EXHIBIT 13

                                  ANNUAL REPORT

                                    
<PAGE>


<TABLE>
<CAPTION>
                                                                                               June 30,
                                                                   ----------------------------------------------------------------
                                                                    1998          1997          1996           1995          1994
                                                                   -------       -------       -------        -------       -------
                                                                                 (In Thousands)
<S>                                                                <C>           <C>           <C>            <C>           <C>    
Selected Financial Condition Data:
----------------------------------
Total assets ...............................................       $89,802       $85,679       $76,705        $71,271       $62,773
Cash & cash equivalents ....................................         9,445         3,634         2,564          3,938         1,636
Certificates of deposits in other institutions .............         1,479         4,435         4,440          5,634         7,430
Investment securities ......................................         2,744         3,477         2,347          1,114           793
Loans receivable, net ......................................        68,980        68,178        62,708         56,420        49,760
Deposits ...................................................        53,672        50,346        45,732         45,596        42,776
FHLB advances ..............................................        18,965        19,000        15,000         10,000         5,000
Stockholders' equity .......................................        16,084        15,233        14,928         14,533        14,010

<CAPTION>
                                                                                          Year Ended June 30, 
                                                                   ----------------------------------------------------------------
                                                                     1998         1997           1996          1995           1994
                                                                   -------       -------       -------        -------       -------
                                                                                           (In Thousands)
<S>                                                                <C>           <C>           <C>            <C>           <C>    
Selected Operations Data:                                                                                                 
------------------------ 
Total interest income ......................................       $ 6,823       $ 6,407       $ 5,785        $ 5,107       $ 4,620
Total interest expense .....................................         4,043         3,626         3,194          2,601         2,179
                                                                   -------       -------       -------        -------       -------
   Net interest income .....................................         2,780         2,781         2,591          2,506         2,441
Provision for loan losses ..................................            52            36            24             24            24
                                                                   -------       -------       -------        -------       -------
   Net interest income after
    provision for loan losses ..............................         2,728         2,745         2,567          2,482         2,417
Non-interest income:
   Real estate operations ..................................           441           404           395            386           347
   Gain on sale of real estate and investments .............            44           158            41              2            28
   Net realized loss on sale of available-for-sale
    securities .............................................            --            --           (24)            --            --
   Other non-interest income ...............................           116           108            58             57            55
                                                                   -------       -------       -------        -------       -------
Total non-interest income ..................................           601           670           470            445           430
Total non-interest expense .................................         1,821         1,991         1,679          1,637         1,445
                                                                   -------       -------       -------        -------       -------
   Income before income taxes ..............................         1,508         1,424         1,358          1,290         1,402
Income tax expense .........................................           491           503           475            486           528
                                                                   -------       -------       -------        -------       -------
Net income before cumulative
  effect of change in accounting
  method ...................................................       $ 1,017       $   921           883            804           874
Cumulative effect of change in
  accounting for income taxes ..............................            --            --            --             --           (59)
                                                                   -------       -------       -------        -------       -------
Net Income .................................................       $ 1,017       $   921       $   883        $   804       $   815
                                                                   =======       =======       =======        =======       =======
</TABLE>




                                        4

<PAGE>


<TABLE>
<CAPTION>
                                                                                         Year Ended June 30,
                                                                   ----------------------------------------------------------------
                                                                     1998          1997          1996           1995          1994
                                                                   -------       -------       -------        -------       -------
<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) ...................................          1.15          1.12          1.20           1.20          1.33
  Interest rate spread information:
   Average during year .....................................          2.60          2.77          2.72           2.98          3.54
   End of year .............................................          2.41          2.65          2.80           2.52          3.28
  Net interest margin(1) ...................................          3.35          3.58          3.72           3.95          4.18
  Ratio of operating expense to average
   total assets ............................................          2.06          2.42          2.29           2.44          2.37
  Return on equity (ratio of net
   income to average equity) ...............................          6.51          6.19          6.00           5.62          7.84

Quality Ratios:
 Non-performing assets to total assets at
   end of year .............................................          1.50          1.55           .62            .20           .54
 Allowance for loan losses to
   non-performing loans ....................................        127.44         22.30         50.21         151.05         56.27

Capital Ratios:
 Stockholders' Equity to total assets at end
   of year .................................................         17.91         17.78         19.46          20.39         22.32
Average Stockholders' Equity to average
  assets ...................................................         17.71         18.10         20.05          21.33         16.93
 Ratio of average interest-earning assets to
  average interest-bearing liabilities .....................         1.153x        1.173x        1.218x         1.235x        1.170x
 Number of full-service offices ............................             2             2             2              2             2

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

(2)  No non-performing loans at year-end.
</TABLE>


                                        5

<PAGE>



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

Forward-Looking Statements

     When  used in this  filing  and in future  filings  by  StateFed  Financial
Corporation (the "Company") with the Securities and Exchange Commission,  in the
Company's  press releases or other public or shareholder  communications,  or in
oral statements made with the approval of an authorized  executive officer,  the
words or phrases "would be," "will allow,"  "intends to," "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 risks and uncertainties,  including but not limited to
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,  all or some of which 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,  and
advises readers that various factors,  including  regional and national economic
conditions,  substantial  changes in levels of market interest rates, credit and
other risks of lending and investment  activities and competitive and regulatory
factors,  could affect the Company's  financial  performance and could cause the
Company's  actual  results for future  periods to differ  materially  from those
anticipated or projected.

     The Company does not undertake,  and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.

General

     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.
Noninterest  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.

     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
profitable and 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 maintain a strong capital position
and  continue  to record  core  earnings  while  serving  its  local  community.
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 ARM loans in
recent years,  achieving a loan portfolio  consisting of 50.89% fixed rate loans
and 49.11% adjustable rate loans at June 30, 1998.


                                        6

<PAGE>



Financial Condition

     Comparison of Fiscal Years Ended June 30,1998 and June 30, 1997.

     The Company's total assets increased from $85.7 million at June 30, 1997 to
$89.8  million at June 30,  1998,  an increase of $4.1  million,  or 4.81%.  The
increase was primarily due to the increase in cash and cash  equivalents of $5.8
million,  the increase in property  acquired in settlement of loans of $952,500,
and the  increase  in  loans  receivable  of  $802,000.  The  increase  in loans
receivable was funded primarily from a decrease in investment in certificates of
deposit held for  investment of $3.0 million and an increase in deposits of $3.3
million.

     Net loans  increased  $802,000 from $68.2 million at June 30, 1997 to $69.0
million at June 30,  1998.  The  increase in the loan  portfolio  was  comprised
primarily  of $16.5  million in mortgage  loans  originated  and $2.2 million in
purchased loans, partially offset by $18.2 million in principal repayments.

     Total  deposits  increased $3.3 million from $50.3 million at June 30, 1997
to $53.7 million at June 30, 1998.  During fiscal 1998,  certificates of deposit
increased $3.2 million,  money market  accounts  increased by $313,000,  and NOW
accounts increased  $343,000,  while passbook accounts decreased  $538,000.  The
Company  did not offer any  special  marketing  programs  during the 1998 fiscal
year.

     Total  stockholders'  equity increased $ 851,300 from $15.2 million at June
30, 1997 to $16.1  million at June 30,  1998.  The increase  was  primarily  the
result of net  income of $1.0  million,  exercised  stock  options  of  $67,200,
amortization of recognition and retention plan ("RRP") awards and allocations to
the Employee Stock Ownership Plan ("ESOP") totaling  $200,900,  and the increase
in  unrealized  gains on available  for sale  securities  of $62,500,  offset by
$184,000  expended for the  repurchase of 10,000 shares of Company  common stock
and dividends declared totaling $312,200.

     Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1996.

     The Company's total assets increased from $76.7 million at June 30, 1996 to
$85.7  million at June 30, 1997,  an increase of $9.0  million,  or 11.73%.  The
increase was primarily due to the increase in loans  receivable of $5.5 million,
the increase in investments available-for-sale of $1.1 million, and the increase
in cash and cash  equivalents  of $1.1  million,  funded  primarily  from a $4.6
million increase in deposits and a $4.0 million increase in FHLB advances.

     Net loans  increased $5.5 million,  or 8.7%, from $62.7 million at June 30,
1996 to $68.2 million at June 30, 1997.  The increase in the loan  portfolio was
comprised primarily of mortgage loans originated.

     Total  deposits  increased $4.6 million from $45.7 million at June 30, 1996
to $50.3 million at June 30, 1997.  During fiscal 1997,  certificates of deposit
increased  $4.8  million,  money market  accounts  increased  by $163,000  while
passbook accounts decreased $180,000, and NOW accounts decreased $159,000.

     Total borrowed funds increased to $19.0 million at June 30, 1997 from $15.0
million at June 30, 1996.  The increase  consisted of advances  from the Federal
Home Loan Bank of Des Moines. The funds were used primarily to to fund increases
in loan demand.

     Total  stockholders'  equity increased  $305,000 from $14.9 million at June
30, 1996 to $15.2  million at June 30,  1997.  The increase  was  primarily  the
result  of  net  income  of  $921,000,   exercised  stock  options  of  $76,400,
amortization of recognition and retention plan ("RRP") awards and allocations to
the Employee Stock Ownership Plan ("ESOP") totaling  $163,000,  and the increase
in  unrealized  gains on available  for sale  securities  of $80,000,  offset by
$621,000  expended for the  repurchase of 37,400 shares of Company  common stock
and dividends declared totaling $315,000.

Results of Operations

     Comparison of Fiscal Years ended June 30, 1998 and June 30, 1997.

     General.  Net income for the year ended June 30,  1997 was  $1,017,000,  an
increase  of $96,000  compared to net income for the year ended June 30, 1997 of
$921,000.  The increase was primarily  the result of a decrease in  non-



                                       7
<PAGE>


interest  expense  of  $169,900  and a  decrease  in  income  taxes of  $12,400,
partially offset by a decrease in non-interest income of $69,100 and an increase
in the provision for loan losses of $16,000.

