.

     Prior to the Company's initial public offering, in order to grant priority
to eligible depositors, BFS established a liquidation account at the time of
conversion in an amount equal to the retained earnings of BFS as of the date of
its latest balance sheet date, June 30, 1995, contained in the final Prospectus
used in connection with the Conversion. In the unlikely event of a complete
liquidation of BFS (and only in such an event), eligible depositors who continue
to maintain accounts at BFS shall be entitled to receive a

                                       F-15
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

distribution from the liquidation account. The total amount of the liquidation
account is decreased if the balances of eligible depositors decrease on the
annual determination dates. The liquidation account approximated $5.3 million
(unaudited) and $6.0 million (unaudited) at December 31, 2002 and 2001,
respectively.

(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (DOLLARS IN
THOUSANDS)

     The amortized cost and fair values of investment and mortgage-backed
securities available for sale are shown below by contractual maturity:

<Table>
<Caption>
                                                                   DECEMBER 31, 2002
                                           ------------------------------------------------------------------
                                           AMORTIZED COST   UNREALIZED GAINS   UNREALIZED LOSSES   FAIR VALUE
                                           --------------   ----------------   -----------------   ----------
<S>                                        <C>              <C>                <C>                 <C>
Investment securities:
  U.S. government, federal agency and
     other obligations:
     Maturing within 1 year..............     $  2,514               8                 (1)            2,521
     Maturing after 1 year but within 5
       years.............................       10,851             217                 --            11,068
     Maturing after 5 years but within 10
       years.............................        6,931             144                 --             7,075
     Maturing after 10 years.............       14,126             437                (21)           14,542
                                              --------           -----               ----           -------
                                                34,422             806                (22)           35,206
                                              --------           -----               ----           -------
  Mutual funds...........................       75,240             120                (37)           75,323
  Other marketable equity securities.....        2,394              83               (118)            2,359
                                              --------           -----               ----           -------
                                                77,634             203               (155)           77,682
                                              --------           -----               ----           -------
       Total investment securities.......     $112,056           1,009               (177)          112,888
                                              ========           =====               ====           =======
</Table>

<Table>
<Caption>
                                                                   DECEMBER 31, 2002
                                           ------------------------------------------------------------------
                                           AMORTIZED COST   UNREALIZED GAINS   UNREALIZED LOSSES   FAIR VALUE
                                           --------------   ----------------   -----------------   ----------
<S>                                        <C>              <C>                <C>                 <C>
Mortgage-backed securities:
  Maturing after 1 year but within 5
     years...............................     $    270               9                 --               279
  Maturing after 5 years but within 10
     years...............................       16,442              63                (28)           16,477
  Maturing after 10 years................       96,838             980                (59)           97,759
                                              --------           -----                ---           -------
                                              $113,550           1,052                (87)          114,515
                                              ========           =====                ===           =======
</Table>

<Table>
<Caption>
                                                                   DECEMBER 31, 2001
                                           ------------------------------------------------------------------
                                           AMORTIZED COST   UNREALIZED GAINS   UNREALIZED LOSSES   FAIR VALUE
                                           --------------   ----------------   -----------------   ----------
<S>                                        <C>              <C>                <C>                 <C>
Investment securities:
  U.S. government, federal agency and
     other obligations:
     Maturing within 1 year..............     $   998              17                  --             1,015
     Maturing after 1 year but within 5
       years.............................       1,264              10                  --             1,274
     Maturing after 5 years but within 10
       years.............................       7,819             200                  --             8,019
     Maturing after 10 years.............      14,794              56                (108)           14,742
                                              -------             ---                ----            ------
                                               24,875             283                (108)           25,050
                                              -------             ---                ----            ------
  Mutual funds...........................      37,980             238                 (23)           38,195
  Other marketable equity securities.....          13              --                  --                13
                                              -------             ---                ----            ------
                                               37,993             238                 (23)           38,208
                                              -------             ---                ----            ------
       Total investment securities.......     $62,868             521                (131)           63,258
                                              =======             ===                ====            ======
</Table>

                                       F-16
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                   DECEMBER 31, 2001
                                           ------------------------------------------------------------------
                                           AMORTIZED COST   UNREALIZED GAINS   UNREALIZED LOSSES   FAIR VALUE
                                           --------------   ----------------   -----------------   ----------
<S>                                        <C>              <C>                <C>                 <C>
Mortgage-backed securities:
  Maturing within 1 year.................     $ 1,453              --                  (3)            1,450
  Maturing after 1 year but within 5
     years...............................       1,092              28                  --             1,120
  Maturing after 5 years but within 10
     years...............................       3,955              34                 (32)            3,957
  Maturing after 10 years................      88,639             456                (700)           88,395
                                              -------             ---                ----            ------
     Total mortgage-backed securities....     $95,139             518                (735)           94,922
                                              =======             ===                ====            ======
</Table>

     Maturities of mortgage-backed securities are shown at final contractual
maturity but are expected to have shorter lives because borrowers have the right
to prepay obligations without prepayment penalties.

     Included in U.S. government, federal agency and other obligations are
investments that can be called prior to final maturity with an amortized cost of
$6,000 and a fair value of $6,137 at December 31, 2002.

     The composition by issuer of mortgage-backed securities available for sale
follows:

<Table>
<Caption>
                                                                        DECEMBER 31,
                                                  ---------------------------------------------------------
                                                             2002                          2001
                                                  ---------------------------   ---------------------------
                                                  AMORTIZED COST   FAIR VALUE   AMORTIZED COST   FAIR VALUE
                                                  --------------   ----------   --------------   ----------
<S>                                               <C>              <C>          <C>              <C>
FHLMC...........................................     $ 79,424        79,870         62,952         62,634
FNMA............................................       28,091        28,564         11,904         11,869
GNMA............................................        5,058         5,101          6,237          6,196
Privately issued collateralized mortgage
  obligations...................................          977           980         14,046         14,223
                                                     --------       -------         ------         ------
                                                     $113,550       114,515         95,139         94,922
                                                     ========       =======         ======         ======
</Table>

     Proceeds from the sale of investment securities and mortgage-backed
securities available for sale amounted to $12,121, $26,743, and $46, in 2002,
2001, and 2000, respectively. Realized losses on investment securities and
mortgage-backed securities available for sale were $3, $186 and $0 in 2002, 2001
and 2000, respectively. Realized gains amounted to $390, $876 and $5 in 2002,
2001 and 2000, respectively.

(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (DOLLARS IN
THOUSANDS)

     The amortized cost and fair values of investment and mortgage-backed
securities held to maturity are shown below by contractual maturity.

<Table>
<Caption>
                                                                   DECEMBER 31, 2002
                                           ------------------------------------------------------------------
                                           AMORTIZED COST   UNREALIZED GAINS   UNREALIZED LOSSES   FAIR VALUE
                                           --------------   ----------------   -----------------   ----------
<S>                                        <C>              <C>                <C>                 <C>
Investment securities:
U.S. government, federal agency and other
  obligations:
Maturing within 1 year...................     $   503               38                 --               541
Maturing after 1 year but within 5
  years..................................       2,021               14                 --             2,035
                                              -------            -----               ----            ------
     Total investment securities.........     $ 2,524               52                 --             2,576
                                              =======            =====               ====            ======
Mortgage-backed securities:
Maturing after 1 year but within 5
  years..................................     $   580               37                 --               617
Maturing after 5 years but within 10
  years..................................      13,666              721                 --            14,387
Maturing after 10 years..................      11,183              410                 --            11,593
                                              -------            -----               ----            ------
     Total mortgage-backed securities....     $25,429            1,168                 --            26,597
                                              =======            =====               ====            ======
</Table>

                                       F-17
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                   DECEMBER 31, 2001
                                           ------------------------------------------------------------------
                                           AMORTIZED COST   UNREALIZED GAINS   UNREALIZED LOSSES   FAIR VALUE
                                           --------------   ----------------   -----------------   ----------
<S>                                        <C>              <C>                <C>                 <C>
Investment securities:
U.S. government, federal agency and other
  obligations:
Maturing within 1 year...................     $   529              44                  --               573
Maturing after 1 year but within 5
  years..................................          25              --                  --                25
                                              -------             ---                 ---            ------
     Total investment securities.........     $   554              44                  --               598
                                              =======             ===                 ===            ======
Mortgage-backed securities:
Maturing within 1 year...................     $   173               3                  --               176
Maturing after 1 year but within 5
  years..................................         687              41                  --               728
Maturing after 5 years but within 10
  years..................................      20,306             270                 (40)           20,536
Maturing after 10 years..................      19,656             451                  --            20,107
                                              -------             ---                 ---            ------
     Total mortgage-backed securities....     $40,822             765                 (40)           41,547
                                              =======             ===                 ===            ======
</Table>

     Maturities of mortgage-backed securities are shown at final contractual
maturity but are expected to have shorter lives because borrowers have the right
to prepay obligations without prepayment penalties.

