<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

               For the fiscal year ended June 30, 2003

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

               Commission file number 0-22790

                         STATEFED FINANCIAL CORPORATION
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

                Delaware                                     42-1410788
    -------------------------------                    --------------------
    (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                     Identification No.)

     13523 University Avenue, Clive, Iowa                     50325
   ----------------------------------------                 ----------
   (Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (515) 223-8484

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None

                     Common Stock, par value $0.01 per share
                    ----------------------------------------
                                (Title of class)

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES [X]. NO [ ].

        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

        State the issuer's revenue for the most recent fiscal year: $7.1
million.

        The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the NASDAQ System as of September 23, 2003, was $13.8 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)

        As of September 23, 2003, there were issued and outstanding 1,293,958
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]

<PAGE>

                                     PART I

Item 1. Description of Business

General

        The Company. StateFed Financial Corporation (the "Company" or the
"Holding Company"), a Delaware corporation, was formed in September, 1993 to act
as the holding company for State Federal Savings and Loan Association of Des
Moines ("State Federal" or the "Bank") upon the completion of the Bank's
conversion from the mutual to the stock form (the "Conversion"). The Company
received approval from the Office of Thrift Supervision (the "OTS") to acquire
all of the common stock of the Bank to be outstanding upon completion of the
Conversion. The Conversion was completed on January 4, 1994. Unless the context
otherwise requires, all references to the Company include the Company and the
Bank on a consolidated basis.

        At June 30, 2003, the Company had $96.8 million of assets and
stockholders' equity of $13.9 million (or 14.37% of total assets).

        State Federal is a federally chartered savings association headquartered
in Clive, Iowa. Its deposits are insured up to applicable limits by the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation (the
"FDIC"), which is backed by the full faith and credit of the United States.

        The principal business of the Bank consists of attracting retail
deposits from the general public and investing those funds primarily in one- to
four-family residential mortgage and commercial and multi-family real estate
loans, and, to a lesser extent, construction and consumer loans primarily in the
Bank's market area. The Bank also invests in U.S. Government and agency
obligations and other permissible investments. At June 30, 2003, most of the
Bank's real estate mortgage loans were secured by properties located in Iowa.

        The Bank's revenues are derived primarily from interest on mortgage
loans and investments, income from service charges and loan originations. The
Bank does not originate loans to fund leveraged buyouts and has no loans to
foreign corporations or governments.

        The Bank offers a variety of accounts having a wide range of interest
rates and terms. The Bank's deposits include savings accounts, money market
savings accounts, checking accounts and certificate accounts with terms of three
months to 60 months. Currently, the Bank only solicits deposits in its primary
market area and does not accept brokered deposits, although management may on
occasion accept brokered deposits in the future as market conditions may
dictate.

        The main office of the Bank is located at 13523 University Avenue,
Clive, Iowa 50325, which is located in Polk County. Its telephone number at that
address is (515) 223-8484. The Bank maintains two other offices in Des Moines,
Iowa. The Bank considers its primary market area to comprise parts of Polk,
Dallas and Warren Counties.

Forward-Looking Statements

        When used in this Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.

                                        1
<PAGE>

        The Company does not undertake -- and specifically declines 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.

Lending Activities

        General. Historically, the Bank has originated fixed-rate, one- to
four-family residential mortgage loans. In the early 1980's, the Bank began to
focus on the origination of adjustable-rate mortgage ("ARM") loans, in order to
increase the percentage of loans in its portfolio with more frequent repricing
than fixed-rate mortgage loans. While the Bank has continued to originate
fixed-rate mortgage loans in response to customer demand, it also continues to
offer ARMs. The Bank also, from time to time, purchases loans.

        While the Bank primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates multi-family and commercial real
estate and, to a lesser extent, construction and consumer loans in its primary
market area. At June 30, 2003, the Bank's net loan portfolio totaled $82.2
million.

        The Loan Committee of the Bank, comprised of executive officers of the
Bank, has the immediate responsibility for the supervision of the Bank's loan
portfolio. Loans are originated and underwritten according to policies approved
by the Board. Any loan in excess of the approved level of the Loan Committee of
the Bank, must be reviewed and approved by the Loan Committee of the Board,
comprised of two non-employee members of the Board. The Board of Directors has
responsibility for the overall supervision of the Bank's loan portfolio and in
addition, reviews all foreclosure actions or the taking of deeds-in-lieu of
foreclosure.

        The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Banks." At June 30,
2003, the maximum amount which the Bank could have lent to any one borrower and
the borrower's related entities was approximately $1.2 million. At that date the
largest loan to one borrower or group of related borrowers consisted of three
loans to one borrower totaling $1.2 million. All of those loans were performing
in accordance with their terms. Currently, it is the Bank's policy to limit its
loans to one borrower to the maximum regulatory limit. The Bank reserves the
right to discontinue, adjust or create new lending programs to respond to its
needs and to competitive factors, and on occasion the Bank's holding company has
participated in loans with the Bank, which loans would have exceeded the limit
on loans to one borrower had such loans been made by the Bank.

                                        2
<PAGE>

        Loan Portfolio Composition. The following table presents the composition
of the Company's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and the allowances
for loan losses) of total loans as of the dates indicated.

<TABLE>
<CAPTION>
                                                                        June 30,
                                         -----------------------------------------------------------------
                                                 2003                   2002                   2001
                                         -----------------------------------------------------------------
                                          Amount      Percent      Amount    Percent     Amount    Percent
                                         -----------------------------------------------------------------
                                                              (Dollars in Thousands)
<S>                                      <C>           <C>       <C>          <C>      <C>          <C>
Real Estate Loans:
   One-to-four family                    $ 55,886       65.77%   $  55,482     63.24%  $  55,179     61.77%
   Multi-family and Commercial             22,235       26.17       25,847     29.46      31,243     34.97
   Construction and development             3,019        3.55        4,331      4.94       1,309      1.46
                                         --------------------    -------------------   -------------------
       Total real estate loans           $ 81,140       95.49    $  85,660     97.64   $  87,731     98.20

Other Loans:
   Consumer loans:
     Deposit account................           41        0.05           56      0.06         117      0.13
     Other..........................        3,794        4.46        2,012      2.29       1,489      1.67
                                         --------------------    -------------------   -------------------
       Total consumer loans.........        3,835        4.51        2,068      2.36       1,606      1.80
                                         --------------------    -------------------   -------------------
       Total loans..................       84,975      100.00%      87,728    100.00%     89,337    100.00%
                                                     ========                =======               =======

Less:
   Loans in process.................       (1,176)                  (1,726)                 (717)
   Deferred fees and discounts......         (286)                    (303)                 (339)
   Allowance for losses.............       (1,319)                    (927)                 (382)
                                         --------                ---------             ---------
   Total loans receivable, net......     $ 82,194                $  84,772             $  87,899
                                         ========                =========             =========
</TABLE>

                                        3
<PAGE>

        The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.

<TABLE>
<CAPTION>
                                                                          June 30,
                                           -----------------------------------------------------------------
                                                   2003                     2002                 2001
                                           -----------------------------------------------------------------
                                            Amount      Percent      Amount    Percent     Amount    Percent
                                           -----------------------------------------------------------------
                                                                  (Dollars in Thousands)
  <S>                                      <C>           <C>       <C>          <C>      <C>          <C>
  Fixed Rate Loans:
    Real estate:
     One-to-four family...............     $ 50,503       59.43%   $  47,701     54.37%  $  42,100     47.13%
     Multi-family and Commercial......       12,767       15.02       14,216     16.20      15,402     17.24
     Construction or development......        3,019        3.55        4,331      4.94       1,309      1.46
                                           --------------------    -------------------   -------------------
         Total real estate loans......       66,289       78.00       66,248     75.51      58,811     65.83
     Consumer.........................        2,759        3.24        1,859      2.12       1,606      1.80
                                           --------------------    -------------------   -------------------
         Total fixed-rate loans              69,048       81.24       68,107     77.63      60,417     67.63

  Adjustable Rate Loans:
    Real estate:
     One-to-four family...............        5,383        6.34        7,781      8.87      13,079     14.64
     Multi-family and Commercial......        9,468       11.15       11,631     13.26      15,841     17.73
                                           --------------------    -------------------   -------------------
         Total real estate loans......       14,851       17.49       19,412     22.13      28,920     32.37
     Consumer.........................        1,076        1.27          209      0.24           -
                                           --------------------    -------------------   -------------------
         Total adjustable-rate loans..       15,927       18.76       19,621     22.37      28,920     32.37
                                           --------------------    -------------------   -------------------
         Total loans..................       84,975      100.00%      87,728    100.00%     89,337    100.00%
                                                       ========                =======               =======

  Less:
     Loans in process.................       (1,176)                  (1,726)                 (717)
     Deferred fees and discounts......         (286)                    (303)                 (339)
     Allowance for losses.............       (1,319)                    (927)                 (382)
                                           --------                ---------             ---------
     Total loans receivable, net......     $ 82,194                $  84,772             $  87,899
                                           ========                =========             =========
</TABLE>

                                        4
<PAGE>

        The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 2003. Mortgages which have fixed,
adjustable or renegotiable interest rates are shown as maturing at the
contractual maturity date. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                                                     Real Estate
                                           -------------------------------------------------------------
                                                                 Multi-family and      Construction
                                           One-to-four family       Commercial         or Development
                                           -------------------------------------------------------------
                                                     Weighted             Weighted              Weighted
                                                      Average              Average               Average
                                            Amount     Rate      Amount     Rate      Amount      Rate
                                           -------   --------   -------   --------   -------    --------
  <S>                                      <C>           <C>    <C>           <C>    <C>            <C>
  Due During Years Ending June 30, /(1)/
  2004...................................  $ 5,365       7.64%  $ 7,027       7.16%  $ 3,019        6.52%
  2005...................................    7,473       7.60     1,768       7.70         -           -
  2006...................................    3,742       7.58     1,874       9.18         -           -
  2007-2011..............................    4,211       7.43     5,775       6.65         -           -
  After 2011.............................   35,095       7.01     5,791       6.96         -           -

<CAPTION>
                                                         Real Estate
                                           ---------------------------------------

                                               Consumer               Total
                                           ---------------------------------------
                                                    Weighted              Weighted
                                                     Average               Average
                                           Amount     Rate      Amount      Rate
                                           ------   --------   --------   --------
  <S>                                      <C>          <C>    <C>            <C>
  Due During Years Ending June 30, /(1)/
  2004...................................  $  897       7.55%  $ 16,308       7.22%
  2005...................................     207       9.57      9,448       7.66
  2006...................................     192       9.62      5,808       8.16
  2007-2011..............................   2,539       6.68     12,525       6.92
  After 2011.............................       -          -     40,886       7.00
</TABLE>

----------
(1)     Includes construction loans which the Bank reclassifies as permanent
        loans once the construction phase is completed.

        The total amount of loans due after June 30, 2004 which have fixed
interest rates is $57.5 million, while the total amount of loans due after such
dates which have floating or adjustable interest rates is $11.2 million.

                                        5
<PAGE>

        One- to four-family Residential Mortgage Lending. Loans of this type are
generated by the Company's marketing efforts, its present customers, walk-in
customers and referrals from real estate agents and builders. The Company
focuses its lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied, one- to four-family residences. At June 30,
2003, the Company's one- to four-family residential mortgage loans totaled $55.9
million, or approximately 65.8% of the Company's total gross loan portfolio.

        The Company currently offers ARM payment and fixed-rate mortgage loans.
During the year ended June 30, 2003, the Bank did not originate any
adjustable-rate real estate loans, which were secured by one- to four-family
residential real estate, due to the historically low interest rate environment.
During the same period, the Company originated $31.9 million of fixed-rate real
estate loans, secured by one- to four-family residential real estate. This
included loans originated with the intent to sell in the secondary market. The
Company's one- to four-family residential mortgage originations are primarily in
its market and surrounding areas. The Company began originating and selling
servicing released fixed rate single family loans in the secondary market, which
totaled $11.0 million during the period ended June 30, 2003. No such loans were
sold during the two year period ended June 30, 2002.

        The Company currently originates up to a maximum of 30-year, fixed-rate,
one- to four-family residential mortgage loans in amounts up to 90% of the
appraised value of the security property provided that private mortgage
insurance is obtained in an amount sufficient to reduce the Company's exposure
to at or below the 80% loan-to-value level. The Company may consider raising the
loan-to-value ratio in the future as regulations permit. Due to consumer demand,
the Company also has offered fixed-rate 10- through 15-year mortgage loans, most
of which conform to secondary market standards (i.e., Federal National Mortgage
Bank ("FNMA"), Government National Mortgage Bank ("GNMA"), and Federal Home Loan
Mortgage Corporation ("FHLMC") standards

        Interest rates charged on these fixed-rate loans are priced according to
market conditions, although management does not currently anticipate offering
rates at the most competitive end of the market on loans that it holds in
portfolio. In order to be more competitive in the market, maintain asset quality
and profitability, the Company began originating and selling fixed rate single
family servicing released mortgages. Residential loans generally do not include
prepayment penalties.

        The Company also currently offers thirty year amortization ARM loans
with interest rate adjustments occurring after one, and to a lesser extent,
three, five and seven year terms with an interest rate margin generally 300
basis points over one year Treasury rates. These loans have a fixed-rate for the
stated period and, thereafter, such loans adjust periodically, pursuant to the
contractual term. These loans provide for up to a 100 basis point annual cap and
a lifetime cap of 600 basis points over the initial rate although the bulk of
the Bank's ARMs are estimated by management to have 500 basis point lifetime
caps. Under the current ARM program, a 500 basis point lifetime cap is being
utilized. Under the contractual terms, the majority of such loans do not adjust
below the initial rate. As a consequence of using an initial fixed-rate and
caps, the interest rates on these loans may not be as rate sensitive as is the
Bank's cost of funds. The Company's ARMs do not permit negative amortization of
principal. The Bank generally qualifies borrowers at the fully indexed rate.

        In underwriting one- to four-family residential real estate loans, State
Federal evaluates, among other things, both the borrower's ability to make
monthly payments and the value of the property securing the loan. All properties
securing real estate loans made by State Federal are appraised by independent
fee appraisers approved by the Board of Directors. State Federal generally
requires borrowers to obtain an attorney's title opinion, and fire and property
insurance (including flood insurance, if necessary) in an amount not less than
the amount of the loan. State Federal now requires title insurance. Real estate
loans originated by the Bank generally contain a "due on sale" clause allowing
the Bank to declare the unpaid principal balance due and payable upon the sale
of the security property.

        Multi-Family and Commercial Real Estate Lending. The Company has also
engaged in commercial and multi-family real estate lending in its market area
and surrounding areas and has purchased participation interests in such loans
from other financial institutions throughout Iowa. At June 30, 2003, the Company
had $22.2 million of commercial and multi-family real estate loans, which
represented 26.2% of the Company's gross loan portfolio. There were two loans
totaling $1.1 million 30-89 days delinquent and two non-performing loans
totaling $1.6 million (two of the loans were on properties located in the Des
Moines area, one in the Chicago area and one commercial property located in
Minnesota). The Company had multi-family and commercial real estate loans, with
an aggregate balance of $4.6 million at June 30, 2003, secured by real estate
located in Colorado, Nebraska, Minnesota, Nevada, California, Illinois and
Florida.

                                        6
<PAGE>

        Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired.

        The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings and office buildings and, to a lesser
extent, strip shopping centers, motels, nursing homes and churches. Multi-family
and commercial real estate loans generally have terms that do not exceed 30
years. The Company has a variety of rate adjustment features and other terms in
its commercial and multi-family real estate loan portfolio. Generally, the loans
are made in amounts up to 80% of the appraised value of the security property.
Multi-family and commercial real estate loans provide for a margin over a
designated index which is generally the one-year Treasury bill rate. The Company
currently analyzes the financial condition of the borrower, the borrower's
credit history, and the reliability and predictability of the cash flow
generated by the property securing the loan. The Company requires personal
guaranties of the borrowers. Appraisals on properties securing commercial real
estate loans originated by the Bank are performed by independent appraisers.

        The following table breaks out the Company's commercial loan portfolio
by type of loan at the dates indicated.

                                                      June 30,
                                       -------------------------------------
                                           2003         2002         2001
                                       -----------  -----------  -----------
          Multi-family                 $     6,916  $     7,472  $    10,956
          Nursing homes                      1,906        1,983        2,030
          Churches                             223          465          525
          Motels                             3,213        4,835        6,037
          Shopping Centers                       -            -        1,305
          Commercial buildings               9,977       11,092       10,390
                                       -----------  -----------  -----------
                 Total                 $    22,235  $    25,847  $    31,243
                                       ===========  ===========  ===========

        This portfolio decreased by $3.6 million from fiscal 2002 to fiscal
2003, and the portfolio comprised 26.2% of total loans in fiscal 2003 compared
to 29.5% of total loans in fiscal 2002.

        Construction Lending. The Company engages in limited amounts of
construction lending to individuals for the construction of their residences as
well as to builders for the construction of single family homes and commercial
properties in the Company's primary market area and surrounding areas. At June
30, 2003, the Company had $3.0 million of gross construction loans.

        Construction loans to individuals for their residences are structured to
be converted to permanent loans at the end of the construction phase, which
typically runs for twelve months. During the construction phase, the borrower
pays interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans.

                                        7
<PAGE>

        All construction loans to builders require payment of interest only for
up to 12 months. At June 30, 2003, there were two delinquent constructions loans
totaling $168,000 secured by single family residences. One of these construction
loans with a carrying value of $85,000 was paid current in July 2003 and is
performing in accordance with its repayment terms.

        Because of the uncertainties inherent in estimating construction costs
and the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds required to complete a project, the
related loan-to-value ratios and the likelihood of ultimate success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding multi-family and commercial
real estate loans and tend to be more sensitive to general economic conditions
than many other types of loans. Also, the funding of loan fees and interest
during the construction phase makes the monitoring of the progress of the
project particularly important, as customary early warning signals of project
difficulties may not be present.

        Consumer Lending. To a lesser extent, State Federal offers secured and
unsecured consumer loans, including auto loans, home equity loans, loans secured
by savings deposits and lines of credit. The Bank currently originates all of
its consumer loans in its primary market area. The Bank originates consumer
loans on a direct basis by extending credit directly to the borrower.

        Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At June 30, 2003, two home equity lines of credit
totaling $59,000, four auto loans totaling $6,000 and six unsecured loans
totaling $1,000 in the consumer loan portfolio were non-performing. There can be
no assurance as to the delinquencies in the future.

        The largest component of State Federal's consumer loan portfolio
consists of home equity lines of credit. At June 30, 2003, these loans totaled
$1.9 million or approximately 2.2% of the Bank's gross loan portfolio. During
the fiscal year ended June 30, 2003, the Bank originated $3.0 million in home
equity lines of credit as compared to $447,000 originated in the same period
ended June 30, 2002. At June 30, 2003, the Bank's consumer loan portfolio
totaled $3.8 million or 4.5% of its total gross loan portfolio.

        Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. Loans secured by
deposit accounts at the Bank are currently originated for up to 90% of the
account balance with a hold placed on the account restricting the withdrawal of
the account balance. The interest rate on such loans is typically equal to 200
basis points above the deposit contract rate.

        The underwriting standards employed by the Bank for consumer loans,
other than loans secured by deposits, include an application, a determination of
the applicant's payment history on other debts and an assessment of ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.

Originations and Purchases of Loans

        Real estate loans are generally originated by State Federal's staff of
salaried and commissioned loan officers. Loan applications are taken and
processed in the office and the branch of the Bank.

        While the Company originates both adjustable-rate and fixed-rate loans,
its ability to originate loans is dependent upon the relative customer demand
for loans in its market. Demand is affected by the interest rate environment.
The Company had primarily been a portfolio lender, but began originating and
selling servicing released single family fixed rate loans in the secondary
market in order to maintain asset quality and profitability.

                                        8
<PAGE>

        In fiscal 2003, the Company originated $37.2 million of loans, compared
to $22.1 million and $18.2 million in fiscal 2002 and 2001, respectively. The
Company sold $11.0 million of its fiscal 2003 fixed rate single family servicing
released loan originations in the secondary market. Principal repayments in
fiscal 2003 increased by $3.1 million from $25.1 million in fiscal 2002.

        In periods of economic uncertainty, the ability of financial
institutions, including State Federal, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in related loan origination fees, other fee income and operating
earnings.

        The following table shows the loan origination, purchase, sales and
repayment activities of the Company for the periods indicated.