     Interest  Income.  Interest income  increased  $415,500 to $6.8 million for
fiscal  1998  compared  to $6.4  million  for fiscal  1997 due  primarily  to an
increase in the volume of loans receivable,  and investment securities and other
assets.

     Interest Expense. Interest expense increased $416,800 from $3.6 million for
fiscal 1997 to $4.0 million in fiscal 1998. The increase was due to the increase
in the balance of certificates of deposit.

     Provision  for Loan Losses.  The  provision for loan losses for fiscal 1998
was $52,000,  an increase of $16,000 compared to the year ended June 30, 1997 of
$36,000.  The amounts provided during the fiscal year were based on management's
quarterly  analysis of the  allowance  for loan  losses,  based on,  among other
things, the condition of the loan portfolio,  the local economy,  and regulatory
comments.  Although the Company  maintains  its  allowance  for loan losses at a
level which it considers to be adequate to provide for potential  losses,  there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of the allowance for loan
losses  is  subject  to review by the  regulatory  agencies  which can order the
establishment of additional general or specific allowances.

     Non-Interest Income.  Non-interest income decreased from $670,000 in fiscal
1997 to $601,000 in fiscal 1998. The decrease of $69,000 is primarily the result
of a $114,100  decrease  in gains on sales of real  estate,  offset by a $36,700
increase in investment in real estate  operations and a $8,400 increase in other
non-interest income.

     Non-Interest  Expense.  Non-interest expense decreased from $2.0 million in
fiscal 1997 to $1.8 million in fiscal 1998. The decrease of $170,000,  or 8.53%,
is primarily the result of a decrease in the Savings Association  Insurance Fund
special  assessment of $291,000,  a decrease in  advertising  of $19,000,  and a
decrease in Federal Deposit Insurance  premiums of $30,000,  partially offset by
an increase in  investment  real estate  operations  of $23,000,  an increase in
other  non-interest  expense of $22,000,  an increase in salaries  and  employee
benefits  of  $96,000,  an increase  in  occupancy  expense of  $14,000,  and an
increase in data processing services of $15,000.

     Income Tax Expense. Income tax expense was $490,000 in fiscal 1998 compared
to  $503,000 in fiscal  1997,  a decrease of  $13,000.  Income  taxes  decreased
primarily due to tax benefits of tax credits on investments.

     Comparison of Fiscal Years Ended June 30, 1997 and June 30, 1996.

     General.  Net  Income for the year ended  June 30,  1997 was  $921,000,  an
increase  of $38,000  compared to net income for the year ended June 30, 1996 of
$883,000.  The increase was  primarily the result of an increase in net interest
income of $190,000,  an increase in non-interest  income of $200,000,  partially
offset by an increase in non-interest expense of $312,000, an increase in income
taxes of $27,000 and an increase in the provision for loan losses of $12,000.

     Net Interest Income. Net interest income increased $190,000,  or 7.34% from
$2.6 million for the year ended June 30, 1996 to $2.8 million for the year ended
June 30, 1997.

     Interest  Income.  Interest income  increased  $622,000 to $6.4 million for
fiscal 1997  compared to $5.8  million for the fiscal 1996 due  primarily  to an
increase in average loans receivable of $7.1 million.

     Interest Expense.  Interest expense increased $431,000 from $3.2 million in
fiscal 1996 to $3.6 million in fiscal 1997. The increase was due to the increase
in the  balance of  advances  from the FHLB and to an increase in the balance of
certificates of deposit.

     Provision  for Loan Losses.  The  provision for loan losses for fiscal 1997
was $36,000,  an increase of $12,000 compared to the year ended June 30, 1996 of
$24,000.  The amounts provided during the fiscal year were based on management's
quarterly  analysis of the  allowance  for loan  losses,  based on,  among other
things, the condition of the loan portfolio,  the local economy,  and regulatory
comments.  Although the Company  maintains  its  allowance  for loan losses at a
level which it considers to be adequate to provide for potential  losses,  there
can be no assurance that future losses will not exceed estimated amounts of that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of the allowance for loan
losses  is  subject  to review by the  regulatory  agencies  which can order the
establishment of additional general or specific allowances.


                                       8
<PAGE>

     Non-Interest Income.  Non-interest income increased from $470,000 in fiscal
1996 to $670,000 in fiscal  1997.  The  increase  of $200,000 is  primarily  the
result of a $117,000  increase in gains on sales of real estate,  an increase of
$9,000 in real estate  operation  income,  an increase in net realized  gains on
sales of  available-for-sale  securities  of  $24,000,  and an increase in other
non-interest income of $49,000.

     Non-Interest  Expense.  Non-interest expense increased from $1.7 million in
fiscal 1996 to $2.0 million in fiscal 1997. The increase of $312,000,  or 18.5%,
is primarily the result of an increase in the Savings Association Insurance Fund
special  assessment  of  $291,000,  an increase in  advertising  of $35,000,  an
increase in  occupancy  expense of $8,000 and an increase in other  non-interest
expense of $27,000, partially offset by a decrease of $39,000 in Federal Deposit
Insurance   premiums  and  a  decrease  of  $7,000  in  investment  real  estate
operations.

     Income Tax Expense. Income tax expense was $503,000 in fiscal 1997 compared
to  $475,000  in fiscal  1996,  an  increase  of $28,000 or 5.9%.  Income  taxes
increased primarily due to the increase in net income.

Asset/Liability Management

     The  measurement and analysis of the exposure of the Association 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 Association  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 Association  focuses  lending  efforts toward offering  adjustable-rate
loan products as an alternative to more traditional  fixed-rate  mortgage loans.
At June 30, 1998, the Company had $34.9 million of  adjustable-rate  loans which
comprised over 49.11% of the Association's  loan portfolio.  StateFed  Financial
has not historically sold its loans.

     The  primary  objective  of the  Association'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  Association  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 Association's asset/liability management policies.

     StateFed  Financial'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 the levels of short-term  interest
rates.  The Association  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,
1998, the Company would qualify for an exemption from this rule.



                                       9
<PAGE>

     The following table sets forth, at June 30, 1998, 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 (+/-400 basis
points, measured in 100 basis point increments).

<TABLE>
<CAPTION>
                                                        Estimated Increase (Decrease) in NPV
    Change in Interest Rates    Estimated NPV           ------------------------------------
         (Basis Points)           Amount                   Amount                  Percent
         --------------           ------                   ------                  -------
                                      (Dollars in Thousands)
<S>                              <C>                     <C>                       <C>
             +400                $10,769                 $(2,421)                   (18)%
             +300                 11,645                  (1,545)                   (12)
             +200                 12,395                    (795)                    (6)
             +100                 12,924                    (266)                    (2)
               --                 13,190
             -100                 13,361                     171                       1
             -200                 13,561                     371                       3
             -300                 13,955                     765                       6
             -400                 14,495                   1,305                      10
</TABLE>


     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 above.



                                       10

<PAGE>



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,
                                          ------------------------------------------------------------------------------------------
                                                          1998                                       1997                           
                                          ------------------------------------------------------------------------------------------

                                           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 .....      $ 7,881       $   380          4.82%         $ 3,255     $   145         4.45%   
 Certificates of deposit invested in                                                                                        
   other institutions ...............        2,553           148          5.80            4,445         262         5.89    
 Investment and other securities ....        3,321           241          7.26            2,483         184         7.41    
 Loans receivable(1) ................       68,195         5,989          8.78           66,558       5,752         8.64    
 FHLB stock .........................          950            65          6.84              912          64         7.02    
                                           -------       -------       -------          -------     -------      -------    
  Total interest-earning assets(1) ..      $82,900       $ 6,823          8.23          $77,653       6,407         8.25%   
                                           =======       -------       -------          =======     -------      -------    
Interest-Bearing Liabilities:                                                                                               
  Passbook accounts .................        3,889           107          2.75          $ 4,094     $   113         2.76    
  NOW accounts ......................        1,901            25          1.32            1,867          23         1.23    
  Money market accounts .............        3,654           132          3.61            3,283         117         3.56    
  Certificates of deposit ...........       43,436         2,624          6.04           38,745       2,302         5.94    
  FHLB advances .....................       18,992         1,155          6.08           18,231       1,071         5.87    
                                                         -------       -------          -------     -------      -------    
  Total interest-bearing liabilities       $71,872         4,043          5.63          $66,220       3,626         5.48    
                                           =======       -------       -------          =======     -------      -------    
Net interest income .................                    $ 2,780                                    $ 2,781
                                                         =======                                    =======
Net interest rate spread ............                                     2.60%                                     2.77%   
                                                                       =======                                   =======    
Net earning assets ..................      $11,028                                      $11,433
                                           =======                                      =======
                                                                                                                            
Net yield on average                                                                                                        
 interest-earning assets ............                                     3.35%                                     3.58%   
                                                                       =======                                   =======    
Average interest-earning assets to                                                                                          
 average interest-bearing liabilities                       1.53x                                     1.173x
                                                         =======                                    =======
                                                                                   
<CAPTION>
                                                      Year Ended June 30,
                                            ------------------------------------ 
                                                            1996                 
                                            ------------------------------------
                                              Average      Interest     
                                            Outstanding     Earned/      Yield/  
                                              Balance        Paid         Rate   
                                              -------        ----         ----   
<S>                                           <C>          <C>           <C>
Interest-Earning Assets:                                                      
 Interest-earning bank accounts .....         $ 2,791      $   125         4.48%     
 Certificates of deposit invested in                                                 
   other institutions ...............           4,918          285         5.80      
 Investment and other securities ....           1,790          121         6.76      
 Loans receivable(1) ................          59,480        5,210         8.76      
 FHLB stock .........................             615           44         7.15      
                                              -------      -------      -------
  Total interest-earning assets(1) ..         $69,594      $ 5,785         8.31%
                                              =======      -------      -------
Interest-Bearing Liabilities:
  Passbook accounts .................         $ 4,499      $   123         2.73%
  NOW accounts ......................           1,848           42         2.27
  Money market accounts .............           3,174          113         3.56
  Certificates of deposit ...........          35,763        2,176         6.08
  FHLB advances .....................          11,846          740         6.25
                                              -------      -------      -------
  Total interest-bearing liabilities          $57,130        3,194         5.59
                                              =======      -------      -------
Net interest income .................                      $ 2,591
                                                           =======