     At December 31, 2002, a U.S. agency note with an amortized cost of $500 and
a fair value of $516 was pledged to secure certain of BFS's recourse liabilities
relating to loans sold as described in note 5.

     Included in U.S. government, federal agency and other obligations are
investments that can be called prior to final maturity with an amortized cost of
$500 and a fair value of $516 at December 31, 2002.

     The composition by issuer of mortgage-backed securities held to maturity
follows:

<Table>
<Caption>
                                                                DECEMBER 31,
                                          ---------------------------------------------------------
                                                     2002                          2001
                                          ---------------------------   ---------------------------
                                          AMORTIZED COST   FAIR VALUE   AMORTIZED COST   FAIR VALUE
                                          --------------   ----------   --------------   ----------
<S>                                       <C>              <C>          <C>              <C>
FHLMC                                        $20,518         21,534         33,401         33,919
FNMA                                              --             --             45             47
GNMA                                           4,911          5,063          7,376          7,581
                                             -------         ------         ------         ------
                                             $25,429         26,597         40,822         41,547
                                             =======         ======         ======         ======
</Table>

(5) LOANS (DOLLARS IN THOUSANDS)

     The Company's primary banking activities are conducted principally in
eastern Massachusetts. The Company grants single-family and multi-family
residential loans, commercial real estate loans, business loans and a variety of
consumer loans. In addition, the Company grants loans for the construction of
residential homes, multi-family properties, commercial real estate properties
and for land development. Except for consumer loans processed by Forward
Financial, the vast majority of the loans granted by the Company are secured by
real estate collateral. Through BFS' subsidiary, Forward Financial, the Company
originates loans, primarily directly with the consumer, on manufactured housing,
recreational vehicles and boats in approximately one-half the states across the
United States. Forward Financial sells substantially all of the loans it
originates. The ability and willingness of the one to four family residential
and consumer borrowers to honor their repayment commitments is generally
dependent, among other things, on the level of overall economic activity within
the borrowers' geographic areas and real estate values. The ability and
willingness of commercial real estate, commercial and construction loan
borrowers to honor their repayment commitments is generally affected by the
health of business in the economy and in the real estate sector in particular,
in the borrowers' geographic areas.

                                       F-18
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company's loan portfolio was comprised of the following at December 31:

<Table>
<Caption>
                                                                 2002        2001
                                                              ----------   ---------
<S>                                                           <C>          <C>
Mortgage loans:
  Residential one- to four-family...........................  $  731,552     763,599
  Multi-family..............................................      21,056      25,904
  Construction and land.....................................     124,071      99,337
  Commercial real estate....................................      96,526     107,767
                                                              ----------   ---------
                                                                 973,205     996,607
                                                              ----------   ---------
Consumer and other loans:
  Home equity and improvement...............................      94,855      66,539
  Secured by deposits.......................................         466         678
  Consumer..................................................       3,768       3,439
  Business..................................................      32,792      28,103
                                                              ----------   ---------
                                                                 131,881      98,759
                                                              ----------   ---------
     Total loans, gross.....................................   1,105,086   1,095,366
                                                              ----------   ---------
Less:
  Allowance for loan losses.................................     (12,656)    (12,328)
  Construction loans in process.............................     (24,832)    (30,264)
  Net unearned premium (discount) on loans purchased........          36          48
  Deferred loan origination costs...........................       3,722       2,976
                                                              ----------   ---------
     Loan, net..............................................  $1,071,356   1,055,798
                                                              ==========   =========
</Table>

     The Company services mortgage loans for investors which are not included in
the accompanying consolidated balance sheets totaling approximately $1,084,797
and $974,221 at December 31, 2002 and 2001, respectively.

     A summary of the activity of the originated mortgage servicing rights,
which is included as a component of other assets, for the years ended December
31 follows:

<Table>
<Caption>
                                                               2002      2001     2000
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Balance, beginning of year..................................  $ 6,907    5,068    5,080
Capitalized mortgage servicing rights.......................    6,968    4,652    1,598
Amortization and impairment.................................   (6,958)  (2,813)  (1,610)
                                                              -------   ------   ------
     Balance, end of year...................................  $ 6,917    6,907    5,068
                                                              =======   ======   ======
</Table>

     The Company has determined that the fair value of mortgage servicing rights
at December 31, 2002, approximates their carrying amount. Capitalized mortgage
servicing rights are periodically evaluated for impairment. Adjustments to the
carrying value are included in amortization expense. The balance of the
valuation allowance for mortgage servicing rights, which was established at
December 31, 2002, amounted to $2,513.

     Regulatory limits for loans to one borrower are limited to 15% of capital
and applicable allowance for loan losses. These regulatory limits for BFS and
BNB, at December 31, 2002, are $15.3 million and $1.7 million, respectively. BFS
and BNB did not have any borrower relationship, net of participation with other
financial institutions, which exceeded the regulatory limit at December 31,
2002.

                                       F-19
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In the ordinary course of business, the Company makes loans to its
directors and senior officers and their related interests at substantially the
same terms prevailing at the time of origination for comparable transactions
with borrowers. The following is a summary of related party loan activity:

<Table>
<Caption>
                                                               2002    2001
                                                              ------   -----
<S>                                                           <C>      <C>
Balance, beginning of year..................................  $1,114     759
Originations................................................     852     867
Payments....................................................    (795)   (561)
Other changes...............................................      72      49
                                                              ------   -----
     Balance, end of year...................................  $1,243   1,114
                                                              ======   =====
</Table>

     At December 31, 2002 and 2001, total impaired loans were $8.4 million and
$216, respectively. In the opinion of management, specific valuation allowances
totaling $225 were established (after charge-offs of $925,000) for $6.0 million
of the impaired loans at December 31, 2002, and no reserves were required for
the remaining $2.4 million of impaired loans. No reserves were required on the
$216 of impaired loans at December 31, 2001. The average recorded value of
impaired loans was $4.3 million in 2002, $211 in 2001 and $228 during 2000. The
Company follows the same policy for recognition of income on impaired loans as
it does for nonaccrual loans. At December 31, 2002 and 2001, there were no
commitments to lend additional funds to those borrowers whose loans were
classified as impaired.

     The following table summarizes information regarding the reduction of
interest income on impaired loans for the year ended December 31:

<Table>
<Caption>
                                                              2002   2001   2000
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Income in accordance with original terms....................  $840    14     15
Income recognized...........................................   720    14     15
                                                              ----    --     --
     Foregone interest income during year...................  $120    --     --
                                                              ====    ==     ==
</Table>

     Nonaccrual loans at December 31, 2002 and 2001 were $5,497 and $1,157,
respectively.

     The following table summarizes information regarding the reduction in
interest income on nonaccrual loans for the year ended December 31:

<Table>
<Caption>
                                                              2002   2001   2000
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Income in accordance with original terms....................  $641    91     83
Income recognized...........................................   469    59     43
                                                              ----    --     --
     Foregone interest income during year...................  $172    32     40
                                                              ====    ==     ==
</Table>

(6) ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)

     The following is a summary of the activity in the allowance for loan losses
for the years ended December 31:

<Table>
<Caption>
                                                               2002      2001     2000
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Balance, beginning of year..................................  $12,328   11,381   10,654
Provision charged to income.................................    1,350      820    1,000
Recoveries..................................................      359      361      181
Charge-offs.................................................   (1,381)    (234)    (454)
                                                              -------   ------   ------
     Balance, end of year...................................  $12,656   12,328   11,381
                                                              =======   ======   ======
</Table>

                                       F-20
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) ACCRUED INTEREST RECEIVABLE (DOLLARS IN THOUSANDS)

     Accrued interest receivable as of December 31 is presented in the following
table:

<Table>
<Caption>
                                                               2002    2001
                                                              ------   -----
<S>                                                           <C>      <C>
Investment and mortgage-backed securities...................  $1,267   1,172
Loans.......................................................   5,203   5,145
                                                              ------   -----
                                                              $6,470   6,317
                                                              ======   =====
</Table>

(8) PREMISES AND EQUIPMENT (DOLLARS IN THOUSANDS)

     A summary of the cost, accumulated depreciation and amortization of land,
buildings and equipment is as follows at December 31:

<Table>
<Caption>
                                                                2002      2001
                                                              --------   -------
<S>                                                           <C>        <C>
Land........................................................  $  2,429     2,429
Buildings...................................................     6,140     5,983
Furniture, fixtures and equipment...........................    12,879    11,624
Leasehold improvements......................................     1,925     1,937
                                                              --------   -------
                                                                23,373    21,973
Less accumulated depreciation and amortization..............   (13,240)  (11,678)
                                                              --------   -------
                                                              $ 10,133    10,295
                                                              ========   =======
</Table>

     Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $1,576, $1,442 and $1,308, respectively.