<TABLE>
<CAPTION>
                                                                    Year ended June 30,
                                                       ---------------------------------------------
                                                           2003              2002           2001
                                                       ------------      -----------    ------------
                                                                      (In Thousands)
  <S>                                                  <C>               <C>            <C>
  Originations by type:
  Adjustable rate:
     Real estate - one-to four-family                  $          -      $         -    $        896
                 - multi-family and commercial                    -                -           1,416
     Non-real estate - consumer                               1,876              447               -
                                                       ------------      -----------    ------------
            Total adjustable-rate                             1,876              447           2,312

  Fixed rate:
     Real estate - one-to four-family                        31,852           13,209          12,069
                 - multi-family and commercial                1,708            6,097           2,486
     Non-real estate - consumer                               1,764            2,337           1,314

            Total fixed-rate                                 35,324           21,643          15,869
                                                       ------------      -----------    ------------

            Total loans originated                           37,200           22,090          18,181

  Purchases:
     Real estate - one-to four-family                             -                -               -
                 - multi-family and commercial                  500            1,000           2,472
     Non-real estate - consumer                                   -                -               -
                                                       ------------      -----------    ------------
            Total loans                                         500            1,000           2,472
     Mortgage-backed securities                                   -                -               -
                                                       ------------      -----------    ------------
            Total purchases                                     500            1,000           2,472

  Sales:
     Real estate - one-to four-family                        10,986                -               -
                 - multi-family and commercial                    -                -               -
     Non-real estate - consumer                                   -                -               -
                                                       ------------      -----------    ------------
            Total loan sales                                 10,986                -               -

  Repayments:
     Principal repayments                                    28,182           25,086          18,713
                                                       ------------      -----------    ------------
            Total reductions                                 39,168           25,086          18,713
                                                       ------------      -----------    ------------

  Increase (decrease) in other items, net                       761           (1,131)           (614)
                                                       ------------      -----------    ------------
            Net increase (decrease)                    $       (707)     $    (3,127)   $      1,326
                                                       ============      ===========    ============
</TABLE>

Non-Performing Assets and Classified Assets

        When a borrower fails to make a required payment on real estate secured
loans and consumer loans, a late charge is automatically assessed and a notice
is sent in accordance with the terms outline in the loan note. At 30 days after
the payment is due, the Company generally institutes collection procedures by
mailing a delinquency notice and/or by telephone. In most cases, delinquencies
are cured promptly; however, if a loan secured by real estate or other
collateral has been delinquent for more than 60 days, satisfactory payment
arrangements must be adhered to or the Company will initiate foreclosure or
repossession.

                                        9
<PAGE>

        Generally, when a loan becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on a non-accrual status and, as a result, previously accrued interest
income on the loan is taken out of current income. The loan will remain on a
non-accrual status as long as the loan is 90 days delinquent.

        The following table sets forth information concerning delinquent
mortgage and other loans at June 30, 2003. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                                              Real Estate
                                                        ---------------------------------------------------------
                                                                                             Commercial and
                                                            One-to four-family                Multi-family
                                                        --------------------------     --------------------------
                                                        Number    Amount    Percent    Number   Amount    Percent
                                                        ------    -------   -------    ------   -------   -------
                                                                         (Dollars in Thousands)
          <S>                                               <C>   <C>          <C>          <C> <C>         <C>
          Loans delinquent for:
             30-59 days .........................           20    $ 1,158      2.07%        2   $ 1,070      4.81%
             60-89 days .........................            2         58      0.10         -         -         -
             90 days and over ...................           16        811      1.45         2     1,576      7.09
                                                        ------    -------   -------    ------   -------   -------
                    Total delinquent loans                  38    $ 2,027      3.62%        4   $ 2,646     11.90%
                                                        ======    =======   =======    ======   =======   =======
</TABLE>

        At June 30, 2003 there were 12 delinquent consumer loans totaling
$66,000. The ratio of delinquent consumer loans to total loans (net) was .08% at
June 30, 2003. There were two delinquent single family construction loans
totaling $168,000 as of June 30, 2003.

        The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio at the dates indicated. Loans are
generally placed on non-accrual status when the collection of principal and/or
interest become doubtful or when the loan is in excess of 90 days delinquent.
Foreclosed assets include assets acquired in settlement of loans.

                                                              June 30,
                                                    --------------------------
                                                      2003      2002    2001
                                                    -------   -------  -------
                                                      (Dollars in Thousands)
  Non-accruing loans:
       One-to four-family                           $   811   $ 1,077  $ 1,218
       Multi-family and commercial real estate        1,576       906       48
       Consumer                                          17        27       53
                                                    -------   -------  -------
            Total                                     2,404     2,010    1,319

  Accruing loans delinquent more than 90 days:
       One-to four-family                                 -       180      362
       Multi-family and commercial real estate            -         -      469
                                                    -------   -------  -------
            Total                                         -       180      831

  Foreclosed assets:
       One-to four-family                                88       365        -
       Multi-family and commercial real estate            -         -    1,320
                                                    -------   -------  -------
            Total                                        88       365    1,320

  Total non-performing assets                       $ 2,492   $ 2,555  $ 3,470
                                                    =======   =======  =======

  Total as a percentage of total assets                2.58%     2.65%    3.23%
                                                    =======   =======  =======

                                       10
<PAGE>

        Non-Performing Assets. Included in total non-performing assets are 16
mortgage loans secured by one- to four-family dwellings totaling $811,000, two
multi-family and commercial loans totaling $1.6 million and three consumer loans
for $17,000.

        Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.

        When a savings institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings bank classifies problem
assets as "loss," it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge-off
such amount. A bank's determination as to the classification of its assets and
the amount of its valuation allowances is subject to review by the bank's
District Director at the regional OTS office, who may order the establishment of
additional general or specific loss allowances.

        In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 2003, the Bank had classified a
total of $1.1 million of its assets as substandard, $3.0 million were classified
as doubtful, and none were classified as loss.

        At June 30, 2003, total classified assets comprised $4.1 million or
52.6% of the Bank's capital, or 4.5% of the Bank's total assets. In addition,
the Bank has $2.8 million of its assets classified as special mention that
contain deficiency characteristics, which if not corrected, could become
classified as substandard, according to OTS guidelines.

        At June 30, 2003 the Bank had a total of $88,000 in property acquired in
settlement of loans, which consisted of a single one- to four-family real estate
property.

        Allowance for Loan Losses. The allowance for loan losses is established
by management and the Board of Directors through a provision for loan losses on
a systematic evaluation process focusing on the risk of loss in the loan
portfolio and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of delinquent residential and consumer, and
all multi-family and commercial loans, considers among other matters the
estimated fair value of the underlying collateral, economic conditions, specific
industries, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan allowance.

        Real estate properties acquired through foreclosure are recorded at fair
value. If fair value at the date of foreclosure is lower than the balance of the
related loan, the difference will be charged-off to the allowance at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.

        Although management believes that it uses the best information available
to determine the allowances, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral reviews and thus cannot be predicted
in advance. At June 30, 2003, the Company had a total allowance for loan losses
of $1.3 million or 1.6% of loans receivable, net. See Notes A and E of the Notes
to Consolidated Financial Statements in Part III Item 7 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II Item 6.

                                       11
<PAGE>

        The following table sets forth an analysis of the Company's allowance
for loan losses.

                                                        Year Ended June 30,
                                                   ---------------------------
                                                     2003      2002      2001
                                                   -------    ------    ------
                                                      (Dollars in Thousands)
  Balance at beginning of period                   $   927    $  382    $  259

  Charge-offs                                         (428)      (77)      (28)
  Recoveries                                            57        56         -
                                                   -------    ------    ------

  Net charge-offs                                     (371)      (21)      (28)
  Additions charged to operations                      763       566       151
                                                   -------    ------    ------

  Balance at end of period                         $ 1,319    $  927    $  382
                                                   =======    ======    ======

  Ratio of net charge-offs during the period
   to average loans outstanding during the period     0.44%     0.02%     0.03%
                                                   =======    ======    ======
  Ratio of net charge-offs during the period
   to average non-performing assets                  17.20%     0.79%     0.96%
                                                   =======    ======    ======

        The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:

<TABLE>
<CAPTION>
                                                                 June 30,
                                     -------------------------------------------------------------
                                             2003                  2002                2001
                                     --------------------    -----------------  ------------------
                                                 Percent              Percent             Percent
                                                 of Loans             of Loans            of Loans
                                                 in Each              in Each             in Each
                                                 Category             Category            Category
                                                 to Total             to Total            to Total
                                      Amount      Loans      Amount     Loans   Amount      Loans
                                     ---------   --------    ------   --------  ------    --------
                                                           (Dollars in Thousands)
  <S>                                <C>           <C>       <C>        <C>     <C>         <C>
  One-to four-family.............    $     522      65.77%   $  292      63.24% $  165       61.77%
  Multi-family and commercial
   real estate...................          753      26.17       594      29.46     198       34.97
  Construction...................           17       3.55         -       4.94       -        1.46
  Consumer and unsecured.........           27       4.51        41       2.36      19        1.80
  Unallocated....................            -          -         -          -       -           -
                                     ---------   --------    ------   --------  ------    --------
            Total                    $   1,319     100.00%   $  927     100.00% $  382      100.00%
                                     =========   ========    ======   ========  ======    ========
</TABLE>

                                       12
<PAGE>

Investment Activities

        State Federal maintains minimum levels of investments for liquidity
purposes. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans.
The Bank's investment policy objective in this regard sets the Bank's desired
liquidity between 6% and 12%. As of June 30, 2003, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and current
borrowings) was 6.92%. See "Regulation - Liquidity."

        Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.

        Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill the Bank's
asset/liability management policies.

        Cash and Investments in Certificates of Deposit and Other Investments.
At June 30, 2003, the Company's cash and interest-bearing deposits in other
financial institutions totaled $4.4 million, or 4.5% of its total assets.
Certificates of deposits invested in other institutions totaled $99,000 or 0.1%
of its total assets. The Bank has a $1.8 million investment in the common stock
of the FHLB of Des Moines in order to satisfy the requirement for membership in
such institution. The Company has $1.1 million or 1.1% of its total assets
invested in corporate securities, which includes preferred common stocks. The
Company has $141,000 or 0.2% of its assets invested in federal agency
securities. See Note D of Notes to Consolidated Financial Statements in Part II
Item 7.

        OTS regulations restrict investments in corporate debt and most equity
securities by the Bank. These restrictions include prohibitions against
investments in the federal agency debt securities of any one issuer in excess of
15% of the Bank's unimpaired capital and unimpaired surplus as defined by
federal regulations, plus an additional 10% if the investments are fully secured
by readily marketable collateral. See "Regulation - Federal Regulation of
Savings Banks" for a discussion of additional restrictions on the Bank's
investment activities.

                                       13
<PAGE>

        The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                       2003               2002               2001
                                                                 ---------------    ----------------   ---------------
                                                                  Book     % of      Book      % of     Book     % of
                                                                  Value    Value     Value     Value    Value    Value
                                                                 ---------------    ----------------   ---------------
                                                                                   (Dollars in Thousands)
  <S>                                                            <C>      <C>       <C>       <C>      <C>       <C>
  Investment Securities:
        Corporate equity securities..........................    $ 1,124   37.13%   $ 1,082    35.06%  $ 1,619   43.92%
        Federal agency debt securities.......................        141    4.66        141     4.57       204    5.54
        Municipal bonds......................................          -       -        101     3.27       101    2.74
  FHLB Stock.................................................      1,762   58.21      1,762    57.10     1,762   47.80
                                                                 ---------------    ----------------   ---------------
        Total investment securities and FHLB stock...........    $ 3,027  100.00%   $ 3,086   100.00%  $ 3,686  100.00%
                                                                 ===============    ================   ===============

  Other Interest-Earning Assets:
        Interest-bearing deposits with banks.................    $ 3,808   97.47%   $ 2,846    96.64%  $ 6,691   95.75%
        Certificates of deposit invested in other
        institutions.........................................         99    2.53         99     3.36       297    4.25
                                                                 ---------------    ----------------   ---------------
        Total................................................    $ 3,907  100.00%   $ 2,945   100.00%  $ 6,988  100.00%
                                                                 ===============    ================   ===============

  Average remaining life or term to repricing of
   certificates of deposit...................................     1 year            2 years            1-1/2
                                                                                                       years
</TABLE>

Contractual maturities of federal agency debt securities and municipal bonds are
shown below:

                                                            June 30, 2003
                                                       ----------------------
                                                                     Weighted
                                                         Book        Average
                                                         Value        Yield
                                                       ----------------------
                                                       (Dollars in Thousands)
          Due in one year or less                           55           3.58%
          Due after one year through five years              -              -
          Due after five years through ten years             4           7.25
          Due after ten years                               82           6.46
                                                       -------
                                                       $   141
                                                       =======

                                       14
<PAGE>

Sources of Funds

        General. The Company's primary sources of funds are deposits,
borrowings, repayment of loan principal, sales of loan participations, maturing
investments in certificates of deposit, proceeds from investment securities and
funds provided from operations.

        Borrowings, consisting of FHLB advances, may be used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels, and may be used on a longer-term basis to support expanded
lending activities.

        Deposits. State Federal offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of savings
accounts, checking and money market accounts, and certificate accounts ranging
in terms from three months to 60 months. The Bank only solicits deposits from
its market area and does not currently use brokers to obtain deposits. The Bank
relies primarily on competitive pricing policies, advertising and customer
service to attract and retain these deposits.

        The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates, and competition.

        The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
ability of the Bank to attract and maintain certificate of deposit accounts and
the rates paid on these deposits has been and will continue to be significantly
affected by market conditions.

        The following table sets forth the savings flows at the Bank during the
periods indicated.

                                                      Year Ended June 30,
                                             ----------------------------------
                                                2003       2002         2001
                                             ----------------------------------
                                                    (Dollars in Thousands)
  Opening balance..........................  $   66,901  $  62,987   $   53,648
  Deposits.................................     121,855    100,655       80,230
  Withdrawals..............................    (118,409)   (99,801)     (73,984)
  Interest credited........................       2,626      3,060        3,093
                                             ----------  ---------   ----------
  Ending balance...........................  $   72,973  $  66,901   $   62,987
                                             ==========  =========   ==========
  Net increase (decrease)..................  $    6,072  $   3,914   $    9,339
                                             ==========  =========   ==========
  Percent increase (decrease)..............         9.1%       6.2%       17.40%
                                             ==========  =========   ==========

                                       15
<PAGE>

        The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2003.

<TABLE>
<CAPTION>
                                                                          Maturity
                                                  ---------------------------------------------------------
                                                                 Over       Over
                                                   3 Months     3 to 6     6 to 12       Over
                                                   or less      Months      Months     12 Months     Total
                                                  ---------   ---------   ---------   ----------   --------
                                                                   (Dollars in Thousands)
  <S>                                             <C>         <C>         <C>         <C>          <C>
  Certificates of deposits less than $100,000...  $   7,226   $   4,210   $   6,706   $   20,450   $ 38,592
  Certificates of deposit $100,000 or more......      1,050       1,312       1,176        8,261     11,799
                                                  ---------   ---------   ---------   ----------   --------
  Total certificates of deposit                   $   8,276   $   5,522   $   7,882   $   28,711   $ 50,391
                                                  =========   =========   =========   ==========   ========
</TABLE>

        Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Bank desires additional capacity to fund loan demand.

        State Federal's borrowings historically have consisted of advances from
the FHLB of Des Moines upon the security of a blanket collateral agreement of a
percentage of unencumbered loans. Such advances can be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At June 30, 2003, the Bank had $9.0 million in FHLB advances.

        At June 30, 2003, the Bank had no repurchase agreements or other
borrowings not mentioned above outstanding.

        The following table sets forth certain information including the maximum
month-end balance and average balance of FHLB advances at the dates indicated.

<TABLE>
<CAPTION>
                                                            Year Ended June 30,
                                                     -------------------------------
                                                       2003        2002       2001
                                                     -------------------------------
                                                         (Dollars in Thousands)
  <S>                                                <C>         <C>        <C>
  Maximum Balance:
        FHLB advances                                $ 14,000    $ 29,185   $ 35,235
                                                     ========    ========   ========
  Average Balance:
        FHLB advances                                $ 10,923    $ 18,541   $ 32,543
                                                     ========    ========   ========
  Weighted average interest rate of FHLB advances        5.17%       5.51%      5.21%
                                                     ========    ========   ========
</TABLE>

Service Corporation Activities

        Federal institutions generally may invest up to 2% of their assets in
service corporations plus an additional 1% of assets if used for community
purposes. In addition, federal institutions may invest up to 50% of their
regulatory capital in conforming loans to their service corporations. In
addition to investments in service corporations, federal institutions are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal institution may engage directly.

        State Federal has one subsidiary which is a service corporation, State
Service Corporation, located in Des Moines, Iowa. State Service Corporation was
organized by State Federal in 1976. State Service Corporation currently sells
noninsured investment products.

                                       16
<PAGE>

        During the fiscal year ended June 30, 2003, State Service Corporation
generated $81,000 in gross revenue from the sale of noninsured investment
products and $16,000 of interest income on real estate contracts. Income tax
(benefit) totaled ($12,000) for fiscal 2003.

                                   REGULATION

General

        State Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government up to applicable limits set by the FDIC. State Federal
is subject to broad federal regulation and oversight extending to all its
operations principally by its primary regulator, the OTS. The Bank is a member
of the FHLB of Des Moines and is subject to certain limited regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As
the savings and loan holding company of State Federal, the Holding Company also
is subject to federal regulation and oversight principally by the OTS. The
purpose of the regulation of the Holding Company and other holding companies is
to protect subsidiary savings associations. The Bank is a member of the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund
(the "BIF") are the two deposit insurance funds administered by the FDIC. As a
result, the FDIC has certain regulatory and examination authority over State
Federal.

        Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

The USA PATRIOT Act

In response to the events of September 11, 2001, President George W. Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT
Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new
powers to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing, and broadened
anti-money laundering requirements. By way of amendments to the Bank Secrecy
Act, Title III of the USA PATRIOT Act takes measures intended to encourage
information sharing among bank regulatory agencies and law enforcement bodies.
Further, certain provisions of Title III impose affirmative obligations on a
broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:

    .   Pursuant to Section 352, all financial institutions must establish
        anti-money laundering programs that include, at minimum: (i) internal
        policies, procedures, and controls, (ii) specific designation of an
        anti-money laundering compliance officer, (iii) ongoing employee
        training programs, and (iv) an independent audit function to test the
        anti-money laundering program.
    .   Pursuant to Section 326 on July 23, 2003, the Secretary of the
        Department of Treasury, in conjunction with other bank regulators issued
        a proposed rule that provides for minimum standards with respect to
        customer identification and verification. At this time, a final rule is
        pending.
    .   Section 312 requires financial institutions that establish, maintain,
        administer, or manage private banking accounts or correspondent accounts
        in the United States for non-United States persons or their
        representatives (including foreign individuals visiting the United
        States) to establish appropriate, specific, and, where necessary,
        enhanced due diligence policies, procedures, and controls designed to
        detect and report money laundering.
    .   Effective December 25, 2001, financial institutions are prohibited from
        establishing, maintaining, administering or managing correspondent
        accounts for foreign shell banks (foreign banks that do not have a
        physical presence in any country), and will be subject to certain record
        keeping obligations with respect to correspondent accounts of foreign
        banks.
    .   Bank regulators are directed to consider a holding company's
        effectiveness in combating money laundering when ruling on Federal
        Reserve Act and Bank Merger Act applications.

                                       17
<PAGE>

The Sarbanes-Oxley Act

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act implements a broad range of corporate
governance and accounting measures for public companies designed to promote
honesty and transparency in corporate America and better protect investors from
the type of corporate wrongdoing that occurred in Enron, WorldCom and similar
companies. The Sarbanes-Oxley Act's principal legislation includes:

    .   the creation of an independent accounting oversight board;
    .   auditor independence provisions which restrict non-audit services that
        accountants may provide to their audit clients;
    .   additional corporate governance and responsibility measures, including
        the requirement that the chief executive officer and chief financial
        officer certify financial statements;
    .   the forfeiture of bonuses or other incentive-based compensation and
        profits from the sale of an issuer's securities by directors and senior
        officers in the twelve month period following initial publication of any
        financial statements that later require restatement;
    .   an increase the oversight of, and enhancement of certain requirements
        relating to audit committees of public companies and how they interact
        with the company's independent auditors;
    .   requirement that audit committee members must be independent and are
        absolutely barred from accepting consulting, advisory or other
        compensatory fees from the issuer;
    .   requirement that companies disclose whether at least one member of the
        committee is a "financial expert" (as such term will be defined by the
        Securities and Exchange Commission) and if not, why not;
    .   expanded disclosure requirements for corporate insiders, including
        accelerated reporting of stock transactions by insiders and a
        prohibition on insider trading during pension blackout periods;
    .   a prohibition on personal loans to directors and officers, except
        certain loans made by insured financial institutions;
    .   disclosure of a code of ethics and filing a Form 8-K for a change or
        waiver of such code;
    .   mandatory disclosure by analysts of potential conflicts of interest; and
    .   a range of enhanced penalties for fraud and other violations.

Although we anticipate that we will incur additional expense in complying with
the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that this compliance will have a material impact on
our results of operations or financial condition.

Federal Regulation of Savings Banks

        The OTS has extensive authority over the operations of savings banks,
such as State Federal. As part of this authority, State Federal is required to
file periodic reports with the OTS and is subject to periodic examinations by
the OTS and the FDIC. The last regular examination of State Federal was as of
June 30, 2002. When these examinations are conducted by the OTS and the FDIC,
the examiners may require the Bank to provide for higher general or specific
loan loss reserves. All savings institutions are subject to a semi-annual
assessment, based upon the savings institution's total assets, to fund the
operations of the OTS. The Bank's OTS assessment for the fiscal year ended June
30, 2003 was approximately $32,000.

        The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including State Federal and the
Holding Company. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.

        In addition, the investment, lending and branching authority of the Bank
is prescribed by federal law and it is prohibited from engaging in any
activities not permitted by such laws. For example, the permissible level of
investment by federal associations, subject to safety and soundness
restrictions, (1) in loans secured by non-residential real property may not
exceed 400% of total capital, (2) in commercial loans may not exceed 20% of
assets, provided that amounts in excess of 10% of assets may only be small
business loans, (3) related to leasing of tangible personal property may not
exceed 10% of assets, and (4) in loans for personal, family and household
purposes, when combined with commercial paper and corporate debt securities, may
not exceed 35% of assets. Federal savings institutions are also generally
authorized to branch nationwide. State Federal is in compliance with the noted
restrictions.

                                       18
<PAGE>

        The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 2003, the Bank's lending limit under this restriction was approximately
$1.2 million.

        The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.