Net interest rate spread ............                                      2.72%
                                                                        =======
Net earning assets ..................         $12,464
                                              =======
Net yield on average
 interest-earning assets.............                                      3.72%
                                                                        =======
Average interest-earning assets to
 average interest-bearing liabilities                        1.218x
                                                           ======= 
</TABLE>

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



                                       11
<PAGE>


Rate/Volume Analysis

     The  following  schedule  presents the dollar amount of changes in interest
income and interest or decrease expense for major components of interest-earning
assets and interest-bearing  liabilities.  It distinguishes between the increase
or decrease related 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,
                                                             ----------------------------------------------------------------------
                                                                        1998 v. 1997                         1997 v. 1996
                                                             ---------------------------------     --------------------------------

                                                                   Increase                             Increase
                                                                  (Decrease)                           (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 ......................       $ 222        $  13        $ 235        $  21        $  (1)       $  20
 Certificates of deposit invested in other
  institutions .......................................        (110)          (4)        (114)         (28)           5          (23)
 Investments and other securities ....................          61           (4)          57           50           13           63
 Loans receivable ....................................         143           94          237          613          (71)         542
 FHLB stock ..........................................           3           (2)           1           21           (1)          20
                                                             -----        -----        -----        -----        -----        -----
   Total interest-earning assets .....................       $ 319        $  97        $ 416        $ 677        $ (55)       $ 622
                                                             =====        =====        =====        =====        =====        =====

Interest-bearing liabilities:
 Passbook accounts ...................................          (6)          --           (6)         (11)           1          (10)
 NOW accounts ........................................          --            2            2          (19)          --          (19)
 Money market accounts ...............................          13            2           15            4           --            4
 Certificates of deposit .............................         283           39          322          178          (52)         126
 FHLB advances .......................................          46           38           84          377          (46)         331
                                                             -----        -----        -----        -----        -----        -----
   Total interest-bearing
    liabilities ......................................       $ 336        $  81        $ 417        $ 529        $ (97)       $ 432
                                                             =====        =====        =====        =====        =====        =====

Net interest income ..................................                                 $  (1)                                 $ 190
                                                                                       =====                                  =====
</TABLE>



                                       12
<PAGE>


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,
                                                                               -----------------------------------------
                                                                                1998              1997              1996
                                                                               -----             -----             ----- 
<S>                                                                            <C>               <C>               <C>   
Weighted average yield on:
 Loans receivable .........................................................    8.477%            8.517%            8.548%
 Interest-earning bank accounts ...........................................    5.49              5.50              5.15
 Certificates of deposit invested in other institutions ...................    6.07              6.01              6.02
 Investments and other securities .........................................    6.71              7.33              6.30
 FHLB stock ...............................................................    6.75              7.00              7.00
   Combined weighted average yield on interest-earning assets .............    8.028             8.181             8.227
Weighted average rate paid on:
 Passbook accounts ........................................................    2.827             2.827             2.827
 NOW accounts .............................................................    1.422             1.070             2.504
 Money market accounts ....................................................    3.291             3.290             3.300
 Certificates of deposit ..................................................    6.100             5.830             5.938
 FHLB advances ............................................................    5.983             6.338             5.729
   Combined weighted average rate paid on interest- bearing
      liabilities .........................................................    5.621             5.534             5.429
Spread ....................................................................    2.407             2.647             2.798
</TABLE>

Liquidity and Capital Resources

     The OTS requires minimum levels of liquid assets. OTS regulations presently
require  the  Company to  maintain  an average  daily  balance of liquid  assets
(United State Treasury,  federal agency, and other investments having maturities
of five years or less)  equal to at least 5.0% of the sum of its  average  daily
balance of net withdrawable  deposit accounts and borrowings payable in one year
or  less.  Such  requirements  may be  changed  from  time to time by the OTS to
reflect changing economic conditions. Such investments are intended to provide a
source of relatively liquid funds upon which the Company may rely, if necessary,
to fund deposit  withdrawals and other  short-term  funding needs. The Company's
regulatory  liquidity at June 30, 1998 was 10.0%.  In addition to the regulatory
liquidity  requirement,  the Company is required to maintain  short-term  liquid
assets, as defined,  equal to 1.0% of the average sum of net withdrawal deposits
and other liabilities,  as defined.  StateFed  Financial's  short-term liquidity
ratio at June 30, 1998 was 10.0%.

     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, 1998 has been the increasing deposit base. The net increase in deposits
was $3.3 million during fiscal year 1998.

     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, 1998,  the Company had  outstanding
commitments to extend credit which  amounted to  $1,644,000.  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.


                                       13
<PAGE>

     Certificates of deposit scheduled to mature in one year or less at June 30,
1998,  totaled  approximately  $29.6  million.  Based on historical  experience,
management believes that a significant portion of such deposits will remain with
the Association.  There can be no assurance,  however,  that the Association can
retain all such deposits. At June 30, 1998, the Association had $19.0 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, 1998,  the  Company's  stockholders'
equity totaled $16.1 million, or 17.91% of assets.

     At June 30,  1998,  the  Association  had tangible and core capital of $9.4
million,   or  11.18%  of  adjusted  total  assets,   respectively,   which  was
approximately  $8.1 million and $6.6 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,  1998,  the  Association  had  risk-based  capital  of $9.6  million
(including $9.4 million in core capital),  or 19.31% of risk-weighted  assets of
$49.8  million.  This amount was $5.6 million above the 8% requirement in effect
on that  date.  The  Association  is  presently  in  compliance  with the  fully
phased-in capital requirements.

Impact of Year 2000

     Much has been written about the potential Year 2000 problems that may arise
with  information   technology   systems.   Many  computer  programs  and  other
technological devices that can only distinguish the final two digits of the year
entered (a common  programming  practice in earlier  years) are expected to read
entries for the year 2000 as the year 1900 and compute  payments,  interest  and
other information  incorrectly or may be unable to function.  Rapid and accurate
data processing is essential to the operation of the Company. Data processing is
also  essential  to most other  financial  institutions  and the  customers  and
suppliers of the Company.

     A  third-party  hardware and software  company  provides the material  data
processing of the Company.  This hardware and software  provider has advised the
Company  that it expects to be Year 2000  compliant  before the end of  calendar
year 1998.  However,  if the hardware and software  provider is unable to become
compliant  with Year 2000 issues,  the Company may experience  significant  data
processing  delays,  mistakes or failures.  These  delays,  mistakes or failures
could have a significant  adverse impact on the financial  condition and results
of operations of the Company.

     During 1998, the Company, in the normal course of operations, installed new
hardware and software supplied by the third-party data processor. The Company is
conducting tests of the hardware and software for Year 2000 compliance. Based on
the results of these tests and its  evaluation  of other  hardware  and software
used  by the  Company,  including  other  technological  equipment  used  by the
Company, management does not anticipate incurring significant additional expense
to implement additional corrective actions.

     Management  believes that  appropriate  actions have been taken to evaluate
Year 2000 risks and to implement  procedures  necessary to address  those risks.
Management  has also  developed  a  contingency  plan that  outlines  courses of
actions that would be followed should the Company encounter computer  processing
or general operational problems arising from the Year 2000 issue.

Impact of Inflation and Changing Prices

     The Consolidated  Financial  Statements and Notes thereto  presented herein
have been prepared in accordance with generally accepted  accounting  principles
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.



                                       14
<PAGE>

Impact of New Accounting Standards

     The Financial  Accounting  standards  Board  ("FASB")  issued  Statement of
Financial Accounting Standard No. 130, "Reporting  Comprehensive  Income" ("SFAS
No. 130"), in June 1997. This Statement  establishes standards for the reporting
and display of  comprehensive  income and its  components  (revenues,  expenses,
gains and losses) in a full set of  general-purpose  financial  statements.  The
Statement requires that an enterprise (a) classify items of other  comprehensive
income by their nature in a financial  statement and (b) display the accumulated
balance of other  comprehensive  income  separately  from retained  earnings and
additional  paid-in  capital in the equity  section of a statement  of financial
position.  The Statement is effective for fiscal years  beginning after December
15, 1997 and  requires  reclassification  of  financial  statements  for earlier
periods provided for comparative purposes.

     The FASB also issued SFAS No. 131 in June 1997, "Disclosures about Segments
of an Enterprise and Related Information".  This Statement establishes standards
for the way that public business  enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures about products and services,  geographic areas, and major customers.
This Statement  supercedes SFAS No. 14,  "Financial  Reporting for Segments of a
Business".  The Statement is effective for fiscal years beginning after December
15, 1997. In the initial year of adoption,  comparative  information for earlier
years is to be restated.

     The Company  expects to adopt these  statements  when required.  Management
believes  adoption  will not have a material  effect on  financial  position and
results of operations, nor will adoption require additional capital resources.


                                       15
<PAGE>



                         STATEFED FINANCIAL CORPORATION

                      CONSOLIDATED FINANCIAL STATEMENTS AND
                          INDEPENDENT AUDITOR'S REPORT

                                  JUNE 30, 1998







<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


Board of Directors
StateFed Financial Corporation
Des Moines, Iowa

We have  audited  the  accompanying  consolidated  balance  sheets  of  StateFed
Financial  Corporation  and  subsidiary  as of June 30,  1998 and 1997,  and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1998.  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 audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
StateFed  Financial  Corporation and its subsidiary as of June 30, 1998 and 1997
and the  consolidated  results of their operations and their cash flows for each
of the three  years in the  period  ended  June 30,  1998,  in  conformity  with
generally accepted accounting principles.