     The Company presently leases office space at four locations and land in one
location to which it is committed to minimum annual rentals plus lease
escalations. Such leases expire at various dates with options to renew. Minimum
future rental expense is as follows:

<Table>
<Caption>

<S>                                                           <C>
Years ended December 31:
2003........................................................  $1,342
2004........................................................   1,045
2005........................................................   1,045
2006........................................................   1,045
2007 and thereafter.........................................   2,690
                                                              ------
                                                              $7,167
                                                              ======
</Table>

     Rent expense was $1,812 in 2002, $1,776 in 2001 and $1,703 in 2000.

     The Company leases, as lessor, office space at two of its branch locations.
The leases expire at various dates with options to renew. Minimum future rental
income is as follows:

<Table>
<Caption>

<S>                                                           <C>
Years ended December 31:
2003........................................................  $177
2004........................................................   154
2005........................................................   110
2006........................................................    52
2007 and thereafter.........................................    --
                                                              ----
                                                              $493
                                                              ====
</Table>

     Rental income was $178, $185 and $198 in 2002, 2001, and 2000,
respectively.

                                       F-21
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) DEPOSIT ACCOUNTS (DOLLARS IN THOUSANDS)

     A summary of deposit balances by type is as follows at December 31:

<Table>
<Caption>
                                                                2002      2001
                                                              --------   -------
<S>                                                           <C>        <C>
NOW.........................................................  $150,342   138,528
Regular and statement savings...............................   218,133   180,966
Money market................................................    62,530    58,133
Demand deposits and official checks.........................   107,154   110,776
                                                              --------   -------
     Total non-certificate accounts.........................   538,159   488,403
                                                              --------   -------
Certificate accounts:
  3 to 6 months.............................................    52,164    65,507
  1 to 3 year...............................................   246,636   233,275
  Greater than 3 years......................................    75,987    53,701
  IRA/Keogh.................................................    47,332    43,630
                                                              --------   -------
     Total certificate accounts.............................   422,119   396,113
                                                              --------   -------
                                                              $960,278   884,516
                                                              ========   =======
Expected maturity of certificate accounts:
  Within one year...........................................  $227,898   247,745
  One to two years..........................................    99,230    79,236
  Two to three years........................................    53,250    38,611
  Over three years..........................................    41,741    30,521
                                                              --------   -------
                                                              $422,119   396,113
                                                              ========   =======
</Table>

     Aggregate amount of certificate accounts of $100 or more were $53,700 and
$58,200 at December 31, 2002 and 2001, respectively. Deposit amounts in excess
of $100 are not federally insured.

     Interest expense on deposits consisted of the following for the years ended
December 31:

<Table>
<Caption>
                                                               2002      2001     2000
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
NOW.........................................................  $   447      735      899
Regular and statement savings...............................    2,838    4,104    4,476
Money market................................................      946    1,380    1,597
Certificate accounts........................................   18,110   23,884   24,753
                                                              -------   ------   ------
                                                              $22,341   30,103   31,725
                                                              =======   ======   ======
</Table>

     The Company had $132,709 and $91,892 of brokered deposits with a weighted
average rate of 5.39% and 6.89% at December 31, 2002 and 2001, respectively.
Brokered deposits of $29,928, $56,340, $26,679, and $19,762 mature in 2003,
2004, 2005 and 2006, respectively.

                                       F-22
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) FEDERAL HOME LOAN BANK (FHLB) OF BOSTON ADVANCES AND OTHER BORROWINGS
     (DOLLARS IN THOUSANDS)

     A summary of FHLB advances at December 31 follows:

<Table>
<Caption>
                                               2002                                    2001
                               ------------------------------------   --------------------------------------
                                           REDEEMABLE AT   WEIGHTED                 REDEEMABLE      WEIGHTED
                               SCHEDULED   INITIAL CALL    AVERAGE    SCHEDULED   AT INITIAL CALL   AVERAGE
                               MATURITY       DATE(1)      RATE(2)    MATURITY        DATE(1)       RATE(2)
                               ---------   -------------   --------   ---------   ---------------   --------
<S>                            <C>         <C>             <C>        <C>         <C>               <C>
Within 1 Year................  $177,500       324,500        3.80%    $158,000        260,000         5.27%
Over 1 year to 2 years.......    59,500        39,500        4.09       92,000        117,000         5.58
Over 2 year to 3 years.......    25,867        25,867        5.66       57,000         27,000         4.21
Over 3 year to 5 years.......    75,693        16,693        4.62       32,000         15,000         5.62
Over 5 years.................    88,000        20,000        5.23      110,000         30,000         5.52
                               --------       -------                 --------        -------
                               $426,560       426,560        4.39%    $449,000        449,000         5.29%
                               ========       =======        ====     ========        =======         ====
</Table>

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

(1) Callable FHLB advances are shown in the respective periods assuming that the
    callable debt is redeemed at the initial call date while all other advances
    are shown in the periods corresponding to their scheduled maturity date.

(2) Weighted average rate based on scheduled maturity dates.

     The advances are secured by FHLB of Boston stock and a blanket lien on
certain qualified collateral. The amount of advances is principally limited to
90% of the market value of U.S. Government and federal agency obligations and
75% of the carrying value of first mortgage loans on owner-occupied residential
property. Applying these ratios, and other ratios on other qualifying
collateral, the Company's overall current borrowing capacity was approximately
$532,652 and $527,672 at December 31, 2002 and 2001, respectively. Borrowing
capacity can also be increased upon the delivery of mortgage notes on non owner-
occupied one to four-family loans, multi-family and commercial loans.

     As a member of the FHLB of Boston, the Company is required to maintain a
minimum investment in the capital stock of the Federal Home Loan Bank of Boston,
at cost, in an amount not less than 1% of its outstanding home loans or 1/20 of
its outstanding notes payable to the Federal Home Loan Bank of Boston, whichever
is greater. The investment exceeds the required level by approximately $2,566
and $909 at December 31, 2002 and 2001, respectively. Any excess may be redeemed
by the Company or called by FHLB of Boston at par. Recent legislation has
changed the structure of the Federal Home Loan Banks' funding obligations,
revised the capital structure of the Federal Home Loan Banks and implemented
entirely voluntary membership of Federal Home Loan Banks. Management cannot
predict the effect that these changes may have with respect to its Federal Home
Loan Bank membership.

     Interest expense on FHLB advances was $22,104 in 2002, $23,885 in 2001 and
$22,476 in 2000.

     The Company maintains a $5.0 million line of credit from a financial
institution, which can be used for general corporate purposes. There was no
outstanding balance on the line of credit at December 31, 2002 and 2001.

                                       F-23
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) INCOME TAXES (DOLLARS IN THOUSANDS)

     An analysis of the current and deferred federal and state income tax
expense follows:

<Table>
<Caption>
                                                               2002     2001    2000
                                                              -------   -----   -----
<S>                                                           <C>       <C>     <C>
Current income tax expense:
  Federal...................................................  $ 3,558   4,462   4,729
  State.....................................................      212     176     394
                                                              -------   -----   -----
     Total current expense..................................    3,770   4,638   5,123
                                                              -------   -----   -----
Deferred income tax expense:
  Federal...................................................   (2,430)    404     166
  State.....................................................       47     167      55
     Total deferred expense.................................   (2,383)    571     221
                                                              -------   -----   -----
       Total income tax expense.............................  $ 1,387   5,209   5,344
                                                              =======   =====   =====
</Table>

     The temporary differences (the difference between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases) that give rise to significant portions of the deferred tax asset and
liability are as follows at December 31:

<Table>
<Caption>
                                                               2002    2001
                                                              ------   -----
<S>                                                           <C>      <C>
Deferred tax assets:
  Allowance for loan losses.................................  $5,591   5,156
  Valuation for Real Estate Owned...........................      70      --
  Deferred compensation.....................................      57      42
  Goodwill..................................................   2,051      --
  Mark to market -- Loans Held for Sale.....................     116      27
  Depreciation..............................................     126     109
  Other.....................................................      --       8
                                                              ------   -----
     Gross deferred assets..................................   8,011   5,342
                                                              ------   -----
Deferred liabilities:
  Premium on loans sold.....................................   2,893   2,907
  Deferred loan fees........................................   1,465   1,155
  Premises and equipment....................................     319     329
  Unrealized gain on securities available for sale..........     701      97
                                                              ------   -----
     Gross deferred liabilities.............................   5,378   4,488
                                                              ------   -----
     Net deferred tax asset.................................  $2,633     854
                                                              ======   =====
</Table>

     At December 31, 2002 and 2001, the net deferred tax asset is supported by
recoverable income taxes. For the year ended December 31, 2002, the Company
generated approximately $8,600 of taxable income. In addition, management
believes that existing net deductible temporary differences which give rise to
the net deferred tax asset will reverse during periods in which the Company
generates net taxable income. Factors beyond management's control, such as the
general state of the economy and real estate values, can affect future levels of
taxable income and no assurance can be given that sufficient taxable income will
be generated to fully absorb gross deductible temporary differences. Management
believes it is more likely than not that the net deferred tax asset will be
realized.