Insurance of Accounts and Regulation by the FDIC

        State Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices, or is in an unsafe
or unsound condition.

        The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period. As
of June 30, 2003, the Bank met the requirements of a well-capitalized
institution

        The premium schedule for BIF and SAIF insured institutions ranged from 0
to 27 basis points. However, SAIF insured institutions and BIF insured
institutions are required to pay a Financing Corporation assessment in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s. This
amount is currently equal to about 1.88 points for each $100 in domestic
deposits for BIF and SAIF insured institutions. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue until the
bonds mature in 2017 through 2019.

Regulatory Capital Requirements

        Federally insured savings institutions, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings banks. These capital requirements must be generally as stringent as
the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual banks on a case-by-case basis.

                                       19
<PAGE>

        The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.

        The OTS regulations establish special capitalization requirements for
savings banks that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the bank's level of ownership. For excludable
subsidiaries, the debt and equity investments in such subsidiaries are deducted
from assets and capital.

        At June 30, 2003, the Bank had tangible capital of $7.2 million, or
7.87% of adjusted total assets, which is approximately $5.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

        The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets depending on an institution's rating. Core capital
generally consists of tangible capital plus certain intangible assets, including
a limited amount of purchased credit card relationships. As a result of the
prompt corrective action provisions discussed below, however, a savings
institution must maintain a core capital ratio of at least 4% to be considered
adequately capitalized unless its supervisory condition is such to allow it to
maintain a 3% ratio.

        At June 30, 2003, the Bank had core capital equal to $7.2 million, or
7.87% of adjusted total assets, which is $3.5 million above the minimum leverage
ratio requirement of 4% as in effect on that date.

        The OTS risk-based requirement requires savings institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 2003, State Federal had
no capital instruments that qualify as supplementary capital but had $650,000 of
general loss reserves, which was less than 1.12% of risk-weighted assets.

        Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. State Federal had no such
exclusions from capital and assets at June 30, 2003.

        In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.

        OTS regulations also require that every savings institution with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings bank, greater than 2% of the present value of its assets,
based upon a hypothetical 200 basis point increase or decrease in interest rates
(whichever results in a greater decline). Net portfolio value is the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts. The rule will not become effective until the OTS evaluates the
process by which savings institutions may appeal an interest rate risk deduction
determination. It is uncertain when this evaluation may be completed. Any
savings institution with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise.

                                       20
<PAGE>

        On June 30, 2003, the Bank had total risk-based capital of $7.8 million
(including $7.2 million in core capital and $650,000 in qualifying supplementary
capital) and risk-weighted assets of $58.8 million or total risk-based capital
of 13.3% of risk-weighted assets. This amount was $3.1 million above the 8%
requirement in effect on that date.

        The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings institutions that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-based
capital ratio or an 8% risk-based capital ratio). Any such institution must
submit a capital restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions.
The OTS is authorized to impose the additional restrictions that are applicable
to significantly undercapitalized institutions.

        Any savings institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authorities of the OTS or FDIC, including the
appointment of a conservator or a receiver.

        The OTS is also generally authorized to reclassify an institution into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.

        The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. Holding Company shareholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Holding Company.

Limitations on Dividends and Other Capital Distributions

        OTS regulations impose various restrictions or requirements on savings
institutions with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. OTS regulations permit a
federal savings institution to pay dividends in any calendar year equal to net
income for that year plus retained earnings for the preceding two years.

Accounting

        An OTS policy statement applicable to all savings institutions clarifies
and re-emphasizes that the investment activities of a savings institution must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and accounting for
loans and securities (i.e., whether held for investment, sale or trading) with
appropriate documentation. The Bank is in compliance with these amended rules.

        The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.

                                       21
<PAGE>

Qualified Thrift Lender Test

        All savings institutions, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the Savings Institution may maintain 60% of its assets specified in
Section 770(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments. At June
30, 2003, the Bank met the test and has always met the test since its
effectiveness.

        Any savings institution that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
bank is immediately ineligible to receive any new FHLB borrowings and is subject
to national bank limits for payment of dividends. If such institution has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
bank that fails the QTL test is controlled by a holding company, then within one
year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies. See "-
Holding Company Regulation."

Community Reinvestment Act

        Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of State
Federal to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by State
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.

        The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 2002 and received a rating of satisfactory.

Transactions with Affiliates

        Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Bank as transactions with non-affiliates. In addition, certain of these
transactions such as loans to an affiliate, are restricted to a percentage of
the bank's capital. Affiliates of State Federal include the Holding Company and
any company which is under common control with the Bank. In addition, a savings
institution may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings banks as affiliates on a case by
case basis.

        Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.

                                       22
<PAGE>

Holding Company Regulation

        The Holding Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings institution subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings bank.

        As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings institution as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than the Bank or any
other SAIF-insured savings institutions) would become subject to such
restrictions unless such other institutions each qualify as a QTL and were
acquired in a supervisory acquisition.

        If the Bank fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."

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

Federal Securities Law

        The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.

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

Federal Reserve System

        The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking accounts). At June 30, 2003, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy liquidity requirements that may be imposed by the OTS. See "--
Liquidity."

        Savings institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

Federal Home Loan Bank System

        The Bank is a member of the FHLB of Des Moines, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
banks. Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures, established by the board
of directors of the FHLB, which are subject to the oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.

                                       23
<PAGE>

        As a member, State Federal is required to purchase and maintain stock in
the FHLB of Des Moines. At June 30, 2003, State Federal had $1.8 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years these dividends have averaged 5.12% and were 3.0% for fiscal year 2003.

        Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in State Federal's capital.

        For the fiscal year ended June 30, 2003, dividends paid by the FHLB of
Des Moines to State Federal totaled $53,000 which constituted a $9,000 decrease
from the amount of dividends received in the fiscal year ended June 30, 2002.
The $13,000 dividend received for the period ended May 31, 2003 and paid June
13, 2003 reflected an annualized rate of 3.0%, which was unchanged from the
quarter ended June 30, 2002.

Federal and State Taxation

        In addition to the regular income tax, corporations, including savings
institutions such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.

        A portion of the Bank's reserves for losses on loans may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 2003, the portion of the Bank's reserves subject to this
treatment for tax purposes totaled approximately $1.4 million.

        State Federal and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. State
Federal and its subsidiaries have not been audited by the IRS within the last
ten years.

        Iowa Taxation. The Holding Company and the Bank's subsidiaries file Iowa
corporation tax returns while the Bank files an Iowa franchise tax return.

        Iowa imposes a franchise tax on the taxable income for both mutual and
stock savings and loan banks. The tax rate is 5%, which may effectively be
increased, in individual cases, by application of a minimum tax provision.
Taxable income under the franchise tax is generally similar to taxable income
under the federal corporate income tax, except that, under the Iowa franchise
tax, no deduction is allowed for Iowa franchise tax and taxable income includes
interest on state and municipal obligations. Interest on U.S. obligations is
taxable under the Iowa franchise tax and under the federal corporate income tax.

        Taxable income under the Iowa corporate income tax is generally similar
to taxable income under the federal corporate income tax, except that, under the
Iowa tax, no deduction is allowed for Iowa income tax payments; interest from
state and municipal obligations is included in income; interest from U.S.
obligations is excluded from income; and 50% of federal corporate income tax is
excluded from income. The Iowa corporate income tax rates range from 6% to 12%
and may be effectively increased, in individual cases, by application of a
minimum tax provision.

                                       24
<PAGE>

        Delaware Taxation. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.

Competition

        State Federal faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings banks, credit
unions and mortgage bankers making loans secured by real estate located in the
Bank's market area. The Bank competes for real estate and other loans
principally on the basis of the quality of services it provides to borrowers,
and loan fees it charges, and the types of loans it originates.

        The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located; therefore, competition for those deposits is principally from other
commercial banks, savings Banks and credit unions located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.

        The Bank's primary concentration is Des Moines, Iowa. There are over 30
commercial banks and approximately 30 credit unions in the Bank's market area.
The Bank estimates its share of the savings market in its primary market area to
be approximately 1.0%.

Employees

        At June 30, 2003, the Company and its subsidiary had a total of 32
full-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.

Item 2. Properties

        The Bank conducts its business at its main office and two other
locations in its primary market area. The following table sets forth information
relating to each of the Bank's offices as of June 30, 2003.

        The Bank owns one branch office and its main office. The total net book
value of the Bank's premises and equipment (including land, building, furniture,
fixtures and equipment) at June 30, 2003 was $3.3 million. See Note G of Notes
to Consolidated Financial Statements in Part II Item 7.

                                       25
<PAGE>

                                                     Total
                                                  Approximate      Net Book
                                        Year        Square         Value at
  Location                            Acquired      Footage     June 30, 2003
  ---------------------------------------------------------------------------

  Main Office:

       13523 University Avenue          2001           12,000   $   2,613,100
       Clive, Iowa

  Branch Offices:

       4018 University Avenue           1985            4,000   $     291,100
       Des Moines, Iowa

       700 Walnut Street, Suite 203     2002/(1)/       2,077   $      39,700
       Des Moines, Iowa

 /(1)/  Lease expires in May 2007 with an option to renew for an additional 5
        year term.
        The minimum lease amount for fiscal years 2004, 2005, 2006 and 2007 are
        $41,500, $41,500, $41,500 and $38,100, respectively.

        The Bank subleases approximately 250 square feet of its location on
Walnut Street, under a five year operating lease. The sublease began on April
29, 2002 and expires in May 2007.

        The Bank believes that its current facilities are adequate to meet the
present and foreseeable needs of the Bank.

        The Bank conducts its data processing through a service bureau, Fiserv.
The net book value of the data processing and computer equipment utilized by the
Bank at June 30, 2003 was $93,000. The net book value of other furniture and
equipment at June 30, 2003 was $286,000.

Item 3. Legal Proceedings

        State Federal is involved from time to time as plaintiff or defendant in
various legal actions arising in the normal course of its business. Neither the
Company nor State Service Corporation, the Bank's wholly-owned subsidiary, is a
party to any legal action. While the ultimate outcome of these proceedings
cannot be predicted with certainty, it is the opinion of management, after
consultation with counsel representing State Federal in the proceedings, that
the resolution of these proceedings should not have a material effect on State
Federal's consolidated financial position or results of operations.

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

        No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 2003.

                                       26
<PAGE>

                                     PART II

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

STOCK LISTING

        StateFed Financial Corporation common stock is traded on the National
Association of Securities Dealers, Inc. Small-Cap System under the symbol
"SFFC."

PRICE RANGE OF COMMON STOCK

        The following table sets forth, for the periods shown, the high and low
prices of the common stock and cash dividends per share declared. The prices
reflect inter-dealer quotations without retail markup, markdown or commissions,
and do not necessarily represent actual transactions.

          QUARTER ENDED            HIGH       LOW         DIVIDENDS
          ------------------       ------     ------      ---------
          September 30, 2000       10.500      8.750          0.075
           December 31, 2000       11.000      9.500          0.125
              March 31, 2001       11.063      8.875          0.100
               June 30, 2001       11.260      8.500          0.100
          September 30, 2001       11.600      9.500          0.100
           December 31, 2001       10.500      7.850          0.100
              March 31, 2002       10.390      9.800          0.100
               June 30, 2002       11.500      9.900          0.100
          September 30, 2002       10.300      8.710          0.100
           December 31, 2002       12.400     10.200          0.100
              March 31, 2003       12.650     11.000          0.100
               June 30, 2003       12.450     11.210          0.100

        Dividend restrictions are described in the notes to consolidated
financial statements included in this report.

        The stock price information set forth in the table above was provided by
the National Association of Securities Dealers, Inc. Automated Quotation System.
The average of the bid and asked prices of StateFed Financial Corporation's
common stock on September 23, 2003 was $12.06.

        At September 24, 2003, there were 1,293,958 shares of StateFed Financial
Corporation common stock issued and outstanding and there were approximately 149
holders of record.

Item 6. Management's Discussion and Analysis of Financial Condition and
        Results of Operation and Selected Financial Data

General

        The Company owns all of the outstanding capital stock of State Federal
Savings and Loan Association (the "Bank"). The principal business of the Company
has historically consisted of attracting deposits from the general public, and
making loans secured by residential real estate. The Company's profitability is
primarily dependent upon its net interest income, which is the difference
between interest income on its loan and investment portfolio and interest paid
on deposits and other borrowed funds. Net interest income is directly affected
by the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on such amounts. The Company's
profitability is also affected by the provision for loan losses and the level of
non-interest income and expenses. Non-interest income consists primarily of
service charges and other fees, gains (losses) on sales of assets and income
from real estate operations. Non-interest expense includes salaries and employee
benefits, real estate operations, occupancy of premises, federal deposit
insurance premiums, data processing expenses and other operating expenses.

                                       27
<PAGE>

        StateFed Financial generally has sought to enhance its net earnings by,
among other things, maintaining asset quality and levels of capital above
federally required minimum standards and by controlling general and
administrative expenses. Although no assurances can be made about future
periods, the Company's results in these areas have enabled it to be consistently
well-capitalized.

        The operating results of the Company are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies and
the policies of agencies that regulate financial institutions. StateFed
Financial's cost of funds is influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
influenced by the demand for real estate loans and other types of loans, which
is in turn affected by the interest rates at which such loans are made, general
economic conditions affecting loan demand and the availability of funds for
lending activities.

        StateFed Financial's basic mission is to record earnings while serving
its local community. The Company wants to earn the complete trust and respect of
its clients by providing compassionate personal service and sound financial
advice. Specifically, it offers a range of customer services and products,
including deposit accounts and loans with a special emphasis on one-to-four
family mortgage lending and, to a lesser extent, multi-family and commercial
real estate lending. Yet smaller portions of the Company's loans receivable
consists of construction and consumer loans. Management has focused on fixed
rate mortgage loans in recent years, achieving a loan portfolio consisting of
23.6% adjustable rate loans, 42.7% fixed rate loans, and 33.7% balloon and/or
call loans.

Critical Accounting Policies

        The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and disclosures included within this report, are based on
the Company's audited consolidated financial statements. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The financial information contained in these
statements is, for the most part, based on approximate measures of the financial
effects of transactions and events that have already occurred. However, the
preparation of these statements requires management to make certain estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses.

        The Company's significant account policies are described in the "Notes
to Consolidated Financial Statements". Based on its consideration of accounting
policies that involve the most complex and subjective estimates and judgments,
management has identified its most critical accounting policy to be that related
to the allowance for loan losses.

        The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The Company has policies and procedures for evaluating the overall
credit quality of its loan portfolio including timely identification of
potential problem credits. On a quarterly basis, management reviews the
appropriate level for the allowance for loan losses incorporating a variety of
risk considerations, both quantitative and qualitative. Quantitative factors
include the Company's historical loss experience, delinquency and charge-off
trends, collateral values, known information about individual loans and other
factors. Qualitative factors include the general economic environment in the
Company's market area and the expected trend of those economic conditions. To
the extent actual results differ from forecasts and management's judgment, the
allowance for loan losses may be greater or less than future charge-offs.

                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                                           June 30,
                                                ---------------------------------------------------------
                                                    2003         2002        2001        2000      1999
                                                ---------------------------------------------------------
                                                                       (In Thousands)
<S>                                             <C>           <C>        <C>          <C>        <C>
Selected Financial Condition Data:

Total assets ...............................    $     96,753  $  96,405  $   107,549  $ 100,685  $ 90,824
Cash & cash equivalents ....................           4,407      3,115        7,729      2,477     8,481
Certificates of deposits in other
 institutions ..............................              99         99          297        496       884
Investment securities ......................           1,264      1,324        1,925      2,231     1,944
Loans held for sale ........................           1,871          -            -          -         -
Loans receivable, net ......................          82,194     84,772       87,899     86,573    72,331
Deposits ...................................          72,973     66,901       62,987     53,648    54,713
FHLB advances ..............................           9,000     14,000       29,185     29,284    18,877
Stockholders' equity .......................          13,907     14,196       14,088     16,650    16,123
</TABLE>

<TABLE>
<CAPTION>
                                                                           June 30,
                                                ---------------------------------------------------------
                                                    2003         2002        2001        2000      1999
                                                ---------------------------------------------------------
                                                                       (In Thousands)
<S>                                             <C>           <C>        <C>          <C>        <C>
Selected Operations Data:

Total interest income ......................    $      6,533  $   7,175  $     8,231  $   7,022  $  6,695
Total interest expense .....................           3,222      4,036        4,961      3,986     3,999
                                                ---------------------------------------------------------
Net interest income ........................           3,311      3,139        3,270      3,036     2,696
Provision for loan losses ..................             763        566          151         36        36
                                                ---------------------------------------------------------
Net interest income after provision for
 loan losses ...............................           2,548      2,573        3,119      3,000     2,660
Non-interest income:
  Real estate operations ...................              49        247          519        525       566
  Gain on sales of loans ...................             177          -            -          -         -
  Gain (Loss) on sale of real estate and
   investments .............................               7        748          (77)        52       106
  Other non-interest income ................             285        196          121        107       101
                                                ---------------------------------------------------------
Total non-interest income ..................             518      1,191          563        684       773
Total non-interest expense .................           3,446      3,044        2,662      2,006     1,926
                                                ---------------------------------------------------------
Income (loss) before income taxes ..........            (380)       720        1,020      1,678     1,507
Income tax expense (benefit) ...............            (341)       189          357        537       489
                                                ---------------------------------------------------------
Net income (loss) ..........................    $        (39) $     531  $       663  $   1,141  $  1,018
                                                =========================================================
</TABLE>

                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                                       June 30,
                                                   -----------------------------------------------
                                                     2003      2002     2001       2000     1999
                                                   -----------------------------------------------
<S>                                                <C>       <C>      <C>        <C>      <C>
Selected Financial Ratios and Other Data:

Performance Ratios:
  Return on assets (ratio of net income to
   average total assets) .....................       (0.04)%    0.53%     0.63%     1.22%     1.13%
  Interest rate spread information:
    Average during the year ..................        3.23      2.94      2.84      2.87      2.50
    End of year ..............................        3.22      3.11      2.58      2.42      2.62
  Net interest margin (1) ....................        3.57      3.37      3.35      3.51      3.20
  Ratio of operating expense to average
   total assets ..............................        3.48      3.04      2.52      2.15      2.13
  Return on equity (ratio of net income to
   average equity) ...........................       (0.28)     3.72      4.07      7.02      6.30

Quality Ratios:
  Non-performing assets to total assets at
   end of year ...............................        2.48      2.06      3.21      2.30      1.84
  Allowance for loan losses to
   non-performing loans ......................       54.87     46.76     17.92     26.54     27.36

Capital Ratios:
  Stockholders' Equity to total assets at
   end of year ...............................       14.37     14.72     13.10     16.54     17.75
  Average Stockholders' Equity to average
   assets ....................................       14.23     14.28     15.44     17.39     17.81
  Ratio of average interest-earning assets
   to average interest-bearing liabilities ...       1.100x    1.098x    1.101x    1.139x    1.147x
  Number of full-service offices .............           3         3         3         2         2

  (1) Net interest income divided by average interest-earning assets.

  Dividends declared per share                     $  0.40   $  0.40  $   0.40   $  0.30  $   0.25
  Dividend payout ratio                                  -%     92.8%     87.5%     41.3%     37.3%
</TABLE>

Financial Condition

Comparison of Fiscal Years Ended June 30, 2003 and June 30, 2002.

        The Company's total assets increased from $96.4 million at June 30, 2002
to $96.8 million at June 30, 2003, an increase of $348,000, or .36%. The
increase was primarily due to increases in loans held for sale of $1.9 million,
cash and cash equivalents of $1.3 million, current and deferred income tax asset
of $264,000, funded by an increase in deposits and offset by decreases in net
loans receivable of $2.6 million, property acquired in the settlement of loans
of $277,000, accrued interest receivable of $102,000, net office property and
equipment of $82,000 and investment securities available for sale of $59,000.

        Cash and cash equivalents increased $1.3 million from $3.1 million at
June 30, 2002 to $4.4 million at June 30, 2003. The increase was the result of
increases in deposits and the repayment of loans receivable, partially offset by
an increase in loans held for sale and the repayment of Federal Home Loan Bank
advances.

        Loans held for sale were $1.9 million at June 30, 2003, as the Bank
began originating and selling servicing released single family fixed rate loans
in the secondary market.

        Net loans receivable decreased $2.6 million from $84.8 million at June
30, 2002 to $82.2 million at June 30, 2003. Loans decreased primarily as a
result of the high level of loan refinancing activity, during 2003, in a lower
interest rate environment. Repayments of loan principal totaled $28.2 million
during 2003, while new loan originations and participation loans purchased for
portfolio totaled only $25.0 million during the same period.

        At June 30, 2003, the allowance for loan losses totaled $1,319,000 or
1.55% of loans, compared to $927,000 or 1.06% of loans at June 30, 2002. In
determining the amount of the loan loss allowance at any point in time,
management and the Board apply a systematic process focusing on the risk of loss
in the portfolio. First, delinquent residential and consumer, and all
multi-family and commercial loans are evaluated individually for potential
impairments in their carrying value. At June 30, 2003, the analysis and review
of $6.9 million of classified loans resulted in $475,000 of the allocation of
the allowance. In the previous year ending June 30, 2002, the analysis and
review of $3.3 million of classified loans resulted in $465,000 of the
allocation of the allowance.

                                       30
<PAGE>

        The second step in determining the allowance for loan losses entails the
application of historic loss experience to the individual loan types in the
portfolio. In addition to the historic loss percentage, management employs an
additional risk percentage tailored to the perception of the overall risk in the
economy. This segment of the loss analysis resulted in assigning $185,000 of the
allowance for loan losses at June 30, 2003, compared to $217,000 of the
allowance for loan losses for the year ended June 30, 2002.