Vroman, McGowen, Hurst, Clark & Smith, P.C.



Des Moines, Iowa
August 7, 1998


<PAGE>

                         STATEFED FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                             June 30,
                                                                                                -----------------------------------
                                                                                                    1998                   1997
                                                                                                ------------           ------------
<S>                                                                                             <C>                    <C>         
ASSETS
       Cash and cash equivalents
             Non-interest bearing                                                               $    338,612           $    180,607
             Interest bearing                                                                      9,106,792              3,453,479
                                                                                                ------------           ------------
                                                                                                   9,445,404              3,634,086
       Investments in certificates of deposit                                                      1,478,514              4,435,425
       Investment securities available-for-sale                                                    2,743,518              3,477,168
       Loans receivable, net                                                                      68,979,770             68,177,746
       Real estate acquired for development                                                          231,870                435,484
       Real estate held for investment, net                                                        2,262,060              1,933,532
       Property acquired in settlement of loans                                                    1,286,452                333,939
       Office property and equipment, net                                                          1,564,077              1,418,982
       Federal Home Loan Bank stock, at cost                                                         949,000                950,000
       Accrued interest receivable                                                                   542,246                567,478
       Other assets                                                                                  318,654                314,754
                                                                                                ------------           ------------

                  Total Assets                                                                  $ 89,801,565           $ 85,678,594
                                                                                                ============           ============


LIABILITIES AND STOCKHOLDERS' EQUITY
       Deposits                                                                                 $ 53,671,860           $ 50,345,972
       Advances from Federal Home Loan Bank                                                       18,964,890             19,000,000
       Advances from borrowers for taxes and insurance                                               340,686                490,053
       Accrued interest payable                                                                      134,251                128,881
       Income taxes
             Current                                                                                  19,019                 29,327
             Deferred                                                                                213,000                171,000
       Accounts payable and other liabilities                                                        295,278                201,982
       Dividends payable                                                                              78,295                 78,372
                                                                                                ------------           ------------
                  Total Liabilities                                                               73,717,279             70,445,587

       Stockholders' equity
             Preferred stock, $.01 par value, 500,000 shares authorized,
               none issued
             Common stock, $.005 par value, 2,000,000 shares authorized
               1,780,972 shares issued with 1,565,892 (1998) and 1,567,446
               (1997) shares outstanding                                                               8,905                  8,905
             Additional paid-in capital                                                            8,483,110              8,398,857
             Retained earnings - substantially restricted                                          9,457,310              8,752,218
             Less treasury stock (215,080 and 213,526 shares, at cost)                            (1,643,697)            (1,560,859)
             Less common stock acquired by:
                  Employee stock ownership plan                                                     (341,270)              (413,940)
                  Retention and recognition plan                                                          --                 (9,636)
             Net unrealized gains on available-for-sale securities,
              net of income taxes                                                                    119,928                 57,462
                                                                                                ------------           ------------
                  Total Stockholders' Equity                                                      16,084,286             15,233,007
                                                                                                ------------           ------------

                  Total Liabilities and Stockholders' Equity                                    $ 89,801,565           $ 85,678,594
                                                                                                ============           ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

<PAGE>

                         STATEFED FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                                  Year ended June 30,
                                                                                 --------------------------------------------------
                                                                                    1998                 1997              1996
                                                                                 -----------         -----------        -----------
<S>                                                                              <C>                 <C>                <C>        
INTEREST INCOME
       Loans receivable interest                                                 $ 5,987,884         $ 5,752,351        $ 5,210,354
       Investment securities and other interest                                      834,682             654,681            575,072
                                                                                 -----------         -----------        -----------
                                                                                   6,822,566           6,407,032          5,785,426
INTEREST EXPENSE
       Deposits                                                                    2,887,066           2,555,022          2,454,135
       Advances from Federal Home Loan Bank                                        1,155,461           1,070,715            740,109
                                                                                 -----------         -----------        -----------
                                                                                   4,042,527           3,625,737          3,194,244
                                                                                 -----------         -----------        -----------

             NET INTEREST INCOME                                                   2,780,039           2,781,295          2,591,182

PROVISION FOR LOAN LOSSES                                                             52,000              36,000             24,000
                                                                                 -----------         -----------        -----------

             NET INTEREST INCOME AFTER
               PROVISION FOR LOAN LOSSES                                           2,728,039           2,745,295          2,567,182

NON-INTEREST INCOME
       Investment real estate operations                                             440,718             404,035            394,519
       Gain on sales of real estate                                                   44,017             158,154             41,269
       Net realized loss on sales of available-for-sale securities                    (1,875)                 --            (23,787)
       Other                                                                         117,977             107,717             58,297
                                                                                 -----------         -----------        -----------
                                                                                     600,837             669,906            470,298
NON-INTEREST EXPENSE
       Salaries and employee benefits                                                930,892             835,207            846,725
       Investment real estate operations                                             267,824             244,224            251,650
       Occupancy expenses                                                            132,669             118,447            110,523
       Federal deposit insurance premiums                                             57,800              88,059            127,257
       SAIF special assessment                                                            --             291,331                 --
       Data processing services                                                       99,239              83,739             74,635
       Advertising                                                                    33,327              52,715             17,977
       Other                                                                         299,386             277,336            250,459
                                                                                 -----------         -----------        -----------
                                                                                   1,821,137           1,991,058          1,679,226
                                                                                 -----------         -----------        -----------
             INCOME BEFORE PROVISION
               FOR INCOME TAXES                                                    1,507,739           1,424,143          1,358,254

PROVISION FOR INCOME TAXES                                                           490,460             502,818            475,400
                                                                                 -----------         -----------        -----------

             NET INCOME                                                          $ 1,017,279         $   921,325        $   882,854
                                                                                 ===========         ===========        ===========

Basic earnings per share                                                         $      0.68         $      0.62        $      0.57
                                                                                 ===========         ===========        ===========
Diluted earnings per share                                                       $      0.66         $      0.60        $      0.55
                                                                                 ===========         ===========        ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

<PAGE>

                         STATEFED FINANCIAL CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                    Years ended June 30, 1998, 1997, and 1996
                                              --------------------------------------------------------------------------------------
                                                                                                                           Common   
                                                              Additional                                    Stock          Stock    
                                                 Common        Paid-in        Retained       Treasury      Acquired       Acquired  
                                                  Stock        Capital        Earnings        Stock         By ESOP        By RRP   
                                              --------------------------------------------------------------------------------------
<S>                                           <C>            <C>            <C>           <C>            <C>            <C>         
Balance at June 30, 1995                      $     8,905    $ 8,338,740    $ 7,591,066   $  (708,475)   $  (570,151)   $  (106,080)

 Net income for the year                                                        882,854                                             
 Dividends declared                                                            (327,846)                                            
 ESOP common stock released for
   allocation                                                     57,061                                      79,940                
 Amortization of RRP contributions                                                                                           64,302 
 Treasury stock acquired - 25,000
   shares, at cost                                                                           (418,750)                              
 Treasury stock reissued to fund stock
   options exercised,-5,899 shares                               (18,877)                      77,867                               
 Change in unrealized gains (losses)
   on available-for-sale securities                                                                                                 
                                              --------------------------------------------------------------------------------------

Balance at June 30, 1996                            8,905      8,376,924      8,146,074    (1,049,358)      (490,211)       (41,778)

 Net income for the year                                                        921,325                                             
 Dividends declared                                                            (315,181)                                            
 ESOP common stock released for                                                                                                     
   allocation                                                     54,877                                      76,271                
 Amortization of RRP contributions                                                                                           32,142 
 Treasury stock acquired - 37,400
   shares, at cost                                                                           (620,825)                              
 Treasury stock reissued to fund stock options
   exercised, -7,638 shares                                      (32,944)                     109,324                               
 Change in unrealized gains (losses)
   on available-for-sale securities                                                                                                 
                                              --------------------------------------------------------------------------------------

Balance at June 30, 1997                            8,905      8,398,857      8,752,218    (1,560,859)      (413,940)        (9,636)

 Net income for the year                                                      1,017,279                                             
 Dividends declared                                                            (312,187)                                            
 ESOP common stock released for                                                                                                     
   allocation                                                    118,559                                      72,670                
 Amortization of RRP contributions                                                                                            9,636 
 Treasury stock acquired - 10,000
   shares, at cost                                                                           (184,375)                              
 Treasury stock reissued to fund stock options
   exercised - 14,534 shares                                     (34,306)                     101,537                               
 Change in unrealized gains (losses)
   on available-for-sale securities                                                                                                 
                                              --------------------------------------------------------------------------------------
Balance at June 30, 1995                      $     8,905    $ 8,483,110    $ 9,457,310   $(1,643,697)   $  (341,270)   $        -- 
                                              ======================================================================================

<CAPTION>


                                          Years ended June 30, 1998, 1997, and 1996
                                          -----------------------------------------
                                                  Unrealized       
                                                Gains (Losses)      Total    
                                                    on AFS       Stockholders'  
                                                  Securities        Equity   
                                                ----------------------------
<S>                                               <C>            <C>        
Balance at June 30, 1995                          $   (21,250)   $14,532,755

 Net income for the year                                             882,854
 Dividends declared                                                 (327,846)
 ESOP common stock released for
   allocation                                                        137,001
 Amortization of RRP contributions                                    64,302
 Treasury stock acquired - 25,000
   shares, at cost                                                  (418,750)
 Treasury stock reissued to fund stock
   options exercised,-5,899 shares                                    58,990
 Change in unrealized gains (losses)
   on available-for-sale securities                    (1,001)        (1,001)
                                                ----------------------------

Balance at June 30, 1996                              (22,251)    14,928,305

 Net income for the year                                             921,325
 Dividends declared                                                 (315,181)
 ESOP common stock released for                                           --
   allocation                                                        131,148
 Amortization of RRP contributions                                    32,142
 Treasury stock acquired - 37,400
   shares, at cost                                                  (620,825)
 Treasury stock reissued to fund stock options
   exercised, -7,638 shares                                           76,380
 Change in unrealized gains (losses)
   on available-for-sale securities                    79,713         79,713
                                                ----------------------------