     As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method for the Company's
subsidiary, BFS. However, the base year reserve of approximately $13,300 remains
subject to recapture in the event that BFS makes "non-dividend distributions" to
the Company in excess of its earnings and profits or redeems its stock.
Non-dividend distributions include distributions in excess of BFS' current and
accumulated earnings and profits, as

                                       F-24
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of BFS' current or accumulated earnings and profits will not be so included in
BFS' income.

     A reconciliation between the amount of total tax expense and expected tax
expense, computed by applying the federal statutory rate to income before taxes,
follows:

<Table>
<Caption>
                                                               2002    2001    2000
                                                              ------   -----   -----
<S>                                                           <C>      <C>     <C>
Computed expected expense at statutory rate.................  $1,321   5,202   5,141
Items affecting federal income tax rate:
  State income tax, net of federal income tax benefit.......     169     223     296
  Allocated ESOP share appreciation.........................     248     170      66
  Bank-owned life insurance.................................    (433)   (439)   (433)
  Other.....................................................      82      53     274
                                                              ------   -----   -----
Effective income tax expense................................  $1,387   5,209   5,344
                                                              ------   -----   -----
     Effective income tax rate..............................    36.8%   35.0%   35.5%
                                                              ======   =====   =====
</Table>

     The Company announced on March 6, 2003, that it will record a provision in
the first quarter of 2003 of approximately $4.6 million for additional state
taxes, including interest (approximately $3.0 million, net after any federal tax
deduction associated with such taxes and interest), relating to the deduction
for dividends received from real estate investment trust subsidiaries ("REITs")
for the 1999 through 2002 fiscal years, thus reducing earnings for the first
quarter of 2003 by the net after tax amount. The provision relates to new
legislation signed by the Governor of Massachusetts on March 5, 2003, that
amends Massachusetts' law to expressly disallow the deduction for dividends
received from a REIT. This amendment applies retroactively to tax years ending
on or after December 31, 1999. The Company believes that this new legislation
would apply to numerous financial institutions in Massachusetts. As a result of
the new legislation, the Company will also cease recording the tax benefits
associated with the dividend received deduction, effective for the 2003 tax
year. The Company believes that the legislation will be challenged, especially
the retroactive provisions, on constitutional and other grounds. The Company
would support such a challenge and otherwise intends to vigorously defend its
position.

(12) EMPLOYEE BENEFITS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

  (A) EMPLOYEE STOCK OWNERSHIP PLAN

     The Company maintains an Employee Stock Ownership Plan (ESOP), which is
designed to provide retirement benefits for eligible employees of BFS. Beginning
in 2001, the ESOP allocation was distributed in a manner, which also provided
retirement benefits to eligible employees of BNB and Forward Financial. Because
the Plan invests primarily in the stock of the Company, it will also give
eligible employees an opportunity to acquire an ownership interest in the
Company. Employees are eligible to participate in the Plan after reaching age
twenty-one, completing one year of service and working at least one thousand
hours of consecutive service during the previous year. Contributions are
allocated to eligible participants on the basis of compensation.

     The Company issued a total of 529,000 shares to the ESOP at a total
purchase price of $5,290. The purchase was made from the proceeds of a $5,290
loan from B.F. Funding Corporation, a wholly owned subsidiary of the Company,
bearing interest at the prime rate. Repayment of the loan is secured by
contributions BFS is obliged to make under a contribution agreement with the
ESOP. BFS made contributions to the ESOP totaling $529 in 2002, $529 in 2001 and
$605 in 2000 to enable the ESOP to make principal payments on the loan. The
amount contributed was charged to compensation and benefits expense. The Company
recognized $969 in 2002, $684 in 2001 and $348 in 2000 in compensation and
benefit expense and an increase in additional paid-in capital related to the
appreciation in the fair value of allocated ESOP shares. The balance of the loan
was repaid at the end of 2002, principally with funds from BFS's, BNB's and
Forward Financial's contributions to ESOP, which are subject to IRS limitations.

     Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal balance of the loan is repaid.
Employees vest in their ESOP account at a rate of

                                       F-25
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

33 1/3% annually commencing after the completion of one year of credited service
or immediately if service was terminated due to death, retirement, disability,
or change in control. Dividends on released shares are credited to the
participants' ESOP accounts.

     At December 31, 2002, 2001 and 2000, shares held in suspense to be released
annually as the loan is paid down amounted to 0, 52,920 and 105,839,
respectively. Additionally, at December 31, 2002, 2001 and 2000, a total of
34,633, 32,655 and 29,170 shares, respectively, were held in suspense,
representing shares acquired with the proceeds of dividends paid on unallocated
ESOP shares. The fair value of all unallocated ESOP shares was $925, $2,062 and
$2,819 at December 31, 2002, 2001 and 2000, respectively. Dividends on ESOP
shares are charged to retained earnings and ESOP shares committed-to-be released
are considered outstanding in determining earnings per share.

  (B) 1996 STOCK-BASED INCENTIVE PLAN

     The Company maintains a Stock-Based Incentive Plan (SIP). The objective of
the SIP is to enable the Company to provide officers and directors with a
proprietary interest in the Company as an incentive to encourage such persons to
remain with the Company. In 1996, the SIP acquired 263,584 shares in the open
market at an average price of $12.255 per share and has since acquired
additional shares with the proceeds of dividends. These original acquisition
shares represent deferred compensation, which is initially recorded as a
reduction in stockholders' equity and charged to compensation expense over the
vesting period of the award. Upon vesting, shares acquired from dividends are
distributed pro-rata to recipients of awards.

     Awards are granted in the form of common stock held by the SIP. A total of
242,500 shares were awarded on April 30, 1996, a total of 8,584 shares were
awarded on October 15, 1996 and 7,500 shares were awarded on February 17, 2000.
During 2001 a total of 6,000 shares were awarded and in 2002, 1,000 shares were
awarded, some of which were shares acquired with accumulated dividends. Awards
outstanding vest in five annual installments generally commencing one year from
the date of the award. As of December 31, 2002, all shares have been awarded
under the SIP.

     Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service period for the
portion of each award that vests equally over a five-year period. The Company
recognized $43, $79 and $225 related to the original cost of earned shares in
compensation and benefit expense in 2002, 2001 and 2000, respectively.

     A recipient will be entitled to all voting and other stockholder rights.
The awarded, but unvested SIP shares are considered outstanding in the
calculation of earnings per share, whereas the unawarded SIP shares are not.

  (C) STOCK OPTION PLANS

     The Company adopted a stock option plan in 1996 (the 1996 Plan) for
officers, key employees and directors. Pursuant to the terms of the 1996 plan,
the number of common shares reserved for issuance is 658,961, all of which have
been awarded. All options have been issued at not less than fair market value at
the date of the grant and expire in 10 years from the date of the grant. All
stock options granted vest over a five-year period from the date of grant.
During 1997, the Company adopted the 1997 stock option plan (the 1997 Plan).
Pursuant to the terms of the 1997 plan, 250,000 common shares are reserved for
issuance of which 24,600 remain unawarded. During 2002, the Company granted
employees options to purchase 13,500 shares of common stock at $27.51. During
2001, the Company granted employees options to purchase 27,000 shares of common
stock at between $21.80 and $23.65 per share.