        The third step in determining the allowance for loan losses involves the
review and analysis of specific loans or industries that may be affected by or
at risk due to changes in the economy. As a result of this analysis, management
reviewed and analyzed its portfolio, and identified $3.3 million of commercial
loans that may contain some weakness and pose a possible loss to the Company.
The Company allocated $659,000 of the allowance to these specific loans at June
30, 2003. In the previous period ended June 30, 2002, the Company had allocated
$245,000 of the allowance, which were attributed to $1.6 million of commercial
participation loans.

        Although management believes that its allowance for loan losses is
adequate based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which could adversely affect the Company's results of operations. To
the best of management's knowledge, all known losses as of June 30, 2003, have
been recorded.

        Total deposits increased $6.1 million from $66.9 million at June 30,
2002 to $73.0 million at June 30, 2003. During fiscal 2003, there were increases
in money market accounts, certificates of deposit of $3.4 million and $3.2
million, respectively, offset in part by decreases in savings accounts of
$545,000 and checking accounts of $32,000. The changes in deposits were
primarily due to the Company's new pricing strategy and increased marketing of
its deposit products.

        Advances from the Federal Home Loan Bank (FHLB) decreased from $14.0
million at June 30, 2002 to $9.0 million at June 30, 2003. The decrease resulted
from the maturity of a $5.0 million long-term advance and the Company's decision
to reduce its outstanding daily FHLB advances.

        Total stockholders' equity decreased $289,000 from $14.2 million at June
30, 2002 to $13.9 million at June 30, 2003. The decrease was primarily the
result of allocations to the Employee Stock Ownership Plan ("ESOP") totaling
$123,000, exercised stock options of $101,000 and unrealized gain net of tax
effect on investment securities of $39,000, which was partially offset by
dividends declared of $514,000 and a net loss of $39,000.

Results of Operations

Comparison of Fiscal Years ended June 30, 2003 and June 30, 2002.

        General. Net income for the year ended June 30, 2003 decreased $570,000
from $531,000 at June 30, 2002 to a loss of $39,000 at June 30, 2003. The
decrease was primarily due to a decrease in non-interest income of $673,000, an
increase in non-interest expense of $402,000, and an increase in the provision
for loan losses of $197,000. Partially offsetting the decrease was an increase
in net-interest income of $172,000 and a decrease in income tax expense of
$530,000.

        Net Interest Income. Net interest income increased $172,000 or 5.5%,
from $3.14 million for the year ended June 30, 2002 to $3.31 million for the
year ended June 30, 2003. This increase was due to a reduction of $814,000 in
interest expense, offset by a decrease in interest income of $642,000.

                                       31
<PAGE>

        Interest Income. Interest income decreased $642,000 or 9.0%, from $7.18
million for the year ended June 30, 2002 to $6.53 million for the year ended
June 30, 2003. This decrease was primarily due to a decrease of 0.62% in the
average interest rate on loans compared to the prior year. Investment and other
interest income decreased due to a lower interest rate environment for interest
bearing cash accounts and investments and other securities and to a lesser
extent, a reduction in the average balance of investments and other securities.

        Interest Expense. Interest expense decreased $814,000 from $4.04 million
for the year ended June 30, 2002 to $3.22 million for the year ended June 30,
2003. This decrease resulted from decreases in interest expense on deposits of
$433,000, and decreases in interest on borrowings of $381,000. The reduction in
interest expense resulted primarily from a decrease in the average rate paid on
deposit accounts and the repayment of Federal Home Loan Bank ("FHLB") advances,
partially offset by an increase in the average deposit balances.

        Provision for Loan Losses. The Company's provision for loan losses was
$763,000 and $566,000 for the fiscal years ended June 30, 2003 and 2002,
respectively. To the best of management's knowledge, all known losses as of June
30, 2003 and 2002 have been recorded.

        Non-interest Income. Non-interest income decreased $673,000 from
$1,191,000 at June 30, 2002 to $518,000 for the year ended June 30, 2003. The
decrease was primarily due to a $620,000 reduction in the net gain on sale of
real estate. During the period ended June 30, 2002, the Company sold its two
apartment complexes resulting in a net gain on sale of real estate held for
investment of $635,000. There was also a decrease in real estate operations
income of $198,000, which had been generated by the two apartment complexes in
previous periods. There was a $7,000 loss on the sale of investments available
for sale for the year ended June 30, 2003, compared to a gain on the sale of
investments available for sale of $113,000 for the year ended June 30, 2002.
Gain on the sale of loans was $177,000, as the Bank began originating and
selling loans in the secondary market during the twelve month period ended June
30, 2003. Other non-interest income increased $88,000, and was primarily due to
increases in fee income for the year ended June 30, 2003, as compared to the
year ended June 30, 2002.

        Non-interest Expense. Non-interest expense increased from $3.04 million
for the year ended June 30, 2002 to $3.44 million for the year ended June 30,
2003. The increase of $402,000 was primarily the result of increases in salaries
and benefits of $279,000, other non-interest expense of $261,000, occupancy and
equipment expense of $122,000, advertising expense of $35,000 and data
processing expense of $29,000, which were partially offset by decreases in real
estate operations expense of $184,000 and provision for decline in value of real
estate held for sale of $158,000. The increase in salaries and benefits was
primarily related to commissions paid to loan originators, as the Bank began
originating and selling mortgages in the secondary market. Other non-interest
expense increases were primarily due to increases in outside audit and
consulting expense and costs associated with expansion of the residential
mortgage program, related to improving efficiency and expansion of residential
mortgage originations. The increase in occupancy and equipment expense was due
to the increased costs associated with the Clive office and the expansion of the
mortgage lending department. Increases in marketing and advertising expense
resulted from increased market awareness and expansion of products and services.
Data processing expense increased primarily due to the addition of telephone
banking services for our customers, provided by our data processor. The
reduction in real estate operations expense was related to the two apartment
complexes that the Company sold during the year ended June 30, 2002. There were
no additional reductions in the value of real estate held for sale.

        Income Tax Expense. Income tax expense (benefit) was ($341,000) for the
fiscal year ended June 30, 2003, compared to a tax expense of $189,000 for the
fiscal year ended June 30, 2002. The expense reduction was due to a decrease in
taxable income, tax refunds receivable from prior periods' amended tax returns,
settlement of tax contingencies and the application of tax credits.

                                       32
<PAGE>

Asset/Liability Management

        The measurement and analysis of the exposure of the Bank to changes in
the interest rate environment is referred to as asset/liability management. A
primary objective of asset/liability management is to manage interest rate risk.
The Bank monitors its asset/liability mix on an ongoing basis and, from time to
time, may institute certain changes in its product mix and asset and liability
maturities.

        The Bank focuses lending efforts toward offering fixed-rate,
adjustable-rate, and balloon loan products. The Bank has not historically sold
its loans, but began originating and selling residential fixed rate servicing
released loans in the secondary market during the fiscal year ended June 30,
2003 in order to maintain asset quality and profitability.

        The primary objective of the Bank's investment strategy is to provide
liquidity necessary to meet funding needs as well as to address daily, cyclical
and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock, U.S. Government securities, and certain issues of
corporate equity securities.

        Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Company's need
for liquidity, to achieve the proper balance between its desire to minimize risk
and maximize yield, to provide collateral for borrowings, and to fulfill the
Bank's asset/liability management policies.

        The Bank's cost of funds responds to changes in interest rates due to
the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are influenced by levels of short-term interest rates. The
Bank offers a range of maturities on its deposit products at competitive rates
and monitors the maturities on an ongoing basis.

        An approach used by management to quantify interest rate risk is the net
portfolio value ("NPV") analysis. In essence, this approach calculates the
difference between the present value of liabilities, expected cash flows from
assets and cash flows from off balance sheet contracts. Under OTS regulations,
an institution's "normal" level of interest rate risk in the event of an
immediate and sustained 200 basis point change in interest rates is a decrease
in the institution's NPV in an amount not exceeding 2% of the present value of
its assets. Pursuant to this regulation, thrift institutions with greater than
"normal" interest rate exposure must take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to the 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, will be exempt from this requirement unless the
OTS determines otherwise. The OTS has postponed the implementation of the rule
until further notice. Based upon its asset size and capital level at June 30,
2003, the Company would qualify for an exemption from this rule.

        The following table sets forth, at June 30, 2003, an analysis of the
Bank's interest rate risk as measured by the estimated changes in NPV resulting
from instantaneous and sustained parallel shifts in the yield curve (+/-300
basis points, measured in 100 basis point increments). Due to the abnormally low
prevailing interest rate environment, down 200 and 300 basis points NPV
estimates are not presented.

             Change in     Estimated    Estimated    Increase
          Interest Rates      NPV       (Decrease)    in NPV
          (Basis Points)     Amount       Amount      Percent
          --------------   ---------    ----------   --------
                         (Dollars in Thousands)
                  +300bp       8,985          (893)        -9%
                  +200bp       9,672          (206)        -2%
                  +100bp      10,121           243          2%
                    +0bp       9,878             -          -
                  -100bp       9,189          (689)        -7%

                                       33
<PAGE>

        Certain assumptions utilized in assessing the interest rate risk of
thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Company's assets and liabilities would perform as
set forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated.

Average Balances, Interest Rates and Yields

        The following table presents, for the periods indicated, the total
dollar amount of interest income from average interest earning assets and the
resultant yields, as well as the interest expense on average interest bearing
liabilities, expressed both in dollars and rates. No tax equivalent adjustments
were made. All average balances are monthly average balances. Non-accruing loans
have been included in the table as loans carrying a zero yield.

<TABLE>
<CAPTION>
                                                           Year Ended June 30,
                                   -----------------------------------------------------------------
                                                 2003                            2002
                                   -----------------------------------------------------------------
                                     Average    Interest               Average     Interest
                                   Outstanding   Earned/   Yield/    Outstanding    Earned/   Yield/
                                     Balance      Paid      Rate        Balance      Paid      Rate
                                   -----------------------------------------------------------------
                                                   (Dollars in Thousands)
<S>                                <C>          <C>          <C>     <C>          <C>           <C>
Interest-Earning Assets:
  Interest-earning bank accounts   $     4,469  $      -        -%   $     4,416  $      65     1.47%
  Certificates of deposit
   invested in other institutions           99         7     7.07            274         15     5.47
  Investments and other securities       1,279        56     4.38          1,763         98     5.56
  Loans receivable/(1)/                 85,015     6,417     7.55         84,915      6,937     8.17
  FHLB stock                             1,762        53     3.01          1,762         60     3.40
                                   ------------------------------    -------------------------------
    Total interest-earning
     assets/(1)/                        92,624     6,533     7.05         93,130      7,175     7.70
                                   =====================             ======================
Interest-Bearing Liabilities:
  Savings accounts                       2,713        16     0.59          3,392         63     1.86
  Checking accounts                      3,460         9     0.26          3,262         21     0.64
  Money market accounts                 14,296       296     2.07          8,649        238     2.75
  Certificates of deposit               52,849     2,305     4.36         50,968      2,738     5.37
  FHLB advances                         10,923       596     5.46         18,541        977     5.27
  Effect of capitalized interest             -         -        -              -          -        -
                                   ---------------------   ------    ----------------------   ------
    Total interest-bearing
     liabilities                        84,241     3,222     3.82         84,812      4,037     4.76
                                   ---------------------   ------    ----------------------   ------
Net interest income                             $  3,311                          $   3,138
                                                ========                          =========
Net interest rate spread                                     3.23%                              2.94%
                                                           ======                             ======
Net earning assets                 $     8,383                       $     8,318
                                   ===========                       ===========
Net yield on average
 interest-earning assets                                     3.57%                              3.37%
                                                           ======                             ======
Average interest-earning assets
 to average interest-bearing
 liabilities                                       1.100x                             1.098x
                                                ========                          =========

<CAPTION>
                                         Year Ended June 30,
                                    ------------------------------
                                                 2001
                                    ------------------------------
                                      Average    Interest
                                    Outstanding   Earned/   Yield/
                                      Balance     Paid      Rate
                                    ------------------------------
                                       (Dollars in Thousands)
<S>                                 <C>          <C>          <C>
Interest-Earning Assets:
  Interest-earning bank accounts    $     3,646  $    162     4.44%
  Certificates of deposit
   invested in other institutions           411        26     6.33
  Investments and other securities        2,047       102     4.98
  Loans receivable/(1)/                  89,869     7,842     8.73
  FHLB stock                              1,663        99     5.95
                                    ------------------------------
    Total interest-earning
     assets/(1)/                         97,636     8,231     8.43
                                    =====================
Interest-Bearing Liabilities:
  Savings accounts                        3,420        93     2.72
  Checking accounts                       3,277        40     1.22
  Money market accounts                   4,750       173     3.64
  Certificates of deposit                44,706     2,787     6.23
  FHLB advances                          32,543     1,928     5.92
  Effect of capitalized interest              -       (60)       -
                                    ---------------------   ------
    Total interest-bearing
     liabilities                         88,696     4,961     5.59
                                    ---------------------   ------
Net interest income                              $  3,270
                                                 ========
Net interest rate spread                                      2.84%
                                                            ======
Net earning assets                  $     8,940
                                    ===========
Net yield on average
 interest-earning assets                                      3.35%
                                                            ======
Average interest-earning assets
 to average interest-bearing
 liabilities                                        1.101x
                                                 ========
</TABLE>

----------
(1)     Calculated net of deferred loan fees, loan discounts, loans in process
        and loss reserves.

                                       34
<PAGE>

Rate/Volume Analysis

        The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or decrease
due to changes in average outstanding balances and that due to the volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.

<TABLE>
<CAPTION>
                                                           Year Ended June 30,                Year Ended June 30,
                                                  ---------------------------------------------------------------------
                                                             2003 v. 2002                           2002 v. 2001
                                                  ---------------------------------------------------------------------
                                                  Increase (Decrease)                 Increase (Decrease)
                                                          Due to                             Due to
                                                  --------------------                -------------------
                                                                           Total                               Total
                                                                          Increase                            Increase
                                                    Volume      Rate     (Decrease)    Volume       Rate     (Decrease)
                                                  ---------   --------   ----------   --------    -------   -----------
                                                                          (Dollars in Thousands)
          <S>                                     <C>         <C>        <C>          <C>         <C>       <C>
          Interest-earning assets:
            Interest-earning bank accounts        $       1   $    (71)  $      (70)  $     29    $  (126)  $       (97)
            Certificates of deposit invested in
             other instituions                          (11)         3           (8)        (8)        (3)          (11)
            Investments and other securities            (24)       (13)         (37)       (15)        11            (4)
            Loans receivable                              8       (528)        (520)      (485)      (420)         (905)
            FHLB stock                                    -         (7)          (7)         6        (45)          (39)
                                                  ---------   --------   ----------   --------    -------   -----------
            Total interest-earning assets         $     (26)  $   (616)  $     (642)  $   (473)   $  (583)  $    (1,056)
                                                  =========   ========   ==========   ========    =======   ===========

          Interest-bearing liabilities:
            Savings accounts                            (11)       (37)         (48)        (1)       (29)          (30)
            Checking accounts                             1        (13)         (12)         -        (19)          (19)
            Money market accounts                       127        (68)          59        115        (50)           65
            Certificates of deposit                      98       (531)        (433)       363       (412)          (49)
            FHLB advances                              (416)        35         (381)      (757)      (194)         (951)
                                                  ---------   --------   ----------   --------    -------   -----------
            Total interest-bearing liabilities    $    (201)  $   (614)  $     (815)  $   (280)   $  (704)  $      (984)
                                                  =========   ========   ==========   ========    =======   ===========

            Net interest income, before effect
             of capitalized interest                                     $      173                         $       (72)
            Effect of capitalized interest                                        -                                 (60)
                                                                         ----------                         -----------
            Net interest income                                          $      173                         $      (132)
                                                                         ==========                         ===========
</TABLE>

Interest Rate Spread

        The Company's results of operations are determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
operating expenses. Net interest income is determined by the interest rate
spread between the yields earned on its interest-earning assets and the rates
paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest- bearing liabilities.

        The following table sets forth the weighted average effective interest
rate earned by the Company on its loan and investment portfolios, the weighted
average effective cost of the Company's deposits and borrowings, the interest
rate spread of the Company and the net yield on weighted average interest-
earning assets at year end.

<TABLE>
<CAPTION>
                                                                               At June 30,
                                                                          --------------------
                                                                          2003    2002    2001
                                                                          --------------------
     <S>                                                                  <C>     <C>     <C>
     Weighted average yield on:
       Loans receivable ................................................  7.01%   7.65%   8.47%
       Interest-earning bank accounts ..................................  0.78    1.29    3.57
       Certificates of deposit invested in other insitutions ...........  6.75    6.75    6.87
       Investments and other securities ................................  4.50    2.63    5.07
       FHLB stock ......................................................  3.00    3.00    4.56
         Combined weighted average yield on interest-earning assets ....  6.64    7.27    7.99
     Weighted average rate paid:
       Savings accounts ................................................  0.32    1.21    2.83
       Checking accounts ...............................................  0.24    0.27    1.44
       Money market accounts ...........................................  1.80    2.47    3.29
       Certificates of deposit .........................................  4.02    4.74    6.12
       FHLB advances ...................................................  5.17    5.51    5.21
         Combines weighted average rate paid on interest-bearing
          liabilities ..................................................  3.42    4.16    5.41
     Spread ............................................................  3.22    3.11    2.58
</TABLE>

                                       35
<PAGE>

Liquidity and Capital Resources

        The OTS requires the Bank to maintain a safe and sound level of liquid
assets. Such assets may include United States Treasury, federal agency, and
other investments having maturities of five years or less and are intended to
provide a source of relatively liquid funds upon which the Bank may rely, if
necessary, to fund deposit withdrawals and other short-term funding needs. The
Bank's regulatory liquidity at June 30, 2003 was 6.92%.

        The Company's primary sources of funds consist of deposits, FHLB
advances, repayments of loans and interest earned on certificates of deposits in
other institutions. Management believes that loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.

        The primary financing activity of the Company during the fiscal year
ended June 30, 2003 has been the increasing deposit base. The net increase in
deposit accounts was $6.1 million during fiscal year 2003.

        Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity is
invested generally in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Company requires additional funds
beyond its internal ability to generate, it has additional borrowing capacity
with the FHLB of Des Moines.

        The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At June 30, 2003, the Company had outstanding
commitments to extend credit which amounted to approximately $3.5 million. The
Company is not aware of any trends, events or uncertainties which will have or
that are reasonably likely to have a material effect on the Company's liquidity,
capital resources or operations.

        Certificates of deposit scheduled to mature in one year or less at June
30, 2003, totaled approximately $21.7 million. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Bank. There can be no assurance, however, that the Bank can retain all such
deposits. At June 30, 2003, the Bank had $9.0 million in advances from the FHLB
of Des Moines outstanding.

        As a savings and loan holding company of a federal stock savings and
loan association, the Company's capital currently consists of stockholders'
equity including retained earnings. At June 30, 2003, the Company's
stockholders' equity totaled $13.9 million, or 14.37% of assets.

        At June 30, 2003, the Bank had tangible and core capital of $7.2
million, or 7.87% of adjusted total assets, respectively, which was
approximately $5.8 million and $3.5 million above the minimum requirements of
1.5% and 4.0% respectively, of the adjusted total assets in effect on that date.
On June 30, 2003, the Bank had risk-based capital of $7.8 million (including
$7.2 million in core capital), or 13.34% of risk-weighted assets of $58.8
million. This amount was $3.1 million above the 8% requirement in effect on that
date. The Bank is considered "well-capitalized."

Impact of Inflation and Changing Prices

        The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America which require the measurement of financial
position and results of operations in terms of historical dollars without
considering changes in the relative purchasing power of money over time because
of inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, virtually all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services.

                                       36
<PAGE>

Impact of New Accounting Standards

Accounting Standards Statement of Financial Accounting Standards.

        The Financial Accounting Standards Board (FASB) has issued Statement
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB No. 123." This Statement amends Statement 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 and amends the
disclosure requirements of Statement No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation are
effective for transitions after July 1, 2003. The Company will not make a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The amended disclosure requirements are currently
effective and have been adopted in the consolidated financial statements for the
year ended June 30, 2003.

        The FASB has issued Statement 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging". This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instrument embedded in other contracts, and for hedging activities
under Statement 133. The Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. Implementation of the Statement is not expected to have a material
impact on the consolidated financial statements.

        The FASB has issued Statement 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. For the Company, the Statement is effective
July 1, 2003 and the Company is not expected to have a material impact on the
consolidated financial statements.

                                       37
<PAGE>

Item 7. Financial Statements

                          INDEPENDENT AUDITOR'S REPORT

To The Board of Directors
StateFed Financial Corporation
Clive, Iowa

We have audited the accompanying consolidated balance sheet of StateFed
Financial Corporation and subsidiary as of June 30, 2003, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
StateFed Financial Corporation and its subsidiary as of June 30, 2003 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.