Balance at June 30, 1997                               57,462     15,233,007

 Net income for the year                                           1,017,279
 Dividends declared                                                 (312,187)
 ESOP common stock released for                                           --
   allocation                                                        191,229
 Amortization of RRP contributions                                     9,636
 Treasury stock acquired - 10,000
   shares, at cost                                                  (184,375)
 Treasury stock reissued to fund stock options
   exercised - 14,534 shares                                          67,231
 Change in unrealized gains (losses)
   on available-for-sale securities                    62,466         62,466
                                                ----------------------------
Balance at June 30, 1995                          $   119,928    $16,084,286
                                                ============================
</TABLE>


   The accompanying notes are an integral part of these financial statements.
<PAGE>

                         STATEFED FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                   Year ended June 30,
                                                                                     ----------------------------------------------
                                                                                          1998            1997             1996
                                                                                     ------------     ------------     ------------
<S>                                                                                  <C>              <C>              <C>         
Cash flows from operating activities
        Net income                                                                   $  1,017,279     $    921,325     $    882,854
        Adjustments to reconcile net income to
          net cash provided by operating activities:
                Depreciation                                                              102,612          111,940          117,439
                Gain on sale of real estate                                               (44,017)        (158,154)          41,269
                Amortization of ESOP and RRP contributions                                200,865          163,291          201,303
                Realized loss on sale of available-for-sale securities                     (1,875)              --           23,787
                Amortization of unearned interest                                         (45,143)              --               --
                Deferred loan fees                                                        (32,165)          13,305           10,814
                Provision for losses on  loans                                             52,000           36,000           24,000
                Deferred income taxes                                                      11,029           38,000          (35,400)
                Change in:
                         Accrued interest receivable                                       25,232          (33,772)         (94,222)
                         Other assets                                                      (3,900)          47,740            1,022
                         Accrued interest payable                                           5,370             (952)          12,471
                         Current income tax liability                                     (10,308)          24,072          (26,559)
                         Accounts payable and other liabilities                            93,296           12,677          (59,720)
                                                                                     ------------     ------------     ------------
                         Net cash provided by operating activities                      1,370,275        1,175,472        1,099,058

Cash flows from investing activities
        Investment in certificates of deposits                                            (99,000)         (99,000)              --
        Maturity of investments in certificates of deposit                              3,052,000           99,000        1,188,000
        Proceeds from sale or maturity of available-for-sale
          investment securities                                                         1,650,000          200,000          453,420
        Purchase of available-for-sale investment securities                             (771,984)      (1,250,407)      (1,711,059)
        (Purchase) redemption of FHLB stock                                                 1,000         (200,000)        (250,000)
        Net increase in loans outstanding                                              (1,435,034)      (5,669,007)      (6,000,121)
        Investment in real estate held for investment                                    (359,497)        (859,781)          (3,450)
        Investment in real estate held for development                                    (36,386)         (75,890)        (432,540)
        Proceeds from sale of real estate                                                      --           29,264               --
        Investment in property acquired in settlement of loans                            (55,321)              --               --
        Purchases of property and equipment                                              (216,738)         (15,676)         (35,638)
        Increase in other assets                                                               --               --         (100,000)
                                                                                     ------------     ------------     ------------
                         Net cash flows provided (used) by investing activities         1,729,040       (7,841,497)      (6,891,388)

Cash flows from financing activities
        Net increase in deposits                                                        3,325,888        4,614,144          135,523
        Advances from Federal Home Loan Bank                                           14,000,000       12,000,000       11,000,000
        Repayment of Federal Home Loan Bank advances                                  (14,035,110)      (8,000,000)      (6,000,000)
        Net decrease in advances from borrowers                                          (149,367)         (15,696)         (27,459)
        Proceeds from stock options exercised                                              67,231           76,380           58,990
        Dividends paid                                                                   (312,264)        (318,159)        (329,756)
        Treasury stock purchased                                                         (184,375)        (620,825)        (418,750)
                                                                                     ------------     ------------     ------------
                         Net cash flows provided by financing activities                2,712,003        7,735,844        4,418,548
                                                                                     ------------     ------------     ------------

CHANGE IN CASH AND CASH EQUIVALENTS                                                     5,811,318        1,069,819       (1,373,782)
                                                                                     ------------     ------------     ------------

CASH AND CASH EQUIVALENTS, beginning of year                                            3,634,086        2,564,267        3,938,049
                                                                                     ------------     ------------     ------------

        CASH AND CASH EQUIVALENTS, end of year                                       $  9,445,404     $  3,634,086     $  2,564,267
                                                                                     ============     ============     ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BUSINESS - StateFed Financial Corporation (the Company),  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  Association).  Its  primary  business  activity  is  the
     operation of the Association.

     The Association provides a full range of banking services to individual and
     corporate  customers from its two offices located in Des Moines,  Iowa. The
     Association's wholly-owned subsidiary, State Service Corporation,  owns and
     operates residential apartment units.

     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 generally accepted  accounting  principles 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.

     Management  believes that the allowances for losses on loans and valuations
     of assets  acquired by  foreclosure  are  adequate and  appropriate.  While
     management  uses  available  information  to recognize  losses on loans and
     assets  acquired  by  foreclosure,  future loss may be  accruable  based on
     changes in economic  conditions,  particularly  the economic  conditions of
     central Iowa. In addition, various regulatory agencies, as an integral part
     of their examination process,  periodically review the Company's allowances
     for losses on loans and valuations of assets acquired by foreclosure.  Such
     agencies  may require the Company to recognize  additional  losses based on
     their  judgment  of  information  available  to them at the  time of  their
     examination.

     INVESTMENTS  IN   CERTIFICATES   OF  DEPOSIT  -  The  Company   invests  in
     certificates  of  deposit  issued  by  other  federally  insured  financial
     institutions  located  throughout the United States. The Company limits its
     investments  in  certificates  to $100,000 per financial  institution.  The
     investments in  certificates  of deposit are carried at cost.  Brokerage or
     other fees paid to acquire the  certificates  are capitalized and amortized
     against  interest income,  using the interest method,  over the term of the
     certificate.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     INVESTMENT  AND OTHER  SECURITIES - Investments  in debt  securities  which
     management  has the  intent  and the  Company  has the  ability  to hold to
     maturity are carried at cost,  adjusted for purchase premiums or discounts.
     Purchase  premiums or discounts are recognized in interest income using the
     interest method over the period to maturity.

     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 net amount in a separate component of stockholders' equity.

     The  Association,  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).  The  stock is  recorded  at cost,  which
     represents anticipated redemption value.

     Gains and losses on the sale of investment  securities are determined using
     the specific identification method.

     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.

     A valuation  allowance  is provided  for  estimated  losses on loans when a
     probable and reasonably  estimable  loss or decline in value occurs.  Loans
     are reviewed periodically to determine potential problems at an early date.
     The Company's experience has shown that foreclosures on loans can result in
     some loss.  Therefore,  in addition to an allowance for specific loans, the
     Company makes a provision  for losses based in part on experience  and part
     on prevailing  market  conditions.  Additions to allowances  are charged to
     earnings.

     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 had non-accrual loans with balances aggregating
     $96,000 and $810,000 at June 30, 1998 and 1997, respectively.

      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.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     PROPERTY  ACQUIRED  IN  SETTLEMENT  OF  LOANS -  Property  acquired  in the
     settlement  of loans,  or where  the loan is  in-substance  foreclosed,  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.  Costs
     relating to  improvement  of the property are  capitalized,  whereas  costs
     relating to the holding of the property are expensed.  Valuation allowances
     are  established  and adjusted  periodically  by management if the carrying
     value of the property exceeds its fair value,  less estimated costs to sell
     the property.

     OFFICE  PROPERTY  AND  EQUIPMENT  AND REAL  ESTATE  HELD FOR  INVESTMENT  -
     Property  and  equipment  acquired  by the  Company  is  recorded  at cost.
     Depreciation is provided using  straight-line  or accelerated  methods over
     the estimated useful lives of the related assets.

     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 - The Company  provides  for  deferred  income taxes using an
     asset-and-liability  method  of  accounting  for  income  taxes.  Under the
     asset-and-liability  method,  deferred  income taxes are recognized for the
     tax consequences of "temporary  differences" by applying enacted  statutory
     tax rates to differences  between financial  statement carrying amounts and
     the tax bases of existing assets and liabilities.

     The Company  and its  subsidiary  file a  consolidated  federal  income tax
     return and separate state income tax returns.

     EFFECT OF NEW FINANCIAL  ACCOUNTING  STANDARDS - The  Financial  Accounting
     Standards Board (FASB) issued  Statement of Financial  Accounting  Standard
     No. 130,  "Reporting  Comprehensive  Income," in June 1997.  This Statement
     establishes standards for the reporting and display of comprehensive income
     and its components (revenues,  expenses, gains and losses) in a full set of
     general-purpose  financial  statements.  The  Statement  requires  that  an
     enterprise (a) classify items of other comprehensive income by their nature
     in a financial  statement and (b) display the accumulated  balance of other
     comprehensive  income  separately  from  retained  earnings and  additional
     paid-in capital in the equity section of a statement of financial position.
     The Statement is effective for fiscal years  beginning  after  December 15,
     1997 and  requires  reclassification  of financial  statements  for earlier
     periods provided for comparative purposes.

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     The FASB  also  issued  SFAS No.  131,  in June  1997,  "Disclosures  about
     Segments  of  an  Enterprise  and  Related  Information".   This  Statement
     establishes  standards for the way that public business  enterprises report
     information  about operating  segments in annual  financial  statements and
     requires that those enterprises report selected information about operating
     segments  in interim  financial  reports  issued to  shareholders.  It also
     establishes  standards for related disclosures about products and services,
     geographic areas, and major customers.  This Statement  supercedes SFAS No.
     14,  "Financial  Reporting  for Segments of a Business".  The  Statement is
     effective  for fiscal years  beginning  after  December  15,  1997.  In the
     initial year of adoption,  comparative  information for earlier years is to
     be restated.