                                       F-26
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of option activity follows:

<Table>
<Caption>
                                                          2002                           2001
                                              ----------------------------   ----------------------------
                                                              WEIGHTED                       WEIGHTED
                                              NUMBER OF   AVERAGE EXERCISE   NUMBER OF   AVERAGE EXERCISE
                                               SHARES          PRICE          SHARES          PRICE
                                              ---------   ----------------   ---------   ----------------
<S>                                           <C>         <C>                <C>         <C>
Balance, beginning of year..................   754,863         $14.80         838,661         $14.26
  Granted...................................    13,500          27.51          27,000          22.28
  Forfeited.................................    (7,500)         22.46          (1,000)         18.82
  Exercised.................................  (191,237)         14.86        (109,798)         12.51
                                              --------                       --------
Balance, end of year........................   569,626         $14.97         754,863         $14.80
                                              ========         ======        ========         ======
Options exercisable.........................   493,826         $14.23         636,671         $14.11
</Table>

<Table>
<Caption>
                                                                          2000
                                                              ----------------------------
                                                              NUMBER OF   WEIGHTED AVERAGE
                                                               SHARES      EXERCISE PRICE
                                                              ---------   ----------------
<S>                                                           <C>         <C>
Balance, beginning of year..................................   809,461         $14.12
  Granted...................................................    38,000          16.98
  Forfeited.................................................    (1,000)         18.82
  Exercised.................................................    (7,800)         13.06
                                                               -------
Balance, end of year........................................   838,661         $14.26
                                                               =======         ======
Options exercisable.........................................   576,277         $13.76
</Table>

     A summary of options outstanding and exercisable by price range as of
December 31 follows:

<Table>
<Caption>
                  OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
-------------------------------------------------------   ------------------------------------
   OUTSTANDING      WEIGHTED AVERAGE                      EXERCISABLE AS OF
      AS OF            REMAINING       WEIGHTED AVERAGE     DECEMBER 31,      WEIGHTED AVERAGE
DECEMBER 31, 2002   CONTRACTUAL LIFE    EXERCISE PRICE          2002           EXERCISE PRICE
-----------------   ----------------   ----------------   -----------------   ----------------
<S>                 <C>                <C>                <C>                 <C>
     336,576              3.3               $12.44             336,576             $12.44
       2,000              3.8                13.44               2,000              13.44
       7,500              3.9                14.82               7,500              14.82
      69,150              4.5                18.82              69,150              18.82
       3,400              4.9                19.75               3,400              19.75
      11,500              5.2                22.22              11,500              22.22
       5,000              5.4                23.38               5,000              23.38
       2,000              6.0                18.13                 900              18.13
      12,500              6.2                18.50               9,500              18.50
      45,200              7.0                14.57              26,800              14.57
      15,000              7.2                13.82               9,000              13.82
       1,000              7.5                12.91                 400              12.91
       1,000              7.7                19.81                 400              19.81
       2,500              7.8                18.44               1,000              18.44
      17,300              8.0                19.41               6,200              19.41
      19,500              8.3                21.80               3,500              21.80
       5,000              8.8                23.65               1,000              23.65
      13,500              9.9                27.51                  --                 --
     -------                                                   -------
     569,626              4.5               $14.97             493,826             $14.23
     =======              ===               ======             =======             ======
</Table>

     The 1996 Plan and the 1997 Plan stock option grants are accounted by
measuring compensation at the grant date as the difference between the fair
market value of the Company's stock and the exercise price of the options
granted. The Company grants options at the fair market value of the stock at the
date of grant. Accordingly, no compensation cost has been charged against income
for these plans.
                                       F-27
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

 (D) PENSION PLAN

     All eligible officers and employees are included in a noncontributory
defined benefit pension plan provided by BFS and BNB as participating employers
with Pentegra. Salaried employees are eligible to participate in the plan after
reaching age twenty-one and completing one year of service. Pentegra does not
segregate the assets or liabilities by participating employer and, accordingly,
disclosure of accumulated vested and nonvested benefits and net assets available
for benefits required by SFAS No. 87 is not possible. Contributions are based on
individual employer experience. According to Pentegra's Administrators, as of
June 30, 2002, the date of the latest actuarial valuation, the market value of
Pentegra's net assets exceeded the actuarial present value of vested benefits in
the aggregate. During 2002, the Company accrued a pension expense of $530,000
for the first half of the plan's fiscal year ending June 30, 2003. There was no
pension expense recorded for 2001 and 2000, except for an administration fee of
approximately $5 per year.

 (E) DEFERRED THRIFT INCENTIVE PLAN

     BFS and BNB have employee tax deferred thrift incentive plans (the "401(k)
plans") under which employee contributions to the plans are matched pursuant to
the provisions of the respective plans. All employees who meet specified age and
length of service requirements are eligible to participate in the 401(k) plans.
The amounts matched by BFS and BNB are included in compensation and employee
benefits expense. The amounts matched were $249 in 2002, $242 in 2001 and $340
in 2000.

 (F) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

     The Company established a supplemental executive retirement plan (the
"SERP") in October 1999 for certain of its senior executives under which
participants are entitled to an annual retirement benefit. The purpose of the
SERP is to restore benefits that would have been received under the Company's
defined benefit and defined contribution plans but for limitations imposed by
federal tax limitations. Expenses associated with SERP totaled $399, $181 and
$269 in 2002, 2001 in 2000, respectively.

 (G) SHORT-TERM INCENTIVE PLAN

     The Company maintains a short-term incentive plan. Except Forward
Financial, generally all BFS and BNB employees are eligible to participate in
the incentive plan, and awards are granted based on the achievement of certain
performance measures. Forward Financial has individualized plans for certain
members of management, focused on profitability and the attainment of measurable
business goals. Compensation expense related to the short-term incentive plan
awards amounted to $1,199, $1,411 and $1,477 during 2002, 2001 and 2000,
respectively.

 (H) BANK-OWNED LIFE INSURANCE

     Bank owned life insurance ("BOLI") represents life insurance on the lives
of certain employees. The Company is the beneficiary of the insurance policies.
Increases in the cash value of the policies, as well as insurance proceeds
received, are recorded in non-interest income, and are not subject to income
taxes. The cash surrender value of the Company's BOLI increased by $1,238 and
$1,255 during the years ended December 31, 2002 and 2001, respectively.

  (I) EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS

     The Company entered into employment agreements with its President and Chief
Executive Officer, and two Executive Vice Presidents and Forward Financial's
President and Senior Vice President. The employment agreements generally provide
for the continued payment of specified compensation and benefits for two or
three years, as applicable, and provide payments for the remaining term of the
agreement after the officers are terminated, unless the termination is for
"cause" as defined in the employment agreements. The agreements also provide for
payments to the officer upon voluntary or involuntary termination of the officer
following a change in control, as defined in the agreements. In addition, BFS
and BNB entered into change in control agreements with certain other executives
which provide for payment to the officer upon voluntary or involuntary
termination, under certain circumstances, after a change of control, as defined
in their change of control agreements.

                                       F-28
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (J) EMPLOYEE SEVERANCE COMPENSATION PLAN

     The Company established an Employee Severance Compensation Plan. The Plan
provides eligible employees with severance pay benefits in the event of a change
in control of the Company and/or its two banks. Generally, employees are
eligible to participate in the Plan if they have completed at least one year of
service with the Company and are not eligible to receive benefits under the
executive officer employment agreements. The Plan provides for the payment,
under certain circumstances, of lump-sum amounts upon termination following a
change of control, as defined in the Plan.

(13) CORPORATION OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES (DOLLARS IN
THOUSANDS)

     On July 12, 2000, the Company sponsored the creation of BFD Preferred
Capital Trust I, (Trust I), a New York common law trust. The Company is the
owner of all of the common securities of the Trust I. On July 26, 2000, the
Trust I issued $10,000 of its 11.295% Capital Securities through a pooled trust
preferred securities offering. The proceeds from this issuance, along with the
Company's $309 capital contribution for the Trust I common securities, were used
to acquire $10,309 aggregate principal amount of the Company's 11.295% Junior
Subordinated notes due July 19, 2030, which constitute the sole asset of the
Trust I. The Company has, through the Trust agreement establishing the Trust,
the Guarantee Agreement, the notes and the related Indenture, taken together,
fully irrevocably and unconditionally guaranteed all of the Trust I's
obligations under the Capital Securities.

     On August 18, 2000, the Company sponsored the creation of BFD Preferred
Capital Trust II, (Trust II), a statutory business trust created under the laws
of Delaware. The Company is the owner of all of the common securities of the
Trust II. On September 22, 2000, the Trust II issued $22,000 of its 10.875%
Capital Securities. The proceeds from this issuance, along with the Company's
$681 capital contribution for the Trust II common securities, were used to
acquire $22,681 aggregate principal amount of the Company's 10.875% junior
subordinated debentures due October 1, 2030, which constitute the sole assets of
the Trust II. The Company has, through the Declaration of Trust and the Amended
and Restated Declaration of Trust establishing the Trust, the Common Securities
and the Capital Securities Guarantee Agreements, the debentures and related
Indenture, taken together, fully irrevocably and unconditionally guaranteed all
of the Trust II's obligations under the Capital Securities.