McGladrey & Pullen, LLP


Des Moines, Iowa
August 14, 2003

                                       38
<PAGE>

                         StateFed Financial Corporation
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                             June 30,
                                                                 ----------------------------
                                                                    2003             2002
                                                                 ------------    ------------
<S>                                                              <C>             <C>
ASSETS
  Cash and cash equivalents
    Non-interest bearing                                         $    598,966    $    268,524
    Interest bearing                                                3,808,372       2,846,158
                                                                 ------------    ------------
                                                                    4,407,338       3,114,682
  Investments in certificates of deposit                               99,000          99,000
  Investment securities available-for-sale                          1,264,495       1,323,918
  Loans held for sale                                               1,870,683               -
  Loans receivable, net                                            82,193,569      84,771,507
  Real estate held for sale, net                                      540,500         540,500
  Property acquired in settlement of loans                             87,546         364,622
  Office property and equipment, net                                3,323,484       3,405,720
  Federal Home Loan Bank stock, at cost                             1,762,200       1,762,200
  Accrued interest receivable                                         470,357         572,414
  Income tax refund receivable                                         90,707               -
  Deferred income taxes                                               314,926         142,046
  Other assets                                                        328,610         308,632
                                                                 ------------    ------------

      Total Assets                                               $ 96,753,415    $ 96,405,241
                                                                 ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
  Deposits                                                       $ 72,973,470    $ 66,901,147
  Advances from the Federal Home Loan Bank                          9,000,000      14,000,000
  Advances from borrowers for taxes and insurance                     380,606         351,422
  Accrued interest payable                                              1,702         174,921
  Income taxes payable                                                      -         305,231
  Accounts payable and other liabilities                              361,694         349,063
  Dividends payable                                                   129,161         127,887
                                                                 ------------    ------------
      Total Liabilities                                            82,846,633      82,209,671

   Commitments and Contingencies
  Stockholders' equity
   Preferred stock, $.01 par value, 500,000 shares authorized,
    none issued                                                             -               -
   Common stock, $.01 par value, 2,000,000 shares authorized
    1,780,972 shares issued with 1,291,614 (2003) and 1,278,870
    (2002) shares outstanding                                          17,810          17,810
   Additional paid-in capital                                       8,566,238       8,527,873
   Retained earnings - substantially restricted                    10,327,496      10,880,409
   Less treasury stock (489,358 and 502,102 shares, at cost)       (5,041,185)     (5,172,468)
   Less unearned employee stock ownership plan shares                 (30,875)        (85,575)
   Accumulated other comprehensive income --
    net unrealized gains on available-for-sale
    securities, net of related tax effect                              67,298          27,521
                                                                 ------------    ------------
      Total Stockholders' Equity                                   13,906,782      14,195,570
                                                                 ------------    ------------
      Total Liabilities and Stockholders' Equity                 $ 96,753,415    $ 96,405,241
                                                                 ============    ============
</TABLE>

                                       39
<PAGE>

                         StateFed Financial Corporation
                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                      Year ended June 30,
                                                2003           2002          2001
                                            -----------    -----------   -----------
<S>                                         <C>            <C>           <C>
INTEREST INCOME
   Loans receivable                         $ 6,416,719    $ 6,937,015   $ 7,842,292
   Investment securities and other              116,112        238,175       388,767
                                            -----------    -----------   -----------
                                              6,532,831      7,175,190     8,231,059
INTEREST EXPENSE
   Deposits                                   2,626,349      3,059,883     3,055,787
   Advances from the Federal Home Loan
    Bank                                        595,514        976,759     1,905,468
                                            -----------    -----------   -----------
                                              3,221,863      4,036,642     4,961,255
                                            -----------    -----------   -----------

      NET INTEREST INCOME                     3,310,968      3,138,548     3,269,804

PROVISION FOR LOAN LOSSES                       762,847        565,656       151,000
                                            -----------    -----------   -----------

      NET INTEREST INCOME AFTER
       PROVISION FOR LOAN LOSSES              2,548,121      2,572,892     3,118,804

NON-INTEREST INCOME
   Investment real estate operations             48,932        247,003       518,719
   Gain on sales of loans held for sale         176,732              -             -
   Gain (loss) on sale of
    available-for-sale investments               (7,087)       112,886       (95,880)
   Gain on sale of real estate, net              14,398        634,026        18,873
   Other                                        285,309        196,975       121,151
                                            -----------    -----------   -----------
                                                518,284      1,190,890       562,863
NON-INTEREST EXPENSE
   Salaries and employee benefits             1,648,057      1,369,299     1,287,057
   Investment real estate operations                  -        183,736       321,672
   Occupancy expenses                           551,825        429,379       245,830
   Federal deposit insurance premiums            44,147         44,385        38,563
   Data processing services                     173,460        144,747       128,429
   Advertising                                  155,078        119,897        62,644
   Legal fees                                   110,163         91,525       156,477
   Provision for decline in value of real
    estate held for sale                              -        157,890             -
   Other                                        763,398        502,802       421,213
                                            -----------    -----------   -----------
                                              3,446,128      3,043,660     2,661,885
                                            -----------    -----------   -----------
      INCOME (LOSS) BEFORE PROVISION
       FOR INCOME TAXES                        (379,723)       720,122     1,019,782

PROVISION FOR INCOME TAXES                     (340,906)       189,307       356,460
                                            -----------    -----------   -----------

      NET INCOME (LOSS)                     $   (38,817)   $   530,815   $   663,322
                                            ===========    ===========   ===========

Basic earnings (loss) per share             $     (0.03)   $      0.42   $      0.45
                                            ===========    ===========   ===========
Diluted earnings (loss) per share           $     (0.03)   $      0.41   $      0.44
                                            ===========    ===========   ===========

Dividends declared per common share         $      0.40    $      0.40   $      0.40
</TABLE>

                                       40
<PAGE>

                         StateFed Financial Corporation
                 Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                         Year ended June 30,
                                            ----------------------------------------
                                               2003           2002          2001
                                            -----------    -----------   -----------
<S>                                         <C>            <C>           <C>
Net income (loss)                           $   (38,817)   $   530,815   $   663,322

Other comprehensive income, net of tax
 effects:

   Unrealized holding gains (losses) on
    securities arising during the year           34,958         78,934        90,003

   Reclassification adjustment - realized
    (gains) losses on securities during
    the year                                      4,819        (76,762)       59,925
                                            -----------    -----------   -----------

      Net change in accumulated other
       comprehensive income                      39,777          2,172       149,928
                                            -----------    -----------   -----------

Comprehensive income                        $       960    $   532,987   $   813,250
                                            ===========    ===========   ===========
</TABLE>

                                       41
<PAGE>

                         StateFed Financial Corporation
            Consolidated Statement of Changes in Stockholders' Equity

<TABLE>
<CAPTION>
                                                             Years ended June 30, 2003, 2002 and 2001
                                                   -----------------------------------------------------------
                                                                   Additional
                                                      Common         Paid-in        Retained        Treasury
                                                      Stock          Capital        Earnings          Stock
                                                   -----------------------------------------------------------
<S>                                                <C>            <C>             <C>             <C>
Balance at June 30, 2000                           $     17,810   $  8,546,501    $ 10,778,818    $ (2,362,921)

   Net income for the year                                    -              -         663,322               -
   Dividends declared                                         -              -        (580,287)              -
   ESOP common stock released for allocation                  -         62,575               -               -
   Treasury stock acquired - 256,474 shares                   -              -               -      (3,035,632)
   Treasury stock reissued to fund stock options
    exercised - 23,200 shares                                 -        (86,720)              -         202,719
   Change in unrealized gains (losses)
    on available-for-sale securities, net of
    related tax effects                                       -              -               -               -
                                                   -----------------------------------------------------------
Balance at June 30, 2001                                 17,810      8,522,356      10,861,853      (5,195,834)

   Net income for the year                                    -              -         530,815               -
   Dividends declared                                         -              -        (512,259)              -
   ESOP common stock released for allocation                  -         61,363               -               -
   Treasury stock acquired - 8,000 shares                     -              -               -         (85,200)
   Treasury stock reissued to fund stock options
    exercised - 10,544 shares                                 -        (55,846)              -         108,566
   Change in unrealized gains (losses)
    on available-for-sale securities, net of
    related tax effects                                       -              -               -               -
                                                   -----------------------------------------------------------
Balance at June 30, 2002                                 17,810      8,527,873      10,880,409      (5,172,468)

   Net income (loss) for the year                             -              -         (38,817)              -
   Dividends declared                                         -              -        (514,096)              -
   ESOP common stock released for allocation                  -         68,429               -               -
   Treasury stock reissued to fund stock options
    exercised - 12,744 shares                                 -        (30,064)              -         131,283
   Change in unrealized gains (losses)
    on available-for-sale securities, net of
    related tax effects                                       -              -               -               -
                                                   -----------------------------------------------------------
Balance at June 30, 2003                           $     17,810   $  8,566,238    $ 10,327,496    $ (5,041,185)
                                                   ===========================================================

<CAPTION>
                                                         Years ended June 30, 2003, 2002 and 2001
                                                   ---------------------------------------------------
                                                      Common
                                                       Stock       Accumulated Other        Total
                                                     Acquired        Comprehensive      Stockholders'
                                                      By ESOP        Income (Loss)          Equity
                                                   ---------------------------------------------------
<S>                                                <C>             <C>                  <C>
Balance at June 30, 2000                           $   (205,761)   $        (124,579)   $   16,649,868

   Net income for the year                                    -                    -           663,322
   Dividends declared                                         -                    -          (580,287)
   ESOP common stock released for allocation             61,895                    -           124,470
   Treasury stock acquired - 256,474 shares                   -                    -        (3,035,632)
   Treasury stock reissued to fund stock options
    exercised - 23,200 shares                                 -                    -           115,999
   Change in unrealized gains (losses)
    on available-for-sale securities, net of
    related tax effects                                       -              149,928           149,928
                                                   ---------------------------------------------------
Balance at June 30, 2001                               (143,866)              25,349        14,087,668

   Net income for the year                                    -                    -           530,815
   Dividends declared                                         -                    -          (512,259)
   ESOP common stock released for allocation             58,291                    -           119,654
   Treasury stock acquired - 8,000 shares                     -                    -           (85,200)
   Treasury stock reissued to fund stock options
    exercised - 10,544 shares                                 -                    -            52,720
   Change in unrealized gains (losses)
    on available-for-sale securities, net of
    related tax effects                                       -                2,172             2,172
                                                   ---------------------------------------------------
Balance at June 30, 2002                                (85,575)              27,521        14,195,570

   Net income (loss) for the year                             -                    -           (38,817)
   Dividends declared                                         -                    -          (514,096)
   ESOP common stock released for allocation             54,700                    -           123,129
   Treasury stock reissued to fund stock options
    exercised - 12,744 shares                                 -                    -           101,219
   Change in unrealized gains (losses)
    on available-for-sale securities, net of
    related tax effects                                       -               39,777            39,777
                                                   ---------------------------------------------------
Balance at June 30, 2003                           $    (30,875)   $          67,298    $   13,906,782
                                                   ===================================================
</TABLE>

                                       42
<PAGE>

                         StateFed Financial Corporation
                      Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                                      Year ended June 30,
                                                                         --------------------------------------------
                                                                             2003            2002            2001
                                                                         ------------    ------------    ------------
<S>                                                                      <C>             <C>             <C>
Cash flows from operating activities
   Net income (loss)                                                     $    (38,817)   $    530,815    $    663,322
   Adjustments to reconcile net income (loss) to net cash provided
    (used) by operating activities:
      Depreciation                                                            248,653         220,277         223,048
      Gain on sales of real estate, net                                       (14,398)       (634,026)        (18,873)
      Amortization of ESOP contributions                                      123,129         119,654         124,470
      Realized (gains) losses on sale of available-for-sale securities          7,087        (112,886)         95,880
      Deferred loan fees                                                      (16,573)        (35,522)         17,530
      (Gain) on sale of loans held for sale                                  (176,732)              -               -
      Loans originated for sale                                           (12,679,980)              -               -
      Loans sold                                                           10,986,029               -               -
      Provision for losses on loans                                           762,847         565,656         151,000
      Provision for decrease in value of real estate held for sale                  -         157,890               -
      Deferred income taxes                                                  (176,812)       (317,846)        (43,962)
      Change in:
         Accrued interest receivable                                          102,057          57,752         (63,573)
         Other assets                                                         (19,978)         31,206          14,326
         Accrued interest payable                                            (173,219)          4,057          30,621
         Current income tax                                                  (395,938)        246,687        (139,448)
         Accounts payable and other liabilities                                12,631         (42,990)        193,364
                                                                         ------------    ------------    ------------
         Net cash provided (used) by operating activities                  (1,450,014)        790,724       1,247,705

Cash flows from investing activities
   Maturity of investments in certificates of deposit                               -         198,272         198,420
   Proceeds from sale or maturity of available-for-sale investment
    securities                                                                298,685       1,122,108         450,426
   Purchase of available-for-sale investment securities                      (202,640)       (375,310)              -
   Purchase of FHLB stock                                                           -               -        (297,600)
   Net (increase) decrease in loans outstanding                             1,568,178       3,617,240      (1,482,619)
   Investment in real estate held for investment                                    -               -          (1,922)
   Investment in real estate held for development                                   -          43,174             (12)
   Proceeds from sales of real estate                                         554,960       2,658,077          24,000
   Purchases of equipment and construction of office property                (166,417)       (358,561)     (1,133,744)
                                                                         ------------    ------------    ------------
         Net cash flows provided (used) by investing activities             2,052,766       6,905,000      (2,243,051)

Cash flows from financing activities
   Net increase (decrease) in deposits                                      6,072,323       3,913,651       9,339,378
   Advances from Federal Home Loan Bank                                             -               -       6,000,000
   Repayment of Federal Home Loan Bank advances                            (5,000,000)    (15,185,149)     (6,098,757)
   Net increase (decrease) in advances from borrowers                          29,184         (43,610)         41,289
   Proceeds from stock options exercised                                      101,219          52,720         116,000
   Dividends paid                                                            (512,822)       (512,005)       (565,875)
   Treasury stock purchased                                                         -         (85,200)     (3,035,632)
                                                                         ------------    ------------    ------------
         Net cash flows provided (used) by financing activities               689,904     (11,859,593)      5,796,403
                                                                         ------------    ------------    ------------
CHANGE IN CASH AND CASH EQUIVALENTS                                         1,292,656      (4,163,869)      4,801,057

CASH AND CASH EQUIVALENTS, beginning of year                                3,114,682       7,278,551       2,477,494
                                                                         ------------    ------------    ------------

   CASH AND CASH EQUIVALENTS, end of year                                $  4,407,338    $  3,114,682    $  7,278,551
                                                                         ============    ============    ============
</TABLE>

                                       43
<PAGE>

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        BUSINESS - StateFed Financial Corporation (the Company), organized under
        the laws of the State of Delaware, is a thrift holding company. The
        Company owns 100% of the outstanding capital stock of State Federal
        Savings and Loan Association (the Bank). Its primary business activity
        is the operation of the Bank.

        The Bank provides a full range of banking services to individual and
        corporate customers from its three offices located in Des Moines and
        Clive, Iowa. The Bank's wholly-owned subsidiary, State Service
        Corporation, sells uninsured investment products and services.

        PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
        include the accounts of StateFed Financial Corporation, State Federal
        Savings and Loan Association and its wholly-owned subsidiary, State
        Service Corporation. All significant intercompany accounts and
        transactions have been eliminated in consolidation.

        USE OF ESTIMATES - The preparation of financial statements in conformity
        with accounting principles generally accepted in the United States of
        America requires management to make estimates and assumptions that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ significantly from those
        estimates.

        Material estimates that are particularly susceptible to significant
        change in the near-term relate to the determination of the allowance for
        loan losses and the valuation of assets acquired in connection with
        foreclosures or in satisfaction of loans. In connection with the
        determination of the allowances for loan losses and the valuation of
        assets acquired by foreclosure, management obtains independent
        appraisals for significant properties.

        CASH, CASH EQUIVALENTS AND CASH FLOWS - For purposes of reporting cash
        flows, cash and cash equivalents include cash on hand and demand
        deposits at other financial institutions, including cash items in
        process of clearing. Cash flows from loans and deposits are reported
        net.

        INVESTMENT AND OTHER SECURITIES - Debt securities to be held for
        indefinite periods of time, including debt securities that management
        intends to use as part of its asset/liability strategy, or that may be
        sold in response to changes in interest rates, changes in prepayment
        risk, the need to increase regulatory capital or other similar factors,
        are classified as available-for-sale and recorded at fair value. Equity
        securities are also carried at fair value. Unrealized holding gains and
        losses, net of tax, on securities available for sale are reported as a
        separate component of other comprehensive income. The amortization of
        premiums and accretion of discounts, computed by the interest method
        over their contractual lives, are recognized in interest income.

        The Bank, as a member of the Federal Home Loan Bank System, is required
        to maintain an investment in capital stock of the Federal Home Loan Bank
        of Des Moines (FHLB). No ready market exists for the FHLB stock, and it
        has no quoted market value. The stock is recorded at cost, which
        represents anticipated redemption value.

        Gains and losses on the sale of investment securities, determined using
        the specific identification method, are included in earnings on the
        trade date.

        LOANS HELD FOR SALE - Loans held for sale are those loans the Company
        has the intent to sell in the foreseeable future. They are carried at
        the lower of aggregate cost or market value. Net unrealized losses, if
        any, are recognized through a valuation allowance by charges to income.
        Gains and losses on sales of loans are recognized at settlement dates
        and are determined by the difference between the sales proceeds and the
        carrying value of the loans.

        LOANS RECEIVABLE - Loans receivable are stated at unpaid principal
        balances, less an allowance for loan losses, deferred loan origination
        fees, and discounts. The Company has both the intent and the ability to
        hold loans receivable to maturity.

                                       44
<PAGE>

        The allowance for loan losses is increased by provisions charged to
        income and by charge-offs, net of recoveries. Management's periodic
        evaluation of the adequacy of the allowance is based on the Bank's past
        loan experience, known and inherent risks in the portfolio, adverse
        situations that may affect the borrower's ability to repay, estimated
        value of any underlying collateral, and current economic conditions.
        While management uses the best information available to make its
        evaluation, future adjustments to the allowance may be necessary if
        there are no significant changes in economic conditions.

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

        The Company accounts for impaired loans by measuring impaired loans
        based upon the present value of expected future cash flows discounted at
        the loan's effective interest rate or, as an alternative, at the loan's
        observable market price or fair value of the collateral. The amount of
        impairment, if any, and any subsequent changes are included in the
        allowance for loan losses.

        A loan is defined as impaired when, based on current information and
        events, it is probable that a creditor will be unable to collect all
        amounts due according to the contractual terms of the loan agreement.

        The Company defers loan fees (net of direct loan origination costs)
        received in the origination process, and recognizes those fees over the
        contractual life of the related loan as a yield adjustment.

        REAL ESTATE HELD FOR SALE - Real estate held for sale is comprised of
        commercial property previously occupied and operated as a branch. It is
        stated at the lower of net carrying value or fair value, less estimated
        costs to sell.

        PROPERTY ACQUIRED IN SETTLEMENT OF LOANS - Property acquired in the
        settlement of loans is initially recorded at the lower of fair value
        (less estimated costs to sell the real estate) at the date of
        foreclosure, or the loan balance. Any write-down to fair value at the
        time of transfer is charged to the allowance for loan losses. Costs
        relating to improvement of the property are capitalized, whereas costs
        relating to the holding of the property are expensed. Valuation
        allowances are established by management if the carrying value of the
        property exceeds its fair value, less estimated costs to sell the
        property.

        OFFICE PROPERTY AND EQUIPMENT - Property and equipment acquired by the
        Company is recorded at cost less accumulated depreciation. Depreciation
        is provided using straight-line or accelerated methods over the
        estimated useful lives of the related assets, ranging from 3 to 39
        years.

        FINANCIAL INSTRUMENTS - The Company does not participate in
        interest-rate exchange agreements, hedging or other similar financial
        instruments.

        ADVERTISING COSTS - Advertising costs are expensed as incurred.

        INCOME TAXES - Deferred taxes are provided on a liability method whereby
        deferred tax assets are recognized for deductible temporary differences
        and operating loss and tax credit carryforwards and deferred tax
        liabilities are recognized for taxable temporary differences. Temporary
        differences are the difference between the reported amounts of assets
        and liabilities and their income tax bases. Income taxes are allocated
        to the Company and its subsidiaries based on each entity's income tax
        liability as if it filed a separate return.

        Deferred tax assets are reduced by a valuation allowance when, in the
        opinion of management, it is more likely than not that some portion, or
        all of the deferred tax assets, will not be realized. Deferred tax
        assets and liabilities are adjusted for the effects of changes in tax
        laws and rates on the date of enactment.

                                       45
<PAGE>

        COMPREHENSIVE INCOME - Accounting principles generally require that
        recognized revenue, expenses, gains and losses be included in net
        income. Although certain changes in assets and liabilities, such as
        realized gains and losses on available-for-sale securities, are reported
        as a separate component of the equity section of the balance sheet, such
        items, along with net income, are components of comprehensive income.
        Gains and losses on available-for-sale securities are reclassified to
        net income as the gains or losses are realized upon sale of the
        securities. Other-than-temporary impairment charges are reclassified to
        net income at the time of the charge.

        OPERATING SEGMENTS - The Company uses the "management approach" for
        reporting information about segments in annual and interim financial
        statements. The management approach is based on the way the chief
        operating decision-maker organizes segments within a company for making
        operating decisions and assessing performance. Reportable segments are
        based on products and services, geography, legal structure, management
        structure and any other manner in which management disaggregates a
        company. Based on the "management approach" model, the Company has
        determined that its business is comprised of a single operating segment.