     The Company  expects to adopt these  statements  when required.  Management
     believes adoption will not have a material effect on financial position and
     results  of  operations,  nor  will  adoption  require  additional  capital
     resources.

     EARNINGS PER SHARE - Basic  earnings  per share is computed  based upon the
     weighted-average  shares outstanding during the period,  less shares in the
     ESOP that are unallocated and not committed to be released. Weighed-average
     common shares outstanding  totaled  1,487,881,  1,489,648 and 1,545,622 for
     the years ended June 30, 1998, 1997 and 1996, respectively.

     Diluted  earnings  per  share is  computed  by  considering  common  shares
     outstanding  and dilutive  potential  common  shares to be issued under the
     Company's   stock  option  plan.   Weighed-average   common  shares  deemed
     outstanding for the purpose of computing diluted earnings per share totaled
     1,545,208,  1,532,881 and 1,593,337 for the years ended June 30, 1998, 1997
     and 1996, respectively.

     During fiscal 1998, the Company began presenting earning per share pursuant
     to the  provisions of SFAS No. 128 "Earnings Per Share."  Accordingly,  the
     fiscal 1997 and 1996 earnings per share  presentations have been revised to
     conform to SFAS No. 128.

     STOCK SPLIT - On October 22,  1997,  the Board of  Directors  authorized  a
     one-for-one common stock split effective October 31, 1997, thereby doubling
     the number of issued and  outstanding  common shares and decreasing the par
     value of each share from $.01 to $.005.  All references in the accompanying
     financial  statements  to the number of common shares and per share amounts
     have been restated to reflect the stock split.

     FINANCIAL  STATEMENT  PRESENTATION  - Certain items in prior year financial
     statements have been reclassified to conform to the 1998 presentation.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - STATEMENT OF CASH FLOWS

For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with maturities of three months or less, when purchased,
to be cash equivalents. The Company had cash deposits of approximately
$8,400,000 at the Federal Home Loan Bank of Des Moines at June 30, 1998.

<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                                           ------------------------------------------
                                                              1998            1997            1996
                                                           ----------      ----------      ----------
<S>                                                        <C>             <C>             <C>       
Supplemental Disclosures of Cash Flow Information
   Income taxes paid                                       $  489,300      $  441,000      $  533,000
                                                           ==========      ==========      ==========
   Interest paid on deposits and FHLB advances
     (includes interest credited to deposit accounts)      $4,046,000      $3,627,000      $3,182,000
                                                           ==========      ==========      ==========
</TABLE>

      Noncash Investing and Financing Activities

     Property  acquired  through  foreclosure  totaled  $1,150,000  and $449,000
     during fiscal years 1998 and 1997, respectively.  The Company also financed
     $730,000 and $299,000 of loans for  borrowers to purchase real estate owned
     by the Company during fiscal years 1998 and 1997, respectively.

     The Company had no significant  noncash  investing or financing  activities
     during the years ended June 30, 1996.

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.  Following is a
     summary of the future maturities of the certificates at June 30, 1998:

                                             Interest
                                               Rate              Amount
                                           ------------       -------------
    Mature during fiscal year:
       1999                                5.40% - 6.10%         $  891,000
       2000                                5.25% - 5.90%            388,000
       2001                                6.70% - 7.00%                 --
       2002                                6.85% - 7.00%            198,000
                                                              -------------
                                                                  1,477,000
    Unamortized broker fees                                           1,514
                                                              -------------
                                                                $ 1,478,514
                                                              =============


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - INVESTMENTS IN CERTIFICATES OF DEPOSIT - Continued

     Following is a summary of certificates by interest rate range:

                                                        June 30,
                                         -------------------------------------
                                              1998                   1997
                                         --------------        ---------------
           Interest rates:                                     
              5.00% - 5.99%              $      792,000        $     1,971,000
              6.00% - 6.99%                     396,000              2,071,000
              7.00% - 7.99%                     289,000                289,000
              Over 8%                                --                 99,000
                                         --------------        ---------------
                                              1,477,000              4,430,000
              Unamortized broker fees             1,514                  5,425
                                         --------------        ---------------
                                         $    1,478,514        $     4,435,425
                                         ==============        ===============
                                                                    
NOTE D - INVESTMENT SECURITIES

     Following  is a  summary  of  investment  securities  (all  securities  are
     classified as available-for-sale):

<TABLE>
<CAPTION>
                                                      Gross           Gross
                                    Amortized       Unrealized      Unrealized          Fair
                                      Cost            Gains           Losses            Value
                                   ----------      ----------      ------------      ----------
<S>                                <C>             <C>             <C>               <C>       
June 30, 1998:
   U.S. government and agency
     debt securities               $1,361,292      $   81,622      $         --      $1,442,914
   Equity securities                1,185,529         115,075                --       1,300,604
                                   ----------      ----------      ------------      ----------
                                   $2,546,821      $  196,697      $         --      $2,743,518
                                   ==========      ==========      ============      ==========
June 30, 1997:
   U.S. government and agency
     debt securities               $2,250,000      $   20,055      $     13,428      $2,256,627
   Equity securities                1,169,706          51,462               627       1,220,541
                                   ----------      ----------      ------------      ----------
                                   $3,419,706      $   71,517      $     14,055      $3,477,168
                                   ==========      ==========      ============      ==========
</TABLE>

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

                                                                 Estimated
                                                  Amortized        Market
                                                    Cost           Value
                                                 ----------      ----------
     Due in one year or less                     $       --      $       --
     Due after one year through five years          298,759         306,898
     Due after five years through ten years         300,000         309,744
     Due after ten years                            762,533         826,272
                                                 ----------      ----------
                                                 $1,361,292      $1,442,914
                                                 ==========      ==========


<PAGE>

                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - INVESTMENT SECURITIES - Continued

     The  Company  had  realized  gains  on the  sale of  investment  securities
     totaling  $1,875 during fiscal year 1998. The Company had no realized gains
     or losses on the sale of investment  securities  available-for-sale  during
     fiscal year 1997.  During fiscal year 1996,  the Company had gross realized
     losses  of  $23,787  and no  realized  gains.  Proceeds  from  the  sale of
     available-for-sale  equity securities totaled $50,000 for 1998 and $253,420
     during 1996.

     Following is a summary of investment income:
<TABLE>
<CAPTION>
                                                           Year Ended June 30,
                                                 ------------------------------------
                                                   1998          1997          1996
                                                 --------      --------      --------
<S>                                              <C>           <C>           <C>     
     U.S. government and agency securities       $162,065      $109,834      $106,087
     Investments in certificates of deposit       147,984       262,253       285,115
     FHLB stock dividends                          64,725        64,262        44,196
     Interest-bearing cash accounts               380,462       144,655       124,866
     Equity securities dividends                   79,446        73,677        14,808
                                                 --------      --------      --------
                                                 $834,682      $654,681      $575,072
                                                 ========      ========      ========
</TABLE>

NOTE E - LOANS RECEIVABLE, NET

     Following is a summary of loans receivable:

<TABLE>
<CAPTION>
                                                                           June 30,
                                                                -------------------------------
                                                                    1998               1997
                                                                ------------       ------------
<S>                                                             <C>                <C>         
     Real estate mortgage loans:
        Secured by one-to-four family residences                $ 44,440,849       $ 44,581,692
        Secured by commercial and multi-family real estate        23,114,638         20,469,228
        Construction loans                                         1,535,363          3,543,880
                                                                ------------       ------------
           Total real estate mortgage loans                       69,090,850         68,594,800

     Consumer and other loans                                        996,850          1,133,198
                                                                ------------       ------------
                                                                  70,087,700         69,727,998
     Less:
        Allowance for loan losses                                   (206,129)          (221,355)
        Undisbursed portion of mortgage loans                       (605,197)          (993,492)
        Unamortized balance on purchased loan discounts               (1,534)            (8,169)
        Deferred loan fees                                          (295,070)          (327,236)
                                                                ------------       ------------

           Loans receivable, net                                $ 68,979,770       $ 68,177,746
                                                                ============       ============
</TABLE>

     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.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - LOANS RECEIVABLE, NET - Continued

     The  economic  condition  of the  Company's  market  area  can  affect  its
     borrowers'  ability to repay their  loans.  The Company has no  significant
     restructured troubled debt.

     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 amount  recognized in the Statement of
     Financial Condition.

     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,  1998,  the Company had  outstanding  commitments  to fund real
     estate loans of $1,644,011.  The commitments  were primarily for adjustable
     interest rate commercial real estate loans.

     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.

     Loan  customers  of  the  Company  include  certain   executive   officers,
     employees,  members of the board of directors, and their related interests.
     All loans to this group were made in the  ordinary  course of  business  at
     prevailing  terms  and  conditions.  Such  loans at June 30,  1998 and 1997
     amounted to $1,579,000 and $1,062,000,  respectively. During the year ended
     June 30,  1998,  there were new loans to this group  totaling  $774,000 and
     repayments totaling $257,000.

     The Company serviced participation loans with outstanding balances totaling
     $3,974,000  and  $7,374,000  at June 30,  1998 and 1997  respectively.  The
     Company's portion of these loans totaled  $2,110,020 and $3,414,000 at June
     30, 1998 and 1997, respectively.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - LOANS RECEIVABLE, NET - Continued

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

                                                   Year Ended June 30,
                                         -------------------------------------
                                            1998          1997          1996
                                         ---------     ---------     ---------
     Balance at beginning of year        $ 221,355     $ 240,278     $ 216,278
        Provision charged to income         52,000        36,000        24,000
        Charge-offs                        (67,226)      (54,923)           --
                                         ---------     ---------     ---------

     Balance at end of year              $ 206,129     $ 221,355     $ 240,278
                                         =========     =========     =========

     Impaired loans as of June 30, 1998 and 1997 totaled  approximately  $83,000
     and   $192,000,   respectively.   The  total   allowance  for  loan  losses
     specifically  related to these  loans was $800 and $5,100 on June 30,  1998
     and 1997,  respectively.  Interest  income on impaired  loans of $1,900 and
     $3,800 was recognized  for cash payments  received for the years ended June
     30, 1998 and 1997, respectively.