     The aggregate amount of Trust I and II securities outstanding totaled
$32,000 at December 31, 2002. A summary of the trust securities issued and
outstanding follows:

<Table>
<Caption>
                                AMOUNT OUTSTANDING                                      DISTRIBUTION
                                ------------------            PREPAYMENT                  PAYMENT
DECEMBER 31                       2002      2001      RATE    OPTION DATE   MATURITY     FREQUENCY
-----------                     --------   -------   ------   -----------   ---------   ------------
<S>                             <C>        <C>       <C>      <C>           <C>         <C>
BFD Preferred Capital Trust
  I...........................  $10,000    10,000    11.295%   7/19/2010    7/19/2030   Semiannually
BFD Preferred Capital Trust
  II..........................   22,000    22,000    10.875    10/1/2010    10/1/2030   Semiannually
</Table>

     All of the corporation obligated mandatorily redeemable capital securities
may be prepaid at the option of the Trusts in whole or in part, on or after the
prepayment dates listed in the table above. Trust I is subject to a prepayment
penalty fee of six months worth of interest reduced each year by 10% commencing
at July 19, 2010. There is no prepayment penalty fee imposed on Trust II after
the first 10 years.

     In addition, the Company also has the right, subject to certain conditions,
at any time during the term of the Trust I Capital Securities to defer the
payment of interest on those securities from time to time for a period of up to
ten consecutive semiannual interest payment periods. No deferral period will end
on a date other than an interest payment date and no deferral will extend beyond
July 19, 2030, the stated maturity of the Trust I Capital Securities. During any
deferral period, each installment of interest that would otherwise have been due
and payable will bear additional interest (to the extent payment of such
interest would be legally enforceable) at the rate of 13.95%, compounded
semiannually.

     The Company has the right, at one or more times, to defer interest payments
on the Trust II Junior Subordinated Debentures for up to ten consecutive
semiannual periods. All deferrals will end on an interest payment date and will
not extend beyond October 1, 2030, the stated maturity date of the Trust II
Junior

                                       F-29
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Subordinated Debentures. If the Company defers interest payments on the Trust II
Junior Subordinated Debentures, the Trust II will also defer distributions on
the Trust II Capital Securities.

(14) LITIGATION

     During the quarter ended March 31, 2002, the Company settled a lawsuit,
which had been filed against its subsidiary, Broadway National Bank. The Company
incurred a cost of $500,000 during the first quarter to settle the lawsuit,
resulting in a reduction in diluted earnings per share of approximately $.07.

     During the quarter ended September 30, 2002, the Company settled a lawsuit,
which had been filed against BFS' subsidiary, Forward Financial Company. The
Company incurred a cost of $750,000 during the third quarter to settle the
lawsuit, resulting in a reduction in diluted earnings per share of approximately
$.11.

     Various other legal proceedings are pending against the Company which have
arisen in the normal course of business. In the opinion of management, the
ultimate disposition of these matters is not expected to have a material adverse
effect on the consolidated financial position, the annual results of operations,
or liquidity of the Company.

(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (DOLLARS IN THOUSANDS)

     In the normal course of business, the Company is party to financial
instruments with off-balance-sheet risk, including commitments to originate or
purchase loans, unadvanced amounts of construction loans, unused credit lines,
standby letters of credit and forward commitments to sell loans and recourse
agreements on assets sold. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in these
particular classes of financial instruments. The Company's exposure to credit
loss is represented by the contractual amount or unpaid principal balance of
these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For forward commitments, the contract or notional amounts exceed
the Company's exposure to credit loss.

     Commitments to originate loans and unused credit lines are agreements to
lend to a customer, provided the customer meets all conditions established in
the contract. Commitments have fixed expiration dates and may require payment of
a fee. The total commitment amounts do not necessarily represent total future
cash requirements since many commitments are not expected to be drawn upon. The
amount of collateral obtained, if necessary for the extension of credit, is
based on the credit evaluation of the borrower.

     Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.

     The Company sells the vast majority of its adjustable rate loans held for
sale to various private institutional investors on a best efforts basis and most
fixed rate loans held for sale to FHLMC and FNMA. In addition, forward
commitments to sell loans are contracts, which the Company enters into for the
purpose of reducing the market risk associated with originating loans for sale.
In order to fulfill a forward commitment, the Company delivers a mortgage loan
(or loans) with aggregate principal balances equaling the contract amount of the
forward commitment. Risks may arise from the possible inability of the Company
to originate loans to fulfill the contracts, in which case the Company would
repurchase the forward commitments at the then prevailing market prices.

                                       F-30
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition to construction loans in process, the Company had the following
outstanding commitments at December 31:

<Table>
<Caption>
                                                                2002      2001
                                                              --------   -------
<S>                                                           <C>        <C>
Commitments to originate mortgage loans.....................  $ 84,941   122,025
Commitments to originate business loans.....................     1,607     2,975
Unused lines of credit:
  Home equity...............................................   129,724   101,331
  Business loans............................................    18,457    15,816
Standby letters of credit...................................     3,120     2,560
Optional commitments to sell loans and commitments to sell
  loans or swap loans for mortgage-backed securities........   100,652    74,449
</Table>

(16) FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS)

     Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment, and
core deposit and other intangibles. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

     Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no active market exists for some of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.

     The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:

  (A) CASH AND CASH EQUIVALENTS

     The fair values of cash and cash equivalents approximate the carrying
amounts as reported in the balance sheet.

  (B) INVESTMENT AND MORTGAGE-BACKED SECURITIES

     Fair values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.

  (C) MORTGAGE LOANS HELD FOR SALE

     Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to sell loans
have been considered in the determination of the fair value of mortgage loans
held for sale.

                                       F-31
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (D) LOANS

     The fair values of loans are estimated using discounted cash flows
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.

  (E) ACCRUED INTEREST RECEIVABLE

     The fair value of accrued interest receivable approximates the carrying
amount as reported in the balance sheet because of its short-term nature.

  (F) STOCK IN FHLB OF BOSTON

     The fair value of Federal Home Loan Bank of Boston (FHLB) stock
approximates its carrying amount as reported in the balance sheet. If redeemed,
the Company will receive an amount equal to the par value of the stock.

  (G) DEPOSIT ACCOUNTS AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE

     The fair values of demand deposits (e.g., NOW, regular and statement
savings and money market accounts and advance payments by borrowers for taxes
and insurance) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow technique
that applies interest rates currently being offered on certificates with similar
remaining maturities to a schedule of aggregated expected monthly maturities on
such time deposits.

  (H) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

     Fair values for FHLB advances and other borrowings are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregated expected monthly maturities of
FHLB advances.

  (I) CORPORATION OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES

     Fair values for the corporation obligated mandatorily redeemable capital
securities are estimated using a discounted cash flow technique that applies
interest rates currently being offered on similar securities to a schedule of
expected maturities of these capital securities.

  (J) OFF-BALANCE-SHEET INSTRUMENTS

     The Company's commitments for unused lines and outstanding standby letters
of credit and unadvanced portions of loans and loans sold with recourse are
considered in estimating the fair value of loans.

                                       F-32
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The carrying amounts and fair values of the Company's financial instruments
at December 31 are as follows:

<Table>
<Caption>
                                                         2002                           2001
                                             ----------------------------   ----------------------------
                                             CARRYING AMOUNT   FAIR VALUE   CARRYING AMOUNT   FAIR VALUE
                                             ---------------   ----------   ---------------   ----------
<S>                                          <C>               <C>          <C>               <C>
Financial assets:
  Cash and cash equivalents................    $   74,672         74,672          95,957         95,957
  Investment securities available for
     sale..................................       112,888        112,888          63,258         63,258
  Investment securities held to maturity...         2,524          2,576             554            598
  Mortgage-backed securities available for
     sale..................................       114,515        114,515          94,922         94,922
  Mortgage-backed securities held to
     maturity..............................        25,429         26,597          40,822         41,547
  Loans, net and mortgage loans held for
     sale..................................     1,102,970      1,128,524       1,080,410      1,094,802
  Accrued interest receivable..............         6,470          6,470           6,317          6,317
  Stock in FHLB of Boston..................        24,552         24,552          24,208         24,208
Financial liabilities:
  Deposit accounts.........................       960,278        961,331         884,516        894,268
  FHLB advances and other borrowings.......       426,560        452,685         449,000        465,822
  Advance payments by borrowers for taxes
     and insurance.........................         2,317          2,317           2,614          2,614
Corporation obligated mandatorily
  redeemable capital securities............        32,000         36,765          32,000         35,057
</Table>

(17) BUSINESS SEGMENTS (DOLLARS IN THOUSANDS)

     The Company's wholly owned bank subsidiaries, BFS and BNB (collectively the
Banks), have been identified as reportable operating segments in accordance with
the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. BF Funding, a wholly owned subsidiary of the Company and
various subsidiaries of the Banks, did not meet the quantitative thresholds for
determining reportable segments. The Banks provide general banking services to
their customers, including deposit accounts, residential, commercial, consumer
and business loans. Each Bank also invests in mortgage-backed securities and
other financial instruments. In addition to its own operations, the Company
provides managerial expertise and other professional services. The results of
the Company and BF Funding comprise the "Other" category.