        EARNINGS PER SHARE - Basic earnings per common share is computed based
        upon the weighted-average number of common shares outstanding during the
        period. Diluted earnings per common share include the dilutive effect of
        additional potential common shares issuable under the Company's stock
        option plan. In accordance with Statement of Position 93-6, shares owned
        by the ESOP that have not been committed to be released are not
        considered to be outstanding for the purpose of computing earnings per
        share. The computation of earnings per share are as follows:

                                                   Year Ended June 30,
                                            ---------------------------------
                                               2003        2002        2001
                                            ---------------------------------
            Weighted-average common
             shares outstanding (basic)     1,271,165   1,258,083   1,468,121

            Dilutive effect of assumed
             exercise of stock options              -      27,426      29,491
                                            ---------------------------------
            Weighted-average common
             shares outstanding (diluted)   1,271,165   1,285,509   1,497,612
                                            =================================

        As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
        the Company accounts for stock options and similar equity instruments
        under Accounting Principles Board ("APB") Opinion No. 25, "Accounting
        for Stock Issued to Employees." Entities that elect to continue to
        account for stock options using APB Opinion No. 25 continue to measure
        compensation using the intrinsic value based method. Accordingly,
        compensation cost for stock options is measured as the excess, if any,
        of the quoted market price of the Company's stock at the date of the
        grant over the amount an employee must pay to acquire the stock.
        Entities are also required to make pro-forma disclosure of net earnings
        and earnings per share, as if the fair value-based method of accounting
        defined in SFAS No. 123 had been applied. Had the Company determined
        compensation cost based on the fair value at the grant date for stock
        options under SFAS 123, the Company's net income and net income per
        share would have been as indicated below:

<TABLE>
<CAPTION>
                                                                               Year Ended June 30,
                                                                      -------------------------------------
                                                                          2003         2002         2001
                                                                      -------------------------------------
              <S>                                                     <C>           <C>          <C>
              Net income (loss) - as reported                         $   (38,817)  $  530,815   $  663,322
              Deduct: Total stock based employee compensation
               expense determined under fair value based
               method for all awards, net of related tax effects
                 Net income (loss) - pro forma                             (8,260)      (2,002)      (7,135)
                                                                      -------------------------------------
                                                                      $   (47,077)  $  528,813   $  656,187
                                                                      =====================================

              Basic earnings (loss) per share - as reported           $     (0.03)  $     0.42   $     0.45
              Basic earnings (loss) per share - pro forma             $     (0.04)  $     0.42   $     0.45
              Diluted earnings (loss) per share - as reported         $     (0.03)  $     0.41   $     0.44
              Diluted earnings (loss) per share - pro forma           $     (0.04)  $     0.41   $     0.44
</TABLE>

                                       46
<PAGE>

        The fair value of each option granted is estimated on the date of grant
        using the Black-Scholes option valuation model with the following
        weighted average assumption used for grants during fiscal 2001:
        risk-free interest rate of 6.50%, dividend yield of 4.00%, expected
        volatility of 34.53%, and expected lives of 5 years. The weighted
        average fair value of the options granted in fiscal 2001 was $0.86 per
        share. The effects of applying SFAS 123 may not be representative of the
        effects on reported net earnings for future years. No options were
        granted by the Company during the fiscal years ended June 30, 2003 and
        2002.

NOTE B - STATEMENT OF CASH FLOWS

                Supplemental Disclosures of Cash Flow Information

                                                Year Ended June 30,
                                      ---------------------------------------
                                          2003          2002          2001
                                      ---------------------------------------
          Income taxes paid           $   231,845   $   236,400   $   539,869
                                      =======================================
          Interest paid on deposits
           and FHLB advances          $ 3,395,082   $ 4,032,585   $ 4,990,324
                                      =======================================

        Noncash Investing and Financing Activities
        Property acquired through foreclosure totaled $617,746, $605,516 and
        $197,343 during fiscal years 2003, 2002 and 2001, respectively. The
        Company also financed $354,260, $1,625,461 and $209,400 of loans for
        borrowers to purchase real estate owned by the Company during fiscal
        years 2003, 2002 and 2001, respectively.

NOTE C - INVESTMENTS IN CERTIFICATES OF DEPOSIT

        The Company invests in certificates of deposit issued by other financial
        institutions, up to a maximum of $100,000 per institution. At June 30,
        2003, the Company had $99,000 invested in a 6.75% certificate of deposit
        that matures during fiscal 2004.

NOTE D - INVESTMENT SECURITIES

        Following is a summary of investment securities available for sale:

<TABLE>
<CAPTION>
                                                         Gross          Gross
                                         Amortized    Unrealized     Unrealized        Fair
                                            Cost         Gains         Losses          Value
                                        -------------------------------------------------------
        <S>                             <C>           <C>            <C>            <C>
        June 30, 2003:
           U.S. government and agency
            debt securities             $   135,945   $     4,971    $      (217)   $   140,699
           Equity securities              1,032,410       111,406        (20,020)     1,123,796
                                        -------------------------------------------------------
                                        $ 1,168,355   $   116,377    $   (20,237)   $ 1,264,495
                                        =======================================================
        June 30, 2002:
           U.S. government and agency
            debt securities             $   140,585   $       992    $         -    $   141,577
           Municipal bonds                  101,170             -           (408)       100,762
           Equity securities              1,029,732        51,847              -      1,081,579
                                        -------------------------------------------------------
                                        $ 1,271,487   $    52,839    $      (408)   $ 1,323,918
                                        =======================================================
</TABLE>

        The contractual maturities of debt securities at June 30, 2003, are
        shown below. Actual maturities may differ from contractual maturities as
        borrowers may have the right to call or prepay obligations with or
        without call or prepayment penalties.

                                       47
<PAGE>

                                                 Weighted
                                                 Average   Amortized      Fair
                                                  Yield       Cost       Value
                                                 -------------------------------
        Due in one year or less                      3.58% $   55,464  $  55,425
        Due after one year through five years           -%          -          -
        Due after five years through ten years       7.25%      3,704      3,721
        Due after ten years                          6.46%     76,777     81,553
                                                           ---------------------
                                                           $  135,945  $ 140,699
                                                           =====================

        The Company had realized gains (losses) on the sale of investment
        securities totaling ($7,087), $112,886, and ($95,880) during fiscal
        years 2003, 2002 and 2001, respectively. Proceeds from the sale of
        available-for-sale securities totaled $145,493 for 2003, $900,871 for
        2002, and $99,790 for 2001.

        Included in the interest income on investment securities and other was
        dividend income of $52,273, $81,252, and $76,817 for the years ended
        June 30, 2003, 2002 and 2001, respectively.

NOTE E - LOANS RECEIVABLE, NET

        Following is a summary of loans receivable:

                                                           June 30,
                                                 ----------------------------
                                                     2003            2002
                                                 ----------------------------
Real estate mortgage loans:
   Secured by one-to-four family residences      $ 55,885,939    $ 55,481,964
   Secured by commercial and multi-family real
    estate                                         22,235,356      25,846,350
   Construction loans                               3,019,017       4,331,204
                                                 ----------------------------
      Total real estate mortgage loans             81,140,312      85,659,518

Consumer and other loans                            3,835,034       2,068,374
                                                 ----------------------------
                                                   84,975,346      87,727,892
Less:
   Allowance for loan losses                       (1,318,868)       (927,311)
   Undisbursed portion of mortgage loans           (1,176,069)     (1,725,745)
   Unamortized balance on purchased loan
    premiums                                                -              83
   Deferred loan fees, net                           (286,840)       (303,412)
                                                 ----------------------------

      Loans receivable, net                      $ 82,193,569    $ 84,771,507
                                                 ============================

        A significant portion of loans receivable consist of first mortgage
        loans issued to finance purchases of real estate, principally
        one-to-four family residences. The real estate is located primarily in
        the greater Des Moines area. There is no significant concentration of
        credit risk to specific industries. The economic condition of the
        Company's market area can affect its borrowers' ability to repay their
        loans.

        Commercial and multi-family real estate loans include participating
        interests in loans purchased by the Company. Participation loans
        purchased totaled approximately $6,374,000 and $7,670,000 at June 30,
        2003 and 2002, respectively. A significant portion of these
        participation loans are secured by real estate located outside of Iowa.

                                       48
<PAGE>

        The Company is a party to financial instruments with off-balance-sheet
        risk in the normal course of business to meet the financial needs of its
        customers and to reduce its own exposure to fluctuations in interest
        rates. These financial instruments primarily include commitments to
        extend credit. These instruments involve, to varying degrees, elements
        of credit and interest rate risk in excess of the amounts recognized in
        the financial statements.

        The Company's exposure to credit loss in the event of non-performance by
        the other party to the financial instrument for loan commitments is
        represented by the contractual amount of those instruments. The Company
        uses the same credit policies in making commitments as it does for
        on-balance-sheet instruments.

        At June 30, 2003, the Company had outstanding commitments to fund loans
        of approximately $3,500,000. The commitments were primarily for fixed
        interest rate commercial and residential real estate loans on real
        estate located across the Midwest. The Company also had outstanding
        commitments on unused portions of available lines of credit totaling
        $1.7 million at June 30, 2003.

        Loan commitments are agreements to lend to customers as long as there
        are no violations of any conditions established in the contracts.
        Commitments generally have fixed expiration dates or other termination
        clauses and may require payment of a fee. Since some of the commitments
        are expected to expire without being drawn upon, the total commitment
        amounts do not necessarily represent future cash requirements. The
        Company evaluates each customer's creditworthiness on a case-by-case
        basis. The amount of collateral obtained, if deemed necessary by the
        Company upon extension of credit, is based on management's credit
        evaluation of the borrower. Collateral held is primarily residential and
        commercial real estate, but may include autos, consumer goods and other
        assets.

        In the normal course of business, the Company has made loans to their
        directors, officers and their related business interests. Regulations
        allow executive officers and directors to receive the same loan terms
        that are widely available to other employees, as long as the director or
        executive officer is not given preferential treatment compared to other
        participating employees. The table below details the activity for loans
        outstanding to directors, officers and their related business interests:

                                            2003         2002
                                         -----------------------
            Balance, beginning of year   $  948,019   $  949,151
            Loans disbursed                 175,836      140,524
            Principal repayments           (185,294)    (141,656)
                                         -----------------------
            Balance, end of year         $  938,561   $  948,019
                                         =======================

        The Company began originating and selling on a servicing released basis,
        single family fixed rate loans in the secondary market during the year
        ended June 30, 2003. During the year ended June 30, 2002, the Company
        did not sell any portion of its loan portfolio, or loans originated.

        Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>
                                                          Year Ended June 30,
                                               -----------------------------------------
                                                   2003           2002           2001
                                               -----------------------------------------
          <S>                                  <C>            <C>            <C>
          Balance at beginning of year         $   927,311    $   382,325    $   258,801
             Provision for losses on loans         762,847        565,656        151,000
             Charge-offs on loans                 (427,948)       (76,751)       (27,476)
             Recoveries on charged-off loans        56,658         56,081              -
                                               -----------------------------------------
          Balance at end of year               $ 1,318,868    $   927,311    $   382,325
                                               =========================================
</TABLE>

                                       49
<PAGE>

        Following is a summary of impaired loans:

                                                     2003           2002
                                                  -------------------------
          Impaired loans without a valuation
           allowance                              $         -   $   534,404
          Impaired loans with a valuation
           allowance                                4,132,522     1,890,915
                                                  -------------------------
             Total investment in impaired loans   $ 4,132,522   $ 2,425,319
                                                  =========================

          Valuation allowance allocated to
           impaired loans                         $   808,857   $   426,889

        As of June 30, 2003, the Company had a net investment of $82,193,569 in
        loans receivable. These loans possess an inherent credit risk given the
        uncertainty regarding the borrower's compliance with the terms of the
        loan agreement. To reduce credit risk, the loans are secured by varying
        forms of collateral, including first mortgages on real estate, liens on
        personal property, savings accounts, etc. It is generally Company policy
        to file liens on titled property taken as collateral on loans, such as
        real estate and autos. In the event of default, the Company's policy is
        to foreclose or repossess collateral on which it has filed liens.

        In the event that any borrower completely failed to comply with the
        terms of the loan agreement and the related collateral proved worthless,
        the Company would incur a loss equal to the loan balance.

NOTE F - REAL ESTATE HELD FOR SALE

        During fiscal 2002, the Company relocated its downtown branch and listed
        the office building it had previously occupied for sale or lease. The
        carrying value of the land and building was written-down to its
        estimated fair value, less estimated selling costs. A loss of $157,890
        was recognized as a result of this valuation adjustment during fiscal
        2002. There were no additional valuation adjustments made during fiscal
        2003. The Company has accepted an offer to sell the real estate held for
        sale. The transaction is expected to close during the second quarter of
        fiscal 2004. No material loss is expected.

NOTE G - OFFICE PROPERTY AND EQUIPMENT

        Following is a summary of office property and equipment:

                                                           June 30,
                                                 ---------------------------
                                                     2003            2002
                                                 ---------------------------
            Land                                 $    305,000    $   305,000
            Office building                         3,019,852      2,941,316
            Furniture, fixtures and equipment         978,160        900,032
            Leasehold improvements                     52,425         52,425
                                                 ---------------------------
                                                    4,355,437      4,198,773
            Less accumulated depreciation          (1,031,953)      (793,053)
                                                 ---------------------------
            Office property and equipment, net   $  3,323,484    $ 3,405,720
                                                 ===========================

NOTE H - ACCRUED INTEREST RECEIVABLE

        Following is a summary of accrued interest receivable:

                                                           June 30,
                                                 ---------------------------
                                                     2003            2002
                                                 ---------------------------
            Investments in certificates of
             deposit                             $        220    $       220
            Investment securities                       1,775          2,334
            Loans receivable                          468,362        569,860
                                                 ---------------------------
                                                 $    470,357    $   572,414
                                                 ===========================

                                       50
<PAGE>

NOTE I - DEPOSITS

        Deposit customers are primarily greater Des Moines area individuals and
        businesses. Deposits with balances in excess of $100,000 totaled
        $14,247,763 and $9,519,988 at June 30, 2003 and 2002, respectively.
        Non-interest bearing deposit accounts totaled approximately $2,169,000
        and $1,920,000 at June 30, 2003 and 2002, respectively.

        Deposit accounts held by members of the board of directors and executive
        officers totaled $355,000 and $534,000 at June 30, 2003 and 2002,
        respectively.

        Following is a summary of savings deposits as of June 30, 2003 and 2002
        and interest expense relating to those deposits for the years then
        ended:

<TABLE>
<CAPTION>
                                                             2003                            2002
                                                 -----------------------------------------------------------
                                                 Outstanding       Interest      Outstanding      Interest
                                                    Balance         Expense        Balance        Expense
                                                 -----------------------------------------------------------
          <S>                                    <C>             <C>             <C>            <C>
          Demand deposits                        $  3,574,219    $      9,393    $  3,606,185   $     21,039
          Savings and money market deposits        19,008,269         312,326      16,115,810        301,320
          Certificates of deposits                 50,390,982       2,311,858      47,179,152      2,743,029
                                                 -----------------------------------------------------------
                                                 $ 72,973,470       2,633,577    $ 66,901,147      3,065,388
                                                 ============                    ============
          Less penalties for early withdrawals                         (7,228)                        (5,505)
                                                                 ------------                   ------------
                                                                 $  2,626,349                   $  3,059,883
                                                                 ============                   ============
</TABLE>

        The scheduled maturities of certificates of deposit as of June 30, 2003
        are as follows:

            Fiscal-year ending June 30:
               2004                       $ 21,679,930
               2005                          8,025,360
               2006                          8,713,443
               2007                          6,053,155
               2008                          5,919,094
                                          ------------
                                          $ 50,390,982
                                          ============

NOTE J - ADVANCES FROM FEDERAL HOME LOAN BANK

        Advances from the Federal Home Loan Bank of Des Moines, which are
        secured by a blanket pledge agreement, including all stock in the FHLB
        and qualifying first mortgage loans, consisted of the following fixed
        rate advances, which are subject to prepayment penalties, at June 30,
        2003:

                  Maturity Date        Interest Rate       Amount
            -------------------------------------------------------
            June 30, 2008 /(1)/                 5.52%   $ 3,000,000
            September 11, 2008 /(1)/            4.99%     6,000,000
                                                        -----------
                                                        $ 9,000,000
                                                        ===========
            (1) Callable in fiscal year 2004

        The weighted average interest rate for all advances was 5.17% and 5.51%
        at June 30, 2003 and 2002, respectively.

NOTE K - INCOME TAXES

        Prior to the year ended June 30, 1997, the savings and loan subsidiary
        was allowed a special bad debt deduction based on a percentage of
        taxable income (8%), or on specified experience formulas, subject to
        certain limitations based on aggregate loan balances at the end of the
        year. The special bad debt deduction has been repealed for thrift
        institutions. Legislation also requires thrifts to recapture, over a
        six-year period, bad debt reserves added since January 1, 1988
        (approximately $61,000 remains to be recaptured). Recapture of pre-1988
        reserves (approximately $1,278,000) is required only under limited
        circumstances, such as if a thrift pays dividends in excess of its
        earnings and profits or liquidates. The recapture is not expected to
        have a material effect on results of operations as the Company has
        provided a deferred tax liability for special bad debt deductions since
        January 1, 1988. The Company, in accordance with SFAS No. 109, has not
        recorded a deferred tax liability of approximately $477,000 relating to
        pre-1988 bad debt reserves.

                                       51
<PAGE>

        Taxes on income consist of:

<TABLE>
<CAPTION>
                                                               Year Ended June 30,
                  -------------------------------------------------------------------------------------------------------------
                                  2003                                  2002                                 2001
                  -------------------------------------------------------------------------------------------------------------
                    Federal       State        Total       Federal      State        Total      Federal      State       Total
                  -------------------------------------------------------------------------------------------------------------
        <S>       <C>          <C>          <C>          <C>          <C>         <C>          <C>         <C>        <C>
        Current   $ (169,644)  $    5,550   $ (164,094)  $  409,828   $  75,175   $  485,003   $ 338,357   $ 62,065   $ 400,422
        Deferred    (161,067)     (15,745)    (176,812)    (249,813)    (45,883)    (295,696)    (37,148)    (6,814)    (43,962)
                  -------------------------------------------------------------------------------------------------------------
        Total     $ (330,711)  $  (10,195)  $ (340,906)  $  160,015   $  29,292   $  189,307   $ 301,209   $ 55,251   $ 356,460
                  =============================================================================================================
</TABLE>

        Taxes on income differ from the "expected" amounts computed by applying
        the federal income tax rate of 34% to income before taxes for the
        following reasons:

<TABLE>
<CAPTION>
                                                        Year Ended June 30,
                                                 ----------------------------------
                                                    2003        2002        2001
                                                 ----------------------------------
            <S>                                  <C>         <C>         <C>
            Computed "expected" taxes on income  $ (129,000) $  245,000  $  348,000
            State taxes, net of federal benefit       4,000      34,000      37,500
            Settlement of tax contingencies        (157,000)          -           -
            Low income housing tax credits          (59,000)    (59,000)    (59,000)
            Other adjustments                            94     (30,693)     29,960
                                                 ----------------------------------
               Provision for income taxes        $ (340,906) $  189,307  $  356,460
                                                 ==================================
</TABLE>

        Temporary differences between the financial statement carrying amounts
        and tax bases of assets and liabilities that give rise to the deferred
        tax (asset) liability at June 30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                                                        June 30,
                                                                -----------------------
                                                                   2003         2002
                                                                -----------------------
          <S>                                                   <C>          <C>
          Federal Home Loan Bank stock (income tax payable
           when shares received as stock dividends are sold)    $   64,000   $   64,000
          Real estate and equipment (depreciation method
           carrying value differences)                              63,000       62,000
          Loan fees deferred for financial reporting purposes       (9,000)     (18,000)
          Allowance for loan losses                               (469,000)    (302,000)
          Deferred intallment sale gains                            26,000       32,000
          Unrealized gains on investment securities                 29,000       22,000
          Other                                                    (18,926)      (2,046)
                                                                -----------------------
             Net deferred income tax (asset) liability          $ (314,926)  $ (142,046)
                                                                =======================
</TABLE>

        No valuation allowance was recorded against deferred tax assets at June
        30, 2003 or 2002.

                                       52
<PAGE>

NOTE L - EMPLOYEE BENEFITS

        EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - The Company has established an
        ESOP for eligible employees. Employees with at least 1,000 hours of
        annual service with the Company and who have attained an age of 21 are
        eligible to participate. The ESOP borrowed $687,700 from the Company to
        purchase up to 8% of the common stock or 137,540 shares. Collateral for
        the loan is the common stock purchased by the ESOP. The loan is repaid
        principally from the Bank's discretionary contributions to the ESOP over
        a period of ten years (through December 31, 2003). The interest rate for
        the loan is 7%. Shares purchased by the ESOP are held in a suspense
        account for allocation among participants as the loan is repaid. Expense
        of $123,129, $119,654, and $124,470 was recorded relative to the ESOP
        for the years ended June 30, 2003, 2002, and 2001, respectively.

        Contributions to the ESOP and shares released from the suspense account
        in an amount proportional to the repayment of the ESOP loan are
        allocated among ESOP participants on the basis of compensation in the
        year of allocation. Benefits generally become 100% vested after five
        years of credited service. Credit for vesting purposes is given for
        years of service prior to the effective date of the ESOP (July 1, 1993).
        Prior to the completion of five years of credited service, a participant
        who terminates employment for reasons other than death, normal
        retirement, or disability will not receive any benefit under the ESOP.
        Forfeitures are reallocated among remaining participating employees, in
        the same proportion as contributions. Benefits may be payable in the
        form of stock or cash upon termination of employment. If the Company's
        stock is not traded on an established market at the time of an ESOP
        participant's termination, the terminated ESOP participant has the right
        to require the Bank to purchase the stock at its current fair market
        value. Bank management believes there is an established market for the
        Company's stock and therefore the Bank believes there is no potential
        repurchase obligation at June 30, 2003 and 2002.