     As of June 30, 1998,  the Company had a net  investment of  $68,979,770  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 ACQUIRED FOR DEVELOPMENT

     Following is a summary of real estate acquired for  development,  which the
     Company records at the lower of cost or fair value:

                                                            June 30,
                                                      ---------------------
                                                        1998         1997
                                                      --------     --------
     Undeveloped residential building lot             $ 43,109     $ 43,109
     Townhouse construction project                    188,761      392,375
                                                      --------     --------

                                                      $231,870     $435,484
                                                      ========     ========

<PAGE>

                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - REAL ESTATE HELD FOR INVESTMENT

     The Company  owns and operates a  sixty-unit  apartment  complex in the Des
     Moines  area.  The  units  rent  for $425 to $450 per  month  under  rental
     agreements which do not exceed one year.

     The Company  also owns and  operates a twenty-two  unit  apartment  complex
     located in Des Moines,  Iowa. The Company completed  construction and began
     renting  units during the fiscal year ended June 30,  1998.  The units rent
     for $525 to $550 per month under rental  agreements which do not exceed one
     year.  Following  is a  summary  of the  investment  in these  real  estate
     projects:

                                                            June 30,
                                                    --------------------------
                                                       1998           1997
                                                    -----------    -----------
     Construction in process - rental real estate   $        --    $   935,873
     Rental real estate, at cost                      2,697,525      1,402,155
     Less accumulated depreciation                     (435,465)      (404,496)
                                                    -----------    -----------

        Net real estate held for investment         $ 2,262,060    $ 1,933,532
                                                    ===========    ===========

     During 1997, the Company sold an eight-unit apartment building and realized
     a gain of $131,048 from the sale.

NOTE H - PROPERTY ACQUIRED IN SETTLEMENT OF LOANS

     At June  30,  1998  the  Company  held  three  properties  acquired  in the
     settlement of loans. The properties,  which include two one-to-four  family
     homes and a  commercial  building,  have a  carrying  value of  $1,286,452.
     Management  believes the carrying value of the  properties  does not exceed
     the fair value of the properties, net of anticipated selling costs.

     No gains or losses were  recognized  from  adjusting the carrying  value of
     property acquired in settlement of loans to fair value during 1998, 1997 or
     1996.

NOTE I - OFFICE PROPERTY AND EQUIPMENT

     Following is a summary of office property and equipment:

                                                        June 30,
                                                --------------------------
                                                    1998           1997
                                                -----------    -----------
     Land                                       $ 1,067,217    $ 1,012,609
     Office building                                471,178        464,986
     Furniture, fixtures and equipment              529,897        373,958
                                                -----------    -----------
                                                  2,068,292      1,851,553
     Less accumulated depreciation                 (504,215)      (432,571)
                                                -----------    -----------

        Office property and equipment, net      $ 1,564,077    $ 1,418,982
                                                ===========    ===========

     The  Company  leases  a  portion  of  one  of  its  office  buildings  on a
     month-to-month basis. Aggregate monthly rental receipts total approximately
     $4,600.

<PAGE>

                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE J - ACCRUED INTEREST RECEIVABLE

     Following is a summary of accrued interest receivable:

                                                             June 30,
                                                        -------------------
                                                          1998       1997
                                                        --------   --------
     Investments in certificates of deposit interest    $  6,299   $ 15,495
     U.S. Government and agency securities interest       14,631     34,211
     Loans receivable interest                           521,316    517,772
                                                        --------   --------

                                                        $542,246   $567,478
                                                        ========   ========

NOTE K - DEPOSITS

     Savings deposit customers are primarily greater Des Moines area individuals
     and  businesses.  Deposits  with  balances  in excess of  $100,000  totaled
     $3,871,947  and  $3,192,557  at  June  30,  1998  and  1997,  respectively.
     Non-interest  bearing deposit accounts totaled  approximately  $881,500 and
     $1,091,000 at June 30, 1998 and 1997, respectively.

     Deposit  accounts  held by members of the board of director  and  executive
     officers  totaled  $563,000  and  $524,000  at  June  30,  1998  and  1997,
     respectively.

     Following is a summary of savings deposits as of June 30, 1998 and 1997 and
     interest expense relating to those deposits for the years then ended:

<TABLE>
<CAPTION>
                                                        1998                            1997
                                            ----------------------------    ---------------------------
                                             Outstanding      Interest       Outstanding     Interest
                                               Balance        Expense          Balance       Expense
                                            ------------    ------------    ------------   ------------
<S>                                         <C>             <C>             <C>            <C>         
     Demand deposits                        $  2,051,363    $     24,874    $  1,708,260   $     22,689
     Savings and money market deposits         7,299,665         238,476       7,525,309        230,329
     Certificates of deposits                 44,320,832       2,632,121      41,112,403      2,315,215
                                            ------------    ------------    ------------   ------------
                                            $ 53,671,860       2,895,471    $ 50,345,972      2,568,233 
                                            ============                    ============
     Less penalties for early withdrawals                         (8,405)                        (8,405)
                                                            ------------                   ------------

                                                            $  2,887,066                   $  2,555,022
                                                            ============                   ============
</TABLE>

<PAGE>

                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K - DEPOSITS - Continued

     At June 30, 1998, the scheduled  maturities of certificates of deposits are
     as follows:

        Fiscal year ending June 30:
           1999                                  $ 29,435,187
           2000                                     8,337,315
           2001                                     3,377,575
           2002                                     1,244,357
           2003                                     1,550,450
           Thereafter                                 375,948
                                                 -------------
                                                 
                                                 $ 44,320,832
                                                 =============
                                        
NOTE L - 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 at June 30,
     1998:

     -    Fixed rate advance due in monthly  principal and interest  payments of
          $16,737 through January 31, 2013. The advance, which bears interest at
          5.87%,  cannot be prepaid  before  January 12, 2001.  The  outstanding
          balance of the advance was $1,964,890 at June 30, 1998.

     -    The  following  fixed rate  advances,  which are subject to prepayment
          penalties:

  Maturity Date                     Interest Rate               Amount
  -------------                     -------------               ------
September 11, 1998                      5.80%                  $  2,000,000
September 14, 1998                      5.94%                     2,000,000
September 29, 1998                      5.91%                     2,000,000
November 2, 2001                        6.46%                     3,000,000
November 21, 2002                       6.14%                     5,000,000
June 30, 2008 (1)                       5.52%                     3,000,000
                                                               ------------
                                                               $ 17,000,000
                                                               ============

     (1)  Callable in 2003

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L - ADVANCES FROM FEDERAL HOME LOAN BANK - Continued

      Scheduled maturities of the advances are as follows:

                                                              Interest
      Year ending June 30,               Amount                Rates
                                    ---------------        -------------
         1999                          $  6,087,843        5.80% - 5.94%
         2000                                93,141                5.87%
         2001                                98,758        5.87% - 6.46%
         2002                             3,104,713                5.87%
         2003                             5,111,028        5.87% - 6.14%
         Thereafter                       4,469,407        5.52% - 5.87%
                                    ---------------
                                       $ 18,964,890
                                    ===============

NOTE M - 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  $340,000).
     Recapture of pre-1988 reserves (approximately  $1,353,000) 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  $520,000  relating to pre-1988 bad
     debt reserves.

     Taxes on income are comprised of:

<TABLE>
<CAPTION>
                                                                  Year Ended June 30,
                        -----------------------------------------------------------------------------------------------------------
                                      1998                                1997                                 1996
                        ---------------------------------   ---------------------------------   -----------------------------------
                         Federal      State       Total      Federal      State       Total      Federal       State        Total
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
<S>                     <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>          <C>      
Current                 $ 405,460   $  74,000   $ 479,460   $ 393,818   $  71,000   $ 464,818   $ 435,000    $  75,800    $ 510,800
Deferred                    9,000       2,000      11,000      32,100       5,900      38,000     (30,100)      (5,300)     (35,400)
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------    ---------    ---------
   Total                $ 414,460   $  76,000   $ 490,460   $ 425,918   $  76,900   $ 502,818   $ 404,900    $  70,500    $ 475,400
                        =========   =========   =========   =========   =========   =========   =========    =========    =========
</TABLE>

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

                                                     Year Ended June 30,
                                            -----------------------------------
                                              1998         1997         1996
                                            ---------    ---------    ---------
Computed "expected" taxes on income         $ 512,600    $ 484,200    $ 461,800
State taxes, net of federal benefit            58,200       55,000       46,800
Low income housing tax credits                (59,000)     (57,500)     (30,500)
Other adjustments                             (21,340)      21,118       (2,700)
                                            ---------    ---------    ---------

   Provision for income taxes               $ 490,460    $ 502,818    $ 475,400
                                            =========    =========    =========

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M - INCOME TAXES - Continued

      Temporary differences between the financial statement carrying amounts and
      tax bases of assets and liabilities that give rise to the deferred tax
      liability at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
                                                                     Year Ended June 30,
                                                                   ----------------------
                                                                     1998         1997
                                                                   ---------    ---------
<S>                                                                <C>          <C>      
     Federal Home Loan Bank stock (income tax payable when
       shares received as stock dividends are sold)                $  63,900    $  63,900
     Real estate and equipment (depreciation method differences)     105,300       90,100
     Compensation agreements (deductible when paid for income
        tax reporting purposes)                                      (24,400)     (22,800)
     Loan fees deferred for financial reporting purposes             (29,800)     (41,600)
     Allowance for loan losses                                        31,100       44,400
     Deferred installment sale gains                                  36,000       36,400
     Unrealized gains on investment securities                        60,000       18,000
     Other                                                           (29,100)     (17,400)
                                                                   ---------    ---------
        Net deferred income tax liability                          $ 213,000    $ 171,000
                                                                   =========    =========
</TABLE>

     No valuation allowance was recorded against deferred tax assets at June 30,
     1998 or 1997.