     The Company evaluates performance and allocates resources based on the
Banks' net income, net interest margin, return on average assets and return on
average equity. The Banks follow generally accepted accounting principles as
described in the summary of significant accounting policies. The Company and
Banks have inter-company expense and tax allocation agreements. These
inter-company expenditures are allocated at cost. Asset sales between the Banks
were accounted for at current market prices at the time of sale and approximated
cost.

     Each Bank is managed separately with its own president, who reports
directly to the respective Boards of Directors of each Bank and the Chief
Executive Officer of the Company and its Board of Directors.

                                       F-33
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table sets forth certain information about and the
reconciliation of reported net income for each of the reportable segments.

<Table>
<Caption>
                                                      TOTAL
                                                    REPORTABLE                            CONSOLIDATED
                                BFS         BNB      SEGMENTS     OTHER    ELIMINATIONS      TOTALS
                             ----------   -------   ----------   -------   ------------   ------------
<S>                          <C>          <C>       <C>          <C>       <C>            <C>
At or for the year ended
  December 31, 2002:
  Interest income..........  $   77,441     7,821      85,262      4,252       (3,911)        85,603
  Interest expense.........      43,031     1,809      44,840      7,160       (3,911)        48,089
  Provision for loan
     losses................       1,350        --       1,350         --           --          1,350
  Non-interest income......      12,921     1,585      14,506        385           --         14,891
  Non-interest expense.....      40,937     5,400      46,337        943           --         47,280
  Income tax expense.......       1,832       720       2,552     (1,165)          --          1,387
                             ----------   -------   ---------    -------     --------      ---------
     Net income............  $    3,212     1,477       4,689     (2,301)          --          2,388
                             ==========   =======   =========    =======     ========      =========
     Total assets..........  $1,360,517   168,486   1,529,003    161,508     (164,899)     1,525,612
                             ==========   =======   =========    =======     ========      =========
Net interest margin........        2.79%     4.18%       n.m.       n.m.         n.m.           2.71%
Return on average assets...        0.24%     0.88%       n.m.       n.m.         n.m.           0.16%
Return on average equity...        3.17%    11.31%       n.m.       n.m.         n.m.           2.44%
</Table>

<Table>
<Caption>
                                                      TOTAL
                                                    REPORTABLE                            CONSOLIDATED
                                BFS         BNB      SEGMENTS     OTHER    ELIMINATIONS      TOTALS
                             ----------   -------   ----------   -------   ------------   ------------
<S>                          <C>          <C>       <C>          <C>       <C>            <C>
At or for the year ended
  December 31, 2001:
  Interest income..........  $   85,317     9,302      94,619      4,787       (4,510)        94,896
  Interest expense.........      52,310     2,609      54,919      7,153       (4,510)        57,562
  Provision for loan
     losses................         707       113         820         --           --            820
  Non-interest income......      14,913     1,242      16,155        444           --         16,599
  Non-interest expense.....      32,622     4,848      37,470        778           --         38,248
  Income tax expense.......       5,062     1,045       6,107       (898)          --          5,209
                             ----------   -------   ---------    -------     --------      ---------
     Net income............  $    9,529     1,929      11,458     (1,802)          --          9,656
                             ==========   =======   =========    =======     ========      =========
       Total assets........  $1,303,082   161,881   1,464,963    162,445     (156,542)     1,470,866
                             ==========   =======   =========    =======     ========      =========
Net interest margin........        2.84%     4.85%       n.m.       n.m.         n.m.           2.86%
Return on average assets...        0.77%     1.22%       n.m.       n.m.         n.m.           0.69%
Return on average equity...       10.29%    15.05%       n.m.       n.m.         n.m.          10.32%
</Table>

                                       F-34
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                      TOTAL
                                                    REPORTABLE                            CONSOLIDATED
                                BFS         BNB      SEGMENTS     OTHER    ELIMINATIONS      TOTALS
                             ----------   -------   ----------   -------   ------------   ------------
<S>                          <C>          <C>       <C>          <C>       <C>            <C>
At or for the year ended
  December 31, 2000:
  Interest income..........  $   82,673     9,113      91,786      1,800       (1,752)        91,834
  Interest expense.........      52,303     2,498      54,801      2,577       (1,752)        55,626
  Provision for loan
     losses................         800       200       1,000         --           --          1,000
  Non-interest income......      13,651     1,190      14,841          5         (492)        14,354
  Non-interest expense.....      29,739     4,685      34,424        576         (492)        34,508
  Income tax expense.......       4,760     1,032       5,792       (448)          --          5,344
                             ----------   -------   ---------    -------     --------      ---------
     Net income............  $    8,722     1,888      10,610       (900)          --          9,710
                             ==========   =======   =========    =======     ========      =========
     Total assets..........  $1,174,902   148,834   1,323,736    159,296     (155,250)     1,327,782
                             ==========   =======   =========    =======     ========      =========
Net interest margin........        2.83%     5.25%       n.m.       n.m.         n.m.           3.02%
Return on average assets...         .76%     1.31%       n.m.       n.m.         n.m.            .75%
Return on average equity...       10.58%    15.46%       n.m.       n.m.         n.m.          10.72%
</Table>

(18) PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)

     The following are the condensed financial statements for BostonFed Bancorp,
Inc. (the Parent Company) only:

<Table>
<Caption>
                                                                2002      2001
                                                              --------   -------
<S>                                                           <C>        <C>
                                     ASSETS
Cash and interest-bearing deposit in subsidiary bank........  $  7,029    12,219
Certificates of deposit.....................................        77        71
                                                              --------   -------
     Total cash and cash equivalents........................     7,106    12,290
Investment securities available for sale (amortized cost of
  $6,168 and $4,277 at 2002 and 2001, respectively).........     6,450     4,411
Investment in subsidiaries, at equity.......................   112,447   109,525
Other assets................................................     1,383     1,420
                                                              --------   -------
     Total assets...........................................  $127,386   127,646
                                                              ========   =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings..................................................  $     --        --
Subordinated debentures supporting corporation obligated
  mandatorily redeemable capital securities.................    32,990    32,990
Accrued expenses and other liabilities......................     1,423     1,268
                                                              --------   -------
     Total liabilities......................................    34,413    34,258
                                                              --------   -------
     Total stockholders' equity.............................    92,973    93,388
                                                              --------   -------
     Total liabilities and stockholders' equity.............  $127,386   127,646
                                                              ========   =======
</Table>

                                       F-35
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                               2002      2001     2000
STATEMENTS OF INCOME                                          -------   ------   ------
<S>                                                           <C>       <C>      <C>
  Interest income...........................................  $   597    1,080      474
  Interest expense..........................................    3,631    3,631    1,439
                                                              -------   ------   ------
     Net interest margin....................................   (3,034)  (2,551)    (965)
  Non-interest income.......................................      385      444        5
  Non-interest expense......................................      929      776      574
                                                              -------   ------   ------
     Loss before income taxes...............................   (3,578)  (2,883)  (1,534)
  Income tax benefit........................................   (1,214)    (978)    (528)
                                                              -------   ------   ------
  Loss before equity in net income of subsidiaries..........   (2,364)  (1,905)  (1,006)
  Equity in net income of subsidiaries......................    4,752   11,561   10,716
                                                              -------   ------   ------
     Net income.............................................  $ 2,388    9,656    9,710
                                                              =======   ======   ======
</Table>

     The Parent Company's statements of changes in stockholders' equity and
comprehensive income are identical to the consolidated statements of changes in
stockholders' equity and comprehensive income and therefore are not presented
here.