        As shares are released from collateral, the Company reports compensation
        expense equal to the current market price of the shares. Dividends on
        allocated ESOP shares are recorded as a reduction of retained earnings;
        dividends on unallocated ESOP shares are recorded as a reduction of debt
        and accrued interest. ESOP shares were as follows:

                                                            June 30,
                                                     ----------------------
                                                        2003         2002
                                                     ----------------------
            Allocated shares, beginning of year        112,082      100,468
            Distribution of shares                     (25,049)           -
            Shares released for allocation              10,898       11,614
                                                     ----------------------
               Total allocated shares, end of year      97,931      112,082
            Unreleased shares                            5,181       16,079
                                                     ----------------------
               Total ESOP shares                       103,112      128,161
                                                     ======================

            Fair value of unreleased shares          $  59,581    $ 160,790
                                                     ======================

        STOCK OPTION PLAN - The Company authorized options for 171,924 shares of
        common stock under the 1993 Stock Option and Incentive Plan (the
        "Plan"). Officers, directors and employees of the Company and its
        subsidiaries are eligible to participate in the Plan. The option
        exercise price must be at least 100% of the market value (as defined in
        the Plan) of the common stock on the date of the grant, and the option
        term cannot exceed 10 years. Stock options vest at a rate of 20% per
        year. There are unexercised outstanding stock options for 36,306 shares
        at June 30, 2003, which have exercise prices between $5.00 and $10.00.
        At June 30, 2003, the weighted average remaining contractual life is 4.0
        years and the weighted average option price is $7.44 for the outstanding
        unexercised options.

                                       53
<PAGE>

        A summary of the status of the Company's stock option plan as of June
        30, 2003, 2002 and 2001, and the changes during the years ended on those
        dates is presented below:

                                                                 Weighted -
                                                                  Average
                                                   Number of   Exercise Price
                                                     shares      Per Share
                                                   --------------------------
            Outstanding, June 30, 2000                61,306   $         5.00
               Granted                                21,488             9.75
               Exercised                             (23,200)            5.00
                                                   --------------------------
            Outstanding, June 30, 2001                59,594             6.71
               Granted                                     -                -
               Exercised                             (10,544)            5.00
                                                   --------------------------
            Outstanding, June 30, 2002                49,050             7.08
               Granted                                     -                -
               Exercised                             (12,744)            6.06
                                                   --------------------------
            Outstanding, June 30, 2003                36,306             7.44
                                                   ==========================

            Options exercisable                       23,414   $         6.17
                                                   ==========================

            Remaining shares available for grant      12,902
                                                   =========

        401(k) Plan - The Company implemented a 401(k) plan that covers
        substantially all employees meeting age and length of service
        requirements during fiscal 2003. Employees participating in this plan
        are eligible to contribute up to 15% of their annual compensation. The
        plan provides for discretionary contributions by the employer, which are
        allocated to the participants' accounts in proportion to employee
        contributions. No Company discretionary contributions were made to the
        plan during fiscal year 2003.

        EMPLOYMENT AGREEMENTS - The Company has entered into certain employment
        agreements with key officers. Under the terms of the agreements, the
        employees are entitled to additional compensation in the event of a
        change in control of the Company and the employees are involuntarily
        terminated within twelve months of the change in control. A change in
        control is generally triggered by the acquisition or control of 10% or
        more of the Company's common stock.

NOTE M - REGULATORY AND CAPITAL MATTERS

        The Bank is subject to minimum regulatory capital standards promulgated
        by the Office of Thrift Supervision (the "OTS"). 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 consolidated financial
        statements. Under capital adequacy guidelines and the regulatory
        framework for prompt corrective action, the Bank must meet specific
        capital guidelines that involve quantitative measures of the Bank's
        assets, liabilities, and certain off-balance-sheet items as calculated
        under regulatory accounting practices. The Bank's capital amounts and
        classification are also subject to qualitative judgments by the
        regulators about components, risk weightings, and other factors. The
        minimum capital standards of the OTS generally require the maintenance
        of regulatory capital sufficient to meet each of three tests,
        hereinafter described as the tangible equity requirement, the core
        capital requirement and the risk-based capital requirement. The tangible
        equity requirement provides for minimum tangible capital (defined as
        stockholders' equity less all intangible assets) equal to 1.5% of
        adjusted total assets.

        The core capital requirement provides for minimum core capital (tangible
        capital plus certain forms of supervisory goodwill and other qualifying
        intangible assets) equal to 4.0% of adjusted total assets. The
        risk-based capital requirement provides for the maintenance of core
        capital plus general loss allowances equal to 8.0% of risk-weighted
        assets. In computing risk-weighted assets, the Bank multiplies the value
        of each asset on its statement of financial condition by a defined
        risk-weighting factor, e.g., one-to-four family residential loans carry
        a risk-weighted factor of 50%.

        As of June 30, 2003 and 2002, management believes that the Bank met all
        capital adequacy requirements to which they are subject.

                                       54
<PAGE>

        The Bank's management believes that, under current regulatory capital
        regulations, the Bank will continue to meet its minimum capital
        requirements in the foreseeable future. However, events beyond the
        control of the Bank, such as increased interest rates or a downturn in
        the economy in the Bank's market area, could adversely affect future
        earnings and, consequently, the ability to meet future minimum
        regulatory capital requirements.

Following is a summary of the Bank's regulatory capital as of June 30, 2003 and
2002:

<TABLE>
<CAPTION>
                                                                                        To be "well-capitalized"
                                                                   For capital           Under prompt corrective
                                                                adequacy purposes           action provisions
                                                            -----------------------------------------------------
                                             Actual         Greater than or equal to:   Greater than or equal to:
                                      ---------------------------------------------------------------------------
                                        Capital     Ratio      Capital          Ratio      Capital          Ratio
                                      ---------------------------------------------------------------------------
        <S>                           <C>           <C>     <C>                  <C>    <C>                 <C>
        June 30, 2003:
        Tangible capital /(1)/        $ 7,199,000    7.87%  $   1,372,000        1.50%            N/A         N/A
        Core capital /(1)/            $ 7,199,000    7.87%  $   3,658,000        4.00%  $   4,573,000        5.00%
        Tier 1 (Core) Capital /(2)/   $ 7,199,000   12.24%  $   2,354,000        4.00%  $   3,530,000        6.00%
        Risk-based capital /(2)/      $ 7,849,000   13.34%  $   4,707,000        8.00%  $   5,884,000       10.00%

        June 30, 2002:
        Tangible capital /(1)/        $ 7,163,000    7.89%  $   1,362,000        1.50%            N/A         N/A
        Core capital /(1)/            $ 7,163,000    7.89%  $   3,632,000        4.00%  $   4,540,000        5.00%
        Tier 1 (Core) Capital /(2)/   $ 7,163,000   11.85%  $   2,417,000        4.00%  $   3,626,000        6.00%
        Risk-based capital /(2)/      $ 7,894,000   13.06%  $   4,835,000        8.00%  $   6,043,000       10.00%
</TABLE>

        (1) - To adjusted total assets
        (2) - To risk-weighted assets

        The Bank established a liquidation account when it converted from a
        federally chartered mutual savings bank to a federally chartered stock
        savings bank. The liquidation account was equal to the Bank's net worth
        as of the date of the consolidated financial statements contained in the
        final prospectus used to sell the common stock at June 30, 1993. The
        liquidation account is maintained for the benefit of depositors with
        deposits as of the March 31, 1993 eligibility record date, who continue
        to maintain their deposits in the Bank after conversion. In the event of
        a complete liquidation (and only in such an event), each eligible
        depositor will be entitled to receive a liquidation distribution from
        the liquidation account in the proportionate amount of the then current
        adjusted balance for deposits then held, before any liquidation
        distribution may be made with respect to the stockholders. Except for
        the repurchase of stock and payment of dividends by the Bank, the
        existence of the liquidation account will not restrict the use or
        application of retained earnings.

        The Company's management believes that, under the current regulatory
        capital regulations, the Bank will continue to meet its minimum capital
        requirements in the foreseeable future. However, events beyond the
        control of the Bank, such as increased interest rates or a downturn in
        the economy in the Banks' market area, could adversely affect future
        earnings and, consequently, the ability to meet future minimum
        regulatory capital requirements.

        The Bank is subject to regulations imposed by the OTS regarding the
        amount of capital distributions payable to the Company. Generally, the
        Bank's payment of dividends is limited, without prior OTS approval, to
        net earnings for the current calendar year, plus the two preceding
        years, less capital distributions paid over the same time period.
        Insured institutions are required to file an application with the OTS
        for capital distributions in excess of the limitation.

NOTE N - LEASES

        The Company leases office space for a branch location. The lease term
        expires May 31, 2007. Future minimum lease payments under the lease
        terms are as follows:

                              2004   $ 41,540
                              2005   $ 41,540
                              2006   $ 41,540
                              2007   $ 38,078

                                       55
<PAGE>

        The Company subleases a portion of this leased space. The sublease began
        on April 29, 2002 and expires in May 2007. The annual sublease rent is
        approximately $5,000.

NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS

        SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
        requires disclosure of the fair value of financial instruments, both
        assets and liabilities whether or not recognized in the consolidated
        statements of financial condition, for which it is practicable to
        estimate that value. For financial instruments where quoted market
        prices are not available, fair values are based on estimates using
        present value and other valuation methods.

        The methods used are greatly affected by the assumptions applied,
        including the discount rate and estimates of future cash flows.
        Therefore, the fair values presented may not represent amounts that
        could be realized in exchange for certain financial instruments. FASB
        Statement No. 107 excludes certain financial instruments and all
        non-financial instruments from its disclosure requirements. Accordingly,
        the aggregate fair value amounts presented do not represent the
        underlying value of the Company.

        The following methods and assumptions were used by the Company in
        estimating its fair value disclosures for financial instruments at June
        30, 2003 and 2002:

        Cash and Amounts Due From Depository Institutions - The carrying amounts
        of cash and amounts due from depository institutions approximate their
        fair value.

        Investments in Certificates of Deposits - The fair values disclosed for
        investments in certificates of deposit are estimated using a discounted
        cash flow calculation that applies interest rates currently available on
        certificates to a schedule of aggregated remaining maturities of the
        certificates.

        Investment Securities - Fair values for securities, excluding restricted
        equity securities, are based on quoted market prices. The carrying
        values of restricted equity securities (Federal Home Loan Bank stock)
        approximate fair values.

        Loans Held for Sale - Fair values are based on quoted market prices of
        similar loans sold on the secondary market.

        Loans Receivable - For variable-rate loans that reprice frequently and
        have no significant change in credit risk, fair values are based on
        carrying values. Fair values for fixed-rate loans are estimated using
        discounted cash flow analyses, using interest rates currently being
        offered for loans with similar terms to borrowers of similar credit
        quality. Fair values for impaired loans are estimated using discounted
        cash flow analyses or underlying collateral values, where applicable.

        Deposit Liabilities - The fair values disclosed for checking, money
        market and savings accounts equal their carrying amounts. Fair values
        for certificates of deposits are estimated using a discounted cash flow
        calculation that applies interest rates currently being offered on
        certificates to a schedule of aggregated expected monthly maturities of
        the certificates.

        Advances from the Federal Home Loan Bank - The fair value of the
        Company's debt is estimated using discounted cash flow analyses based on
        the Company's current incremental borrowing rates for similar types of
        borrowing arrangements.

        Accrued Interest - The carrying amounts of accrued interest approximates
        their fair value.

                                       56
<PAGE>

        Commitments to extend credit - The fair values of commitments to extend
        credit are based on fees currently charged to enter into similar
        agreements, taking into account the remaining terms of the agreements
        and credit worthiness of the counterparties. At June 30, 2003 and 2002,
        the carrying amount and fair value of the commitments were not
        significant.

NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS - continued

        The estimated fair values of the Company's financial instruments are as
        follows:

<TABLE>
<CAPTION>
                                                           June 30, 2003                 June 30, 2002
                                                    ---------------------------------------------------------
                                                      Carrying         Fair         Carrying        Fair
                                                       Amount          Value         Amount         Value
                                                    ---------------------------------------------------------
      <S>                                           <C>            <C>            <C>            <C>
      Financial assets
         Cash and cash equivalents                  $  4,407,338   $  4,407,338   $  3,114,682   $  3,114,682
         Investments in certificates of deposit           99,000         99,000         99,000        107,000
         Investment securities available-for-sale      1,264,495      1,264,495      1,323,918      1,323,918
         Loans held for sale                           1,870,683      1,870,683              -              -
         Loans receivable                             82,193,569     85,682,000     84,771,507     85,808,000
         Federal Home Loan Bank stock                  1,762,200      1,762,200      1,762,200      1,762,200
         Accrued interest receivable                     470,357        470,357        572,414        572,414

      Financial liabilities
         Deposits                                     72,973,470     74,728,000     66,901,147     68,316,000
         Advances from Federal Home Loan Bank          9,000,000      9,481,000     14,000,000     14,086,000
         Accrued interest payable                          1,702          1,702        174,921        174,921

</TABLE>

NOTE P - RECENT ACCOUNTING DEVELOPMENTS

        The Financial Accounting Standards Board (FASB) has issued Statement
        148, "Accounting for Stock-Based Compensation - Transition and
        Disclosure - an amendment of FASB No. 123." This Statement amends
        Statement 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 and amends the disclosure requirements
        of Statement No. 123 to require prominent disclosures in both annual and
        interim financial statements about the method of accounting for
        stock-based employee compensation and the effect of the method used on
        reported results. The alternative methods of transition for a voluntary
        change to the fair value based method of accounting for stock-based
        employee compensation are effective for transitions after July 1, 2003.
        The Company will not make a voluntary change to the fair value based
        method of accounting for stock-based employee compensation. The amended
        disclosure requirements are currently effective and have been adopted in
        the consolidated financial statements for the year ended June 30, 2003.

        The FASB has issued Statement 149, "Amendment of Statement 133 on
        Derivative Instruments and Hedging". This Statement amends and clarifies
        financial accounting and reporting for derivative instruments, including
        certain derivative instruments embedded in other contracts, and for
        hedging activities under Statement 133. The Statement is effective for
        contracts entered into or modified after June 30, 2003 and for hedging
        relationships designated after June 30, 2003. Implementation of the
        Statement is not expected to have a material impact on the consolidated
        financial statements.

        The FASB has issued Statement 150, "Accounting for Certain Financial
        Instruments with Characteristics of both Liabilities and Equity". This
        Statement establishes standards for how an issuer classifies and
        measures certain financial instruments with characteristics of both
        liabilities and equity and requires that certain freestanding financial
        instruments be reported as liabilities in the balance sheet. For the
        Company, the Statement is effective July 1, 2003 and the Company is not
        expected to have a material impact on the consolidated financial
        statements.

                                       57
<PAGE>

NOTE Q - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

        Following are condensed financial statements of the parent company,
        StateFed Financial Corporation:

                             Condensed Balance Sheet

<TABLE>
<CAPTION>
                                                                 June 30,
                                                       ----------------------------
                                                           2003            2002
                                                       ------------    ------------
        <S>                                            <C>             <C>
        Assets
        Cash and cash equivalents                      $  1,499,160    $  1,753,813
        Investment in subsidiary                          7,769,628       7,725,032
        Investment securities                               465,235         444,515
        Loans receivable                                  3,797,435       4,110,075
        ESOP note receivable - subsidiary                    34,385         103,155
        Deferred income taxes                                24,436               -
        Other assets                                        476,021         317,570
                                                       ------------    ------------
                                                       $ 14,066,300    $ 14,454,160
                                                       ============    ============
        Liabilities
        Dividends payable                              $    129,161    $    127,887
        Deferred income taxes                                     -          20,000
        Other liabilities                                    30,357         110,703
                                                       ------------    ------------
                                                            159,518         258,590
        Stockholders' equity
        Common stock                                         17,810          17,810
        Additional paid-in capital                        8,566,238       8,527,873
        Retained earnings                                10,327,496      10,880,409
        Treasury stock                                   (5,041,185)     (5,172,468)
        Less common stock acquired by employee stock
         ownership plan                                     (30,875)        (85,575)
        Accumulated other comprehensive income               67,298          27,521
                                                       ------------    ------------
                                                         13,906,782      14,195,570
                                                       ------------    ------------
                                                       $ 14,066,300    $ 14,454,160
                                                       ============    ============
</TABLE>

                          Condensed Statement of Income

<TABLE>
<CAPTION>
                                                               Year ended June 30,
                                                       ----------------------------------
                                                          2003         2002        2001
                                                       ----------   ---------   ---------
        <S>                                            <C>          <C>         <C>
        Operating income - interest and dividend
         income                                        $  335,956   $ 583,151   $ 464,855
        Less:
           Loss on sale of real estate                          -     171,887           -
           Operating expenses                             397,451     301,180     536,268
                                                       ----------   ---------   ---------
        Income (loss) before undistributed income
         of subsidiary                                    (61,495)    110,084     (71,413)

        Equity in undistributed income of subsidiary      (87,828)    387,034     688,428
                                                       ----------   ---------   ---------
        Income (loss) before income tax                  (149,323)    497,118     617,015

        Provision (credit) for income tax                (110,506)    (33,697)    (46,307)
                                                       ----------   ---------   ---------
           Net income (loss)                           $  (38,817)  $ 530,815   $ 663,322
                                                       ==========   =========   =========
</TABLE>

                                       58
<PAGE>

NOTE Q - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - continued

                        Condensed Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                             Year ended June 30,
                                                                 -------------------------------------------
                                                                     2003           2002            2001
                                                                 -----------    ------------    ------------
        <S>                                                      <C>            <C>             <C>
        Cash flows from operating activities:
           Net income                                            $   (38,817)   $    530,815    $    663,322
           Cash dividends received from subsidiary                         -               -       3,000,000
           Deferred income taxes                                     (36,635)         27,412           9,001
           Adjustments to reconcile net income to net cash
            from operating activities:
              Depreciation and amortization                                -           9,689          38,756
              Provision for loan losses                               82,700               -               -
              Loss (gain) on sale of investments                       7,087        (106,740)         95,880
              Loss on sale of real estate held for investment              -         171,811               -
              Equity in undistributed income of subsidiary            87,828        (387,034)       (688,428)
              Change in other assets                                (158,451)          6,039         (15,685)
              Change in other liabilities                            (80,346)        (12,038)         48,835
                                                                 -----------    ------------    ------------
                                                                    (136,634)        239,954       3,151,681

        Cash flows from investing activities:
           Purchase of investment securities                        (202,640)       (375,310)              -
           Proceeds from sale or maturity of investment
            securities                                               197,514         416,962          99,789
           Proceeds from sales of real estate                              -       1,042,563               -
           Changes in investment in and advances to subsidiary             -         952,371        (374,340)
           Decrease (increase) in loans receivable                   229,940         120,986          44,965
           Payment received on ESOP debt                              68,770          68,770          68,770
                                                                 -----------    ------------    ------------
                                                                     293,584       2,226,342        (160,816)

        Cash flows from financing activities:
           Treasury stock purchased                                        -         (85,200)     (3,035,632)
           Proceeds from options exercised                           101,219          52,720         116,000
           Proceeds from note payable                                      -      (1,200,000)      1,200,000
           Dividends paid                                           (512,822)       (512,005)       (565,875)
                                                                 -----------    ------------    ------------
                                                                    (411,603)     (1,744,485)     (2,285,507)
                                                                 -----------    ------------    ------------

        Net increase (decrease) in cash and cash equivalents        (254,653)        721,811         705,358

        Cash and cash equivalents, beginning of year               1,753,813       1,032,002         326,644
                                                                 -----------    ------------    ------------

           Cash and cash equivalents, end of year                $ 1,499,160    $  1,753,813    $  1,032,002
                                                                 ===========    ============    ============
</TABLE>

                                       59
<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

        There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting
disagreements on any matter of accounting principle or financial statement
disclosure.

        On August 28, 2002, September 3, 2002 and September 12, 2002, the
Company disclosed on Forms 8-K a change of independent accounts to McGladrey &
Pullen, LLP for the fiscal year 2003.

                                       60
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act

Directors

        The table below sets forth certain information, as of June 30, 2003
regarding the composition of the Company's Board of Directors, including each
director's term of office. The Board of Directors acting as the nominating
committee has recommended and approved the nominees identified in the following
table. It is intended that the proxies solicited on behalf of the Board of
Directors (other than proxies in which the vote is withheld as to a nominee)
will be voted at the Meeting "FOR" the election of the nominees identified
below. If a nominee is unable to serve, the shares represented by all valid
proxies will be voted for the election of such substitute nominee as the Board
of Directors may recommend. At this time, the Board of Directors knows of no
reason why any nominee may be unable to serve, if elected. Except as disclosed
herein, there are no arrangements or understandings between the nominee and any
other person pursuant to which the nominee was selected.