<Table>
<Caption>
                                                               2002      2001      2000
STATEMENTS OF CASH FLOWS                                      -------   -------   -------
<S>                                                           <C>       <C>       <C>
  Net cash flows from operating activities:
     Net income.............................................  $ 2,388     9,656     9,710
     Adjustments to reconcile net income to net cash (used
      in) provided by operating activities:
       Equity in undistributed earnings of subsidiaries.....     (299)  (11,561)  (10,716)
       Amortization and accretion, net......................        2        (2)       --
       Appreciation in fair value of shares charged to
        expense for compensation plans......................      969       684       348
       Earned SIP shares....................................       43        79       225
       Reduction in unallocated ESOP shares.................      529       529       605
       Gain on sale of investment securities................     (385)     (444)       (5)
       Decrease (increase) in other assets..................       37      (137)   (1,270)
       Increase in accrued expenses and other liabilities...       98       471       947
                                                              -------   -------   -------
          Net cash used in operating activities.............    3,382      (725)     (156)
                                                              -------   -------   -------
  Cash flows from investing activities:
     Proceeds from sale of investment securities available
      for sale..............................................    1,621     4,323       431
     Purchase of investment securities available for sale...   (3,130)   (5,775)       --
     Change in investment in subsidiaries...................     (944)      829      (635)
                                                              -------   -------   -------
       Net cash used in investing activities................   (2,453)     (623)     (204)
                                                              -------   -------   -------
  Cash flows from financing activities:
     Proceeds from other borrowed money.....................       --        --     1,945
     Repayments of other borrowed money.....................       --        --    (5,000)
     Proceeds from subordinated debentures supporting
      corporation obligated mandatorily redeemable capital
      securities............................................       --        --    32,990
     Common stock repurchases...............................   (6,109)   (6,907)   (5,886)
     Cash dividends paid....................................   (2,848)   (2,650)   (2,495)
     Stock options exercised................................    2,844     1,774       129
                                                              -------   -------   -------
       Net cash (used in) provided by financing
        activities..........................................   (6,113)   (7,783)   21,683
                                                              -------   -------   -------
</Table>

                                       F-36
<PAGE>
                    BOSTONFED BANCORP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                               2002      2001      2000
STATEMENTS OF CASH FLOWS                                      -------   -------   -------
<S>                                                           <C>       <C>       <C>
       Net (decrease) increase in cash and cash
        equivalents.........................................   (5,184)   (9,131)   21,323
     Cash and cash equivalents at beginning of year.........   12,290    21,421        98
                                                              -------   -------   -------
  Cash and cash equivalents at end of year..................  $ 7,106    12,290    21,421
                                                              =======   =======   =======
  Supplemental cash flow information:
     Cash paid during the year for:
       Interest.............................................    3,604     3,632       277
       Income taxes.........................................   (1,285)   (1,235)     (321)
</Table>

(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)

     Summaries of consolidated operating results on a quarterly basis for the
years ended December 31 follow:

<Table>
<Caption>
                                              2002 QUARTERS                        2001 QUARTERS
                                    ----------------------------------   ---------------------------------
                                    FOURTH    THIRD    SECOND   FIRST    FOURTH   THIRD    SECOND   FIRST
                                    -------   ------   ------   ------   ------   ------   ------   ------
<S>                                 <C>       <C>      <C>      <C>      <C>      <C>      <C>      <C>
Interest and dividend income......  $20,552   21,805   21,863   21,383   22,959   24,124   23,947   23,866
Interest expense..................   11,405   12,128   12,099   12,457   13,687   14,725   14,632   14,518
                                    -------   ------   ------   ------   ------   ------   ------   ------
Net interest income...............    9,147    9,677    9,764    8,926    9,272    9,399    9,315    9,348
                                    -------   ------   ------   ------   ------   ------   ------   ------
Provision for loan losses.........      500      350      250      250      200      200      208      212
Non-interest income...............    3,551    3,116    4,096    4,128    4,680    4,220    4,499    3,200
Non-interest expense..............   10,073   17,789    9,687    9,731    9,988    9,414    9,620    9,226
                                    -------   ------   ------   ------   ------   ------   ------   ------
Income (loss) before income
  taxes...........................    2,125   (5,346)   3,923    3,073    3,764    4,005    3,986    3,110
Income tax expense (benefit)......      812   (1,816)   1,340    1,051    1,255    1,377    1,477    1,100
                                    -------   ------   ------   ------   ------   ------   ------   ------
Net income (loss).................  $ 1,313   (3,530)   2,583    2,022    2,509    2,628    2,509    2,010
                                    =======   ======   ======   ======   ======   ======   ======   ======
Basic earnings (loss) per share...  $   .30     (.80)     .58      .46      .58      .59      .56      .45
Diluted earnings (loss) per
  share...........................      .28     (.80)     .55      .43      .54      .56      .54      .42
</Table>

                                       F-37
<PAGE>

ANNUAL MEETING

     The annual meeting of stockholders will be held on Wednesday, April 30,
2003, at 2:00 p.m. The meeting will take place at the Burlington Marriott Hotel,
1 Mall Road, Burlington, MA.

STOCK LISTING

     BostonFed Bancorp, Inc. became a public company on October 24, 1995.
BostonFed Bancorp, Inc. Common Stock is traded on the American Stock Exchange
with the symbol "BFD." The stock is listed as "Bostnfd" in the Boston Globe and
as "BstnfdBcp" in the Wall Street Journal.

COMMON STOCK INFORMATION

     Initial Public Offering Price $10.00 per share.

     Closing Price at December 31, 2002 was $26.70.

COMMON STOCK PRICE AND DIVIDENDS PAID (UNAUDITED)

<Table>
<Caption>
                                              2001                              2002
BY QUARTER                       ------------------------------   ---------------------------------
STOCK PRICE                       1      2        3        4        1        2        3        4
---------------------------------------------------------------   ---------------------------------
<S>                              <C>   <C>      <C>      <C>      <C>      <C>      <C>      <C>
  High.........................  $25   $23.19   $25.50   $24.25   $25.63   $32.40   $35.20   $30.10
  Low..........................   20 5/8  20.40  20.50    22.25    23.30    24.60    26.70    25.50
Dividend Paid..................  .13      .15      .15      .15      .15      .16      .16      .16
</Table>

     As of December 31, 2002, the Company had 4,425,348 shares outstanding and
approximately 550 stockholders of record, not including persons of entities
holding stock in nominee or street name through brokers or banks.

10-K REPORT

     A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge upon written request to
BostonFed Bancorp, Inc., Investor Relations, 17 New England Executive Park,
Burlington, MA 01803.

<Table>
<S>                                               <C>
TRANSFER AGENT

Shareholder and Broker Correspondence:            Courier:
EquiServe                                         EquiServe
P.O. Box 43010                                    Blue Hills Office Park
Providence, RI 02940-3010                         Mail Stop: 45-02-62
Shareholder Inquiries: 866-897-1807               150 Royall Street
                                                  Canton, MA 02021

INDEPENDENT AUDITOR

KPMG LLP
99 High Street
Boston, MA 02110

REGULATORY COUNSEL                                LOCAL COUNSEL

Muldoon Murphy & Faucette LLP                     Goodwin Procter LLP
5101 Wisconsin Avenue NW                          Exchange Place
Washington, DC 20016                              Boston, MA 02109
</Table>

                                       F-38
<PAGE>

                            BOSTONFED BANCORP, INC.

<Table>
<S>                                               <C>
CORPORATE HEADQUARTERS                            INVESTOR RELATIONS
17 New England Executive Park                     Amy L. Timmerman
Burlington, MA 01803                              (781) 221-6396
(781) 273-0300
(800) 688-2372
</Table>

BOARD OF DIRECTORS

David F. Holland
Chairman, President and Chief Executive Officer of the Company,
Chairman and Chief Executive Officer of Boston Federal Savings Bank
and Chairman of Broadway National Bank

David P. Conley
Executive Vice President of the Company,
President of Boston Federal Savings Bank and
Chief Executive Officer and President of Broadway National Bank

Richard J. Fahey
Principal of Trammel Crow Company, Inc.

Patricia M. Flynn, Ph.D.
Trustee Professor of Economics and Management at Bentley College

Kija Kim
President and Chief Executive Officer of
Harvard Design and Mapping Company, Inc.

Joanna T. Lau
Chief Executive Officer and Chairman of LAU Technologies, Inc.

W. Russell Scott, Jr.
Former President and Chief Executive Officer of First Financial Trust, NA

Catherine Friend White
President and Senior Portfolio Manager of FinArc, LLC

MANAGEMENT

David F. Holland, President and Chief Executive Officer
David P. Conley, Executive Vice President, President of Boston Federal Savings
Bank and Broadway
     National Bank
John A. Simas, Executive Vice President, Chief Financial Officer and Secretary
Janice M. Forster, Senior Vice President
Dennis J. Furey, Senior Vice President
Mark H. Kellett, Senior Vice President and Treasurer
Stephen F. Kelly, Senior Vice President and Controller
Dennis G. Kilduff, Senior Vice President
Marylea R. Oates, Senior Vice President
Barbara A. Martin, Senior Vice President and Executive Vice President and Chief
Operating Officer of
     Broadway National Bank
Shaun W. McGee, Senior Vice President and President of Forward Financial Company

                                       F-39
<PAGE>

                                     NOTES
--------------------------------------------------------------------------------

                                       F-40