<TABLE>
<CAPTION>
                                                                                 Shares of Common         Percent
                                     Position(s) Held       Director   Term to  Stock Beneficially           of
        Name          Age/(1)/        in the Company       Since/(2)/   Expire      Owned/(3)/           Class/(4)/
<S>                         <C> <C>                           <C>        <C>                <C>                 <C>
NOMINEES

Eugene M. McCormick         76  Director                      1979       2006               40,266/(5)/         3.1%

Sidney M. Ramey             63  Director                      1987       2006               13,044/(6)/         1.0

Andra K. Black              56  Executive Vice President      1995       2006               34,855/(7)/         2.7
                                 and Director

DIRECTORS CONTINUING
 IN OFFICE

Harry A. Winegar            75  Director                      1977       2004               28,266/(8)/         2.2

William T. Nassif           53  Director                      2000       2004               10,477/(9)/            *

Randall C. Bray             59  Chairman of the Board and     2001       2005                7,707/(10)/           *
                                 President

Kevin J. Kruse              43  Director                      1993       2005               15,504/(11)/        1.2
</TABLE>

*       less than 1%

1.      At June 30, 2003.

2.      Includes service as a director of the Bank.

3.      Amounts include shares held directly, as well as shares which are held
        in retirement accounts, or held by certain members of the named
        individuals' families, or held by trusts of which the named individual
        is a trustee or substantial beneficiary, with respect to which shares
        the respective directors may be deemed to have sole or shared voting
        and/or investment power. Amounts also include 15,474, 2,344, 3,447 and
        4,297 shares subject to options granted to Directors Black, Winegar,
        Nassif and Bray under the Stock Option Plan which options are
        exercisable within 60 days of June 30, 2003.

4.      Percentage is calculated based on 1,293,958 shares of Common Stock
        outstanding as of September 25, 2003.

5.      Includes 39,266 shares held directly and 1,000 shares held by Mr.
        McCormick's spouse.

6.      Includes 9,004 shares held directly, 1,260 shares held by Mr. Ramey's
        spouse, and 2,780 shares held jointly with his spouse

                                       61
<PAGE>

7.      Includes 4,292 shares held directly, 15,089 shares allocated to Ms.
        Black's account pursuant to the ESOP and 15,474 shares subject to
        options granted to Ms. Black under the Stock Option Plan.

8.      Includes 25,922 shares held directly and 2,344 shares subject to options
        granted to Mr. Winegar under the Stock Option Plan.

9.      Includes 7,000 shares held directly and 3,447 shares subject to options
        granted to Mr. Nassif under the Stock Option Plan.

10.     Includes 2,500 shares held directly, 910 shares allocated to Mr. Bray's
        account pursuant to the ESOP, and 4,297 shares subject to option granted
        to Mr. Bray under the Stock Option Plan.

11.     Includes 13,816 shares held jointly with his spouse, 1,688 shares held
        by Mr. Kruse's spouse.

        Set forth below is the principal occupation of each director of StateFed
Financial Corporation and of each of the nominees for director. All directors
and nominees have held their present positions for at least five years unless
otherwise indicated.

        Eugene M. McCormick. Mr. McCormick has served on the Board since 1980.
Mr. McCormick is currently retired. Until 1993, he practiced dentistry in Des
Moines, Iowa.

        Sidney M. Ramey. Mr. Ramey has served on the Board since 1987. Since
1982, Mr. Ramey has been the Manager of Peoples Abstract Company, LLC, a title
search company located in Des Moines, Iowa.

        Andra K. Black. In January 2002, Ms. Black resumed her duties as
Executive Vice President of the Company. Prior to this appointment, Ms. Black
served as Co-President from July, 2000 and prior to that as Executive Vice
President. In addition to her duties as Executive Vice President, Ms. Black is
responsible for the operations and savings departments, which include compliance
with savings regulations and disclosures, general office administration and
reporting to the Office of Thrift Supervision ("OTS") and the Internal Revenue
Service ("IRS"). Ms. Black also oversees the maintenance of the general ledger
and monthly reporting.

        Harry A. Winegar. Mr. Winegar has served on the Board since 1977. Mr.
Winegar is currently retired. Until his retirement in 1992, Mr. Winegar was a
consultant and appraiser for Carlson, McClure & McWilliams, Inc. a real estate
appraisal firm located in Des Moines, Iowa.

        William T. Nassif. On July 1, 2000, Mr. William T. Nassif was appointed
to the board of directors. Mr. Nassif is the staff attorney for Legal Services
Corporation of Iowa. Legal Services Corporation provides legal services for
elderly Iowans.

        Randall C. Bray. Mr. Bray was elected Chairman of the Board in April,
2001 and became President of the Company in January 2002. Mr. Bray is also
President of Greyhawk Partners and has been involved in the financial services
business for more than 30 years. He has been President and CEO of Midland
Savings Bank in Des Moines and was also Chairman and Founder of The Evergreen
Group, a distributor of insurance products to the banking industry.

        Kevin J. Kruse. Mr. Kruse has served on the Board since 1993. Mr. Kruse
is the Senior Vice President and Corporate Counsel for Diversified Management
Services, Inc. a trade association headquartered in Des Moines.

Section 16(a) Beneficial Ownership Reporting Compliance.

        Section 16(a) of the Securities Exchange Act of 1934 requires StateFed's
directors and executive officers, and persons who own more than 10% of the
Company's common stock to report their initial ownership of the Company's common
stock and any subsequent changes in that ownership to the SEC. Specific due
dates for these reports have been established by the SEC and the Company is
required to disclose in this proxy statement any late filings or failures to
file.

                                       62
<PAGE>

                  The Company believes, based solely on a review of the copies
of such reports furnished to us and written representations that no other
reports were required during the fiscal year ended June 30, 2003, of Section
16(a) filing requirements applicable to our executive officers, directors and
greater than 10% beneficial owners were complied with.

Item 10. Executive Compensation

        The following table sets forth information regarding compensation paid
by the Company and the Bank to their President and executive officers who made
in excess of $100,000 for services rendered during the fiscal year ended June
30, 2003.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                Long Term
                                    Annual Compensation        Compensation
                             --------------------------------  ------------
                                                                Securities
                                                                Underlying     All Other
                             Fiscal    Salary          Bonus   Options/SARs  Compensation
Name and Principal Position   Year      ($)             ($)         ($)           ($)
---------------------------  ------  ---------       --------  ------------  ------------
<S>                           <C>    <C>             <C>             <C>     <C>
Randall C. Bray, President    2003   $  64,184       $    100            --  $      9,198/(1)/

                              2002      62,400            500            --         7,800

                              2001      25,200/(2)/        --        10,744         1,800

Steven J. Blazek,             2003     107,826            100            --         2,273/(1)/
Sr. Vice President
                              2002      55,385         10,000            --            --

                              2001          --             --            --            --

John Kallemyn,                2003     100,902             40            --         2,143/(1)/
Sr. Vice President
                              2002       2,308             --            --            --

                              2001          --             --            --            --
</TABLE>

1.      Includes director fees of $9,100 for Mr. Bray and company matched 401(k)
        contributions of $98, $2,273 and $2,143 for Messrs. Bray, Blazek and
        Kallemyn, respectively.
2.      Includes consulting fees of $15,600 received in the fiscal year 2001
        prior to executive's appointment as President.

                                       63
<PAGE>

        The following table sets forth information regarding the number and
value of stock options at June 30, 2003 held by the Company's President and
executive officers who made in excess of $100,000 during the fiscal year ended
June 30, 2003.

                AGGREGATED OPTION/SAR GRANTS IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                        Number of Unexercised            In-the Money
                                                           Options/SARs at             Options/SARs at
                                                      Fiscal Year End (#)/(1)/     Fiscal Year End (#)(2)
                      Shares Acquired      Value     --------------------------  --------------------------
        Name          on Exercise (#)  Realized ($)  Exercisable  Unexercisable  Exercisable  Unexercisable
--------------------  ---------------  ------------  -----------  -------------  -----------  -------------
<S>                           <C>           <C>            <C>            <C>    <C>          <C>
Randall C. Bray               0             0%             4,297          6,447  $     7,520  $      11,282
President

Steven J. Blazek              0             0%                 0              0            0              0
Sr. Vice President

John Kallemyn                 0             0%                 0              0            0              0
Sr. Vice President
</TABLE>

----------
1.      Represents an option to purchase Common Stock awarded to the Company's
        Chief Executive Officers pursuant to the terms of the incentive stock
        option award.
2.      Represents the aggregate market value (market price of the common stock
        less the exercise price) of the option granted based upon the average of
        the bid and asked price of $11.75 per share of the common stock as
        reported on the NASDAQ Bulletin Board on June 30, 2003.

Employment Agreements and Salary Continuation Plan

        Employment Agreements. The continued success of the Bank depends to a
significant degree on the skills and competence of its officers. In April 2001,
the Bank entered into an employment agreement with President Bray. The
employment agreement provides for an initial annual base salary of $62,400,
subject to annual review and adjustment by the Company's Board of Directors, and
an initial term of three years. The agreement provides for extensions of one
year, in addition to the then-remaining term under the agreement, on each
anniversary of the effective date of the agreement, subject to a formal
performance evaluation performed by disinterested members of the Board of
Directors of the Bank. The agreement provides for termination upon the
employee's death, for cause or in certain events specified by OTS regulations.
The employment agreement is also terminable by the employee upon 60-days' notice
to the Bank.

        The employment agreement provides for payment to the employee of his
salary for the remainder of the term of the agreement, plus up to 299% of the
employee's base compensation, in the event there is a "change in control" of the
Bank where employment terminates involuntarily in connection with such change in
control or within 12 months thereafter. This termination payment is subject to
reduction by the amount of all other compensation to the employee deemed for
purposes of the Code to be contingent on a "change in control," and may not
exceed three times the employee's average annual compensation over the most
recent five-year period or be non-deductible by the Bank for federal income tax
purposes. For the purposes of the employment agreement, a "change in control" is
defined as any event which would require the filing of an application for
acquisition of control or notice of change in control pursuant to 12 C.F.R.
Sections 574.3 or 4. Such events are generally triggered prior to the
acquisition or control of 10% of the Common Stock. The agreement guarantees
participation in an equitable manner in employee benefits applicable to
executive personnel.

        Based on current salaries, if Mr. Bray's employment had been terminated
as of June 30, 2003, under circumstances entitling him to severance pay as
described above, he would have been entitled to receive a lump sum cash payment
of approximately $154,448.

                                       64
<PAGE>

Director Compensation

        The Company's directors do not receive a fee for serving on the
Company's Board of Directors. No fee is paid for membership on the Board's
committees. All Bank directors receive a fee of $700 per board meeting. A fee of
$200 is paid to non-employee directors of the Bank for committee membership.
$200 was paid to certain directors for four audit committee meetings, four
compensation committee meetings and one extra meeting.

Executive Compensation

        The Company has not paid any compensation to its executive officers
since its formation. The Company does not presently anticipate paying any
compensation to such persons until it becomes actively involved in the operation
or acquisition of business other than the Bank.

                                       65
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

Equity Compensation Plan Information

        The following table summarizes our equity compensation plan as of June
30, 2003.

<TABLE>
<CAPTION>
                                              Number of securities       Weighted-average      Number of Securities
                                           to be issued upon exercise    exercise price of   remaining available for
                                             of outstanding options    outstanding options    future issuance under
Plan Category                                 warrants and rights      warrants and rights  equity compensation plans
---------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>                            <C>
Equity compensation plans approved  by
 security holders                                              36,306           $     7.44                     19,950(1)
Equity compensation plans not approved by
 security holders                                                  --                   --                         --
</TABLE>

-----------
1.      Includes 12,902 shares available for future grants under the Company's
stock option plans and 7,048 shares available for future grants under the
Company's recognition and retention plan.

Stock Ownership of Significant Stockholders, Directors and Executive Officers

        Stockholders of record as of the close of business on September 25,
2003, will be entitled to one vote for each share then held. As of September 25,
2003, the Company had 1,293,958 shares of Common Stock issued and outstanding.
The following table sets forth as of June 30, 2003 information regarding share
ownership of: (i) those persons or entities known by management to beneficially
own more than five percent of the Company's Common Stock, (ii) the Company's
Chief Executive Officer, and (iii) all directors and executive officers as a
group.

<TABLE>
<CAPTION>
                                                                      Shares       Percent
                                                                   Beneficially      of
                             Beneficial Owner                         Owned         Class
<S>                                                                     <C>            <C>
Krause Gentle Corporation/(1)/                                          149,000        11.5%
c/o James B. Langeness
Duncan, Green, Brown, Langeness & Eckley
380 Capital Square, 400 Locust Street
Des Moines, Iowa 50309

StateFed Financial Corporation Employee Stock Ownership Plan/(2)/       103,112         8.0
13523 University Avenue
Clive, Iowa 50325

Douglas M. Kratz/(3)/                                                   126,600         9.8
Middle Road, Suite 101
Bettendorf, Iowa 52722

Randall C. Bray/(4)/                                                      7,707            *
StateFed Financial Corporation
13523 University Avenue
Clive, Iowa 50325

Directors and executive officers of the Company and the Bank
 as a group (7 persons)/(5)/                                            150,089        11.4
</TABLE>

                                       66
<PAGE>

*       less than 1%.

1.      The above information is as reported by Krause Gentle Corporation in an
        amended statement dated October 5, 2000 on Schedule 13-D/A filed
        pursuant to the Securities Exchange Act of 1934.
2.      The amount reported represents shares held by the Employee Stock
        Ownership Plan ("ESOP"), of which 97,931 shares of Common Stock were
        allocated to accounts of participants. First Bankers Trust Company,
        N.A., the trustee of the ESOP, may be deemed to beneficially own all the
        shares held by the ESOP. Pursuant to the terms of the ESOP, participants
        in the ESOP have the right to direct the voting of shares allocated to
        participant accounts. Unallocated shares held by the ESOP are voted by
        the plan trustee in the manner that the plan trustee is directed to vote
        by the majority of the plan participants who directed the plan trustee
        as to the manner of voting the shares allocated to their plan accounts.
        If an ESOP participant fails to give timely voting instructions to the
        plan trustee with respect to the voting of the shares allocated to the
        participant's account, the plan trustee is entitled to vote such shares
        in its discretion.
3.      The above information is as reported by Douglas M. Kratz in a statement
        dated November 19, 2002 on Schedule 13-D filed pursuant to the
        Securities Exchange Act of 1934.
4.      Includes 2,500 shares held directly, 910 shares allocated pursuant to
        the Company's ESOP, and 4,297 shares subject to options granted to Mr.
        Bray under the Stock Option Plan.
5.      Includes shares held directly, as well as jointly with family members,
        and shares held in retirement accounts in a fiduciary capacity or by
        certain family members, with respect to which shares the listed
        individuals or group members may be deemed to have sole voting and
        investment power. This table also includes 15,089 and 910 shares
        allocated to the accounts of Ms. Black and Mr. Bray, respectively
        pursuant to the Company's ESOP and 25,562 shares subject to options
        granted to directors and the executive officers under the Company's
        Stock Option Plan.

Item 12. Certain Relationships and Related Transactions

        The Bank has followed a policy of granting consumer loans and loans
secured by the borrower's personal residence to officers, directors and
employees. The loans to employees, executive officers and directors are made in
the ordinary course of business and on the same terms and conditions as those of
comparable transactions prevailing at the time, in accordance with the Bank's
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to executive
officers and directors must be approved by a majority of the disinterested
directors and loans to other officers and employees must be approved by the
Bank's Loan Committee.

        All loans by the Bank to its directors and executive officers are
subject to OTS regulations restricting loan and other transactions with
affiliated persons of the Bank. Loans to all directors, executive officers,
employees and their associates totaled $1.9 million at June 30, 2003, which was
13.8% of the Company's stockholders' equity at that date. All of such loans were
made on the same terms, including interest rates, as those of comparable
transactions prevailing at the time.

                                       67
<PAGE>

                                     PART IV

Item 13. Exhibits and Reports on Form 8-K

        (a)     Exhibits and Exhibit Index

<TABLE>
<CAPTION>
                                                                               Reference to
                                                                              Prior Filing or
                                                                              Exhibit Number
Exhibit Number   Document                                                     Attached Hereto
--------------   ----------------------------------------------------------   ---------------
     <S>         <C>                                                          <C>
     3(i)        Articles of Incorporation, including amendments thereto            *

     3(ii)       By-Laws                                                            **

     4           Instruments defining the rights of security holders,
                  including indentures                                              *

     9           Voting Trust Agreement                                            None

     10          Executive Compensation Plans and Arrangements
                 (a)         Employment contract between:
                       (i)   Andra K. Black and the Bank                            *
                       (ii)  Randall C. Bray and the Bank                           10
                 (b)         1993 Stock Option and Incentive Plan                   *
                 (c)         1993 Management Recognition and Retention Plan         *

     11          Statement Regarding Computation of Per Share Earnings             None

     13          Annual Report to Security Holders                            Not Applicable

     16          Letter Regarding Change in Certifying Accountant                  None

     18          Letter Regarding Change in Accounting Principles                  None

     21          Subsidiaries of Registrant                                         21

     22          Published Report Regarding Matters Submitted to Vote of
                  Security Holders                                                 None

     23          Consents of Experts and Counsel                                    23

     24          Power of Attorney                                             Not Required

     31          Rule 13a-14(a)/15d-14(a) Certifications                            31

     32          Section 1350 Certifications                                        32
</TABLE>

----------
*       Filed as exhibits to the Company's Form S-1 registration statement filed
        on September 23, 1993 (File No. 33-69314) pursuant to Section 5 of the
        Securities Act of 1933. All of such previously filed documents are
        hereby incorporated herein by reference in accordance with Item 601 of
        Regulation S-K.

**      Filed as exhibits to the Company's Annual Report on Form 10-KSB for the
        fiscal year ended June 30, 1999.

                                       68
<PAGE>

        (b)     Reports on Form 8-K

        The following Reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ending June 30, 2003:

                             Regarding Event
                Date Filed    Occurring on:    Nature of Event
                ----------   ---------------   ---------------------------------

                04/30/2003        04/28/2003   Announcement of Registrant's
                                               Third Quarter Earnings

                06/09/2003        06/06/2003   Registrant Declares Cash Dividend

Item 14. Principal Accountant Fees and Services

        McGladrey & Pullen LLP, Certified Public Accountants, provided
accounting services to the Company during the year ended June 30, 2003 in
conjunction with the audit of the Company's annual financial statements for
2003, and fees billed for other services rendered by McGladrey & Pullen, LLP and
its associated entity RSM McGladrey, Inc. during 2003. Financial statements for
the fiscal year ended June 30, 2002 had been audited by the Company's former
accounting firm, McGowen, Hurst, Clark & Smith, P.C.

Audit Fees. The aggregate fees billed to StateFed Financial Corporation by
McGladrey & Pullen, LLP for the professional services rendered for the audit of
StateFed's consolidated financial statements for fiscal 2003 and the reviews of
the consolidated financial statements included in StateFed's Forms 10-QSB for
that year were $43,400. StateFed's consolidated financial statements for fiscal
2002 and the reviews of the consolidated financial statements included in
StateFed's Forms 10-QSB, billed to StateFed by McGowen, Hurst, Clark & Smith,
P.C. for that year were $32,000.

Financial Information Systems Design and Implementation Fees. There were no fees
for financial information systems design and implementation billed to StateFed
by McGladrey & Pullen, LLP or McGowen, Hurst, Clark & Smith P.C. for fiscal
years 2003 and 2002, respectively.

All Other Fees. Other than audit fees, the aggregate fees billed to StateFed by
McGladrey & Pullen, LLP for fiscal 2003 were $17,100. The aggregate fees billed
for fiscal 2002 to StateFed by McGowen, Hurst, Clark & Smith, P.C. were $25,105.

The Audit Committee has considered whether the services provided by McGladrey &
Pullen, LLP and its associated entity RSM McGladrey, Inc., apart from the audit
services described under the heading "Audit Fees" above, are compatible with
maintaining the independence of McGladrey & Pullen, LLP.

Item 15. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

An evaluation of the StateFed's disclosure controls and procedures (as defined
in Rule13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")
as of June 30, 2003, was carried out under the supervision and with the
participation of StateFed's Chief Executive Officer, Chief Financial Officer and
several other members of StateFed's senior management. StateFed's Chief
Executive Officer and Chief Financial Officer concluded that StateFed's
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by StateFed in the
reports it files or submits under the Exchange Act is (i) accumulated and
communicated to StateFed's management (including the Chief Executive Officer and
Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. There have been no changes in our internal controls over financial
reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the
year ended June 30, 2003, that has materially effected, or is reasonably likely
to materially affect, StateFed's internal control over financial reporting.

                                       69
<PAGE>

StateFed intends to continually review and evaluate the design and effectiveness
of its disclosure controls and procedures and to improve its controls and
procedures over time and to correct any deficiencies that it may discover in the
future. The goal is to ensure that senior management has timely access to all
material financial and non-financial information concerning StateFed's business.
While StateFed believes the present design of its disclosure controls and
procedures is effective to achieve its goal, future events affecting its
business may cause StateFed to modify its disclosure controls and procedures.

                                       70
<PAGE>

                                   SIGNATURES

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


                                               STATEFED FINANCIAL CORPORATION


Date: September 29, 2003                        By: /s/   Randall C. Bray
                                                    ----------------------------
                                                Randall C. Bray, President
                                                (Duly Authorized Representative)

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


  /s/ Randall C. Bray                            /s/ Harry A. Winegar
----------------------------------------       ---------------------------------
RANDALL C. BRAY                                HARRY A. WINEGAR
Chairman of the Board                          Director
Officer

Date:  September 29, 2002                      Date:  September 29, 2003


  /s/ Eugene M. McCormick                        /s/ Sidney M. Ramey
----------------------------------------       ---------------------------------
EUGENE M. MCCORMICK                            SIDNEY M. RAMEY
Director                                       Director

Date:  September 29, 2003                      Date:  September 29, 2003


  /s/ Kevin J. Kruse                             /s/ William T. Nassif
----------------------------------------       ---------------------------------
KEVIN J. KRUSE                                 WILLIAM T. NASSIF
Director                                       Director

Date:  September 29, 2003                      Date:  September 29, 2003


  /s/ Andra K. Black
----------------------------------------
ANDRA K. BLACK
Director, Executive Vice President, Secretary
and Chief Financial and Accounting Officer

Date:  September 29, 2003

                                       71