NOTE N - EMPLOYEE BENEFITS

     RECOGNITION  AND RETENTION  PLAN (RRP) - The Company has a Recognition  and
     Retention Plan that provides directors, officers and other key employees of
     the Company with a proprietary interest in the Company in a manner designed
     to encourage such persons to remain with the Company.  Eligible  directors,
     officers and other key  employees of the Company earn (i.e.,  become vested
     in) shares of common  stock  covered by the award at a rate of 25% per year
     starting one year from the date of the grant.  As of June 30, 1998,  all of
     the 68,770 shares  reserved for issuance  under the RRP had been awarded to
     directors,  officers  and other key  employees.  Expense  of  approximately
     $9,600,  $32,100 and $64,300 was  recorded  for the RRP for the years ended
     June 30, 1998, 1997 and 1996, respectively.

     EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - The Company has also  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
     Association'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 $191,200, $131,100 and
     $137,000  was  recorded  relative  to the ESOP for the years ended June 30,
     1998, 1997 and 1996, respectively.

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N - EMPLOYEE BENEFITS - Continued

     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.

     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,
                                                     ----------------------
                                                       1998          1997
                                                     --------      --------
     Allocated shares                                  54,730        39,534
     Shares released for allocation                    14,479        15,196
     Shares sold for distributions                         --            --
     Distributions of shares                               --            --
     Unreleased shares                                 66,839        81,318
                                                     --------      --------
        Total ESOP shares                             136,048       136,048
                                                     ========      ========

     Fair value of unreleased shares                 $935,746      $772,521
                                                     ========      ========

     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.
     During 1994,  the  Company's  Compensation  Committee  granted  options for
     137,540 shares to certain officers, directors and employees, at an exercise
     price of $5 per share. No additional  options have been granted since 1994.
     Stock options vest at a rate of 20% per year.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N - EMPLOYEE BENEFITS - Continued

     During fiscal year 1998, the Company adopted SFAS No. 123,  "Accounting for
     Stock-Based  Compensation," SFAS No. 123 contains a fair-value based method
     for valuing stock-based  compensation that entities may use. The fair-value
     based  method  measures  compensation  cost at the grant dated based on the
     fair value of the award.  Compensation  is then recognized over the service
     period,  which is usually the vesting period.  Alternatively,  SFAS No. 123
     permits  entities  to  continue  to account  for stock  options and similar
     equity  instruments  under Accounting  Principles Board ("APB") Opinion No.
     25,  "Accounting for Stock Issued to Employees."  Entities that continue to
     account for stock  options  using APB  Opinion No. 25 are  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.
     Management  has  determined  that the Company will  continue to account for
     stock  based   compensation   using  APB  Opinion  No.  25.  The  pro-forma
     disclosures  required by SFAS No. 123 are not  required as no options  were
     granted by the Company  during the fiscal years ended June 30,  1998,  1997
     and 1996.

     A summary of the status of the  Company's  stock option plan as of June 30,
     1998 and 1997,  and the  changes  during the years  ended on those dates is
     presented below:

                                                      Year ended June 30,
                                                     ---------------------
                                                       1998         1997
                                                     --------     --------
     Unexercised options, beginning of year            95,466      110,742
     Stock options exercised                          (13,446)     (15,276)
                                                     --------     --------

        Unexercised options, end of year               82,020       95,466
                                                     ========     ========

     STOCK-BASED  COMPENSATION COSTS - Compensation costs related to stock-based
     compensation plans (RRP plan and stock option plan) totaled $9,636, $32,142
     and $64,302 for the years ended June 30, 1998, 1997 and 1996, respectively.

     SIMPLIFIED  EMPLOYEE  PENSION PLAN - During  fiscal year 1997,  the Company
     adopted  a  simplified   employee  pension  plan  (SEP).  The  plan  allows
     employees, over the age of eighteen, to make tax-deferred  contributions to
     the SEP. The Company is also allowed to make discretionary contributions to
     the SEP. No Company discretionary contributions were made to the SEP during
     fiscal years 1998 and 1997.

     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
     common stock.

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O - REGULATORY AND CAPITAL MATTERS

     The  Association  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  its  financial
     statements.  Under capital adequacy guidelines and the regulatory framework
     for prompt  corrective  action,  the Association must meet specific capital
     guidelines that involve quantitative  measures of the Association's assets,
     liabilities,  and  certain  off-balance-sheet  items  as  calculated  under
     regulatory  accounting  practices.  The  Association'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 four tests,  hereinafter
     described as the tangible equity requirement, the core capital requirement,
     the  risk-based  capital  requirement  and the  Tier I  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,  while the Tier I risk-based capital  requirement is
     core capital equal to at least 4.0% of  risk-weighed  assets.  In computing
     risk-weighted assets, the Association 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, 1998 and 1997,  management believes that the Association met
     all capital adequacy requirements to which it is subject.

     As of June 30, 1998:

<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>
Tangible equity (1)                  $ 9,408,000        11.18%      $ 1,262,070           1.50%              NA             NA
Core capital (1)                     $ 9,408,000        11.18%      $ 3,365,520           4.00%         $ 4,206,900       5.00%
Risk-based capital (2)               $ 9,614,000        19.31%      $ 3,982,720           8.00%         $ 4,978,400       10.00%
Tier I risk-based capital (2)        $ 9,408,000        18.90%      $ 1,991,360           4.00%         $ 2,987,040        6.00%
</TABLE>


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

<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O - REGULATORY AND CAPITAL MATTERS - Continued

     The Association  established a liquidation account when it converted from a
     federally  chartered  mutual  savings bank to a federally  chartered  stock
     savings bank. The  liquidation  account is equal to the  Association'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 will be 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 Association 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  Association,  the
     existence  of  the  liquidation  account  will  not  restrict  the  use  or
     application of retained earnings.

     Under Federal  regulations,  the  Association may not declare or pay a cash
     dividend  on or  repurchase  any of its stock if the effect  thereof  would
     cause the Association's  regulatory  capital to be reduced below the amount
     required  for  the   liquidation   accounts  or  the   regulatory   capital
     requirements of the OTS. In addition,  banks that before and after proposed
     dividend  distributions  meet  or  exceed  their  fully  phased-in  capital
     requirements, may make capital distributions, with prior notice to the OTS,
     during any calendar year in an amount of (i) up to 100% of its net earnings
     to date  during the year plus an amount  equal to one-half of the amount by
     which its  total  capital  to assets  ratio  exceeded  its fully  phased-in
     capital to assets ratio at the beginning of the year (ii) or 75% of its net
     earnings for the most recent four quarters.

NOTE P - 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.

     The  following  methods  and  assumptions  were  used  by  the  Company  in
     estimating its fair value disclosures for financial instruments at June 30,
     1998 and 1997:

     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.



<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued

     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 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 NOW, money market and
     passbook  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.

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

<TABLE>
<CAPTION>
                                                          June 30, 1998               June 30, 1997
                                                   -------------------------   -------------------------
                                                     Carrying       Fair         Carrying        Fair
                                                      Amount        Value         Amount        Value
                                                   -----------   -----------   -----------   -----------
<S>                                                <C>           <C>           <C>           <C>
     Financial assets
        Cash and cash equivalents                  $ 9,445,404   $ 9,445,404   $ 3,634,086   $ 3,634,086
        Investments in certificates of deposit       1,478,514     1,487,868     4,435,425     4,430,000
        Investment securities available-for-sale     2,743,518     2,743,518     3,477,168     3,477,168
        Loans receivable                            68,979,770    69,542,000    68,177,746    68,380,000
        Federal Home Loan Bank stock                   949,000       949,000       950,000       950,000
     Financial liabilities
        Deposits                                    53,671,860    53,893,547    50,345,972    50,640,000
        Advances from Federal Home Loan Bank        18,964,890    18,857,039    19,000,000    18,957,000
</TABLE>


NOTE Q - LEGISLATIVE MATTERS 

     Deposits  of  the  Association  are  insured  by  the  Savings  Association
     Insurance Fund (SAIF) as  administered by the FDIC. The FDIC also maintains
     another  insurance  fund, the Bank Insurance  Fund (BIF),  which  primarily
     insures commercial bank deposits. Effective September 30, 1996, federal law
     was revised to mandate a one-time special assessment of SAIF members,  such
     as the Association, of deposits held on March 31, 1995. The Association has
     reflected a $291,331 pre-tax expense for this assessment for the year ended
     June 30, 1997.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE R - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

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

                             Condensed Balance Sheet

<TABLE>
<CAPTION>
                                                                June 30
                                                      ----------------------------
Assets                                                    1998            1997
                                                      ------------    ------------
<S>                                                   <C>             <C>         
Cash and cash equivalents                             $    694,836    $    706,956
Investments in certificates of deposits                    689,458         690,127
Investment in subsidiary                                10,569,296      10,492,580
Advances to subsidiary                                     634,359         285,291
Investment securities                                      256,104         199,680
Contract notes receivable                                1,168,312         827,457
ESOP note receivable - subsidiary                          378,235         447,005
Real estate acquired for development                       231,870         435,484
Real estate held for investment                          1,290,265         935,873
Other assets                                               298,785         317,044
                                                      ------------    ------------
                                                      $ 16,211,520    $ 15,337,497
                                                      ============    ============
Liabilities
Dividends payable                                     $     78,295    $     78,372
Other liabilities                                           48,939          26,118
                                                      ------------    ------------
                                                           127,234         104,490
Stockholders' equity
Common stock                                                 8,905           8,905
Additional paid-in capital                               8,483,110       8,398,857
Retained earnings                                        9,457,310       8,752,218
Treasury stock                                          (1,643,697)     (1,560,859)
Less common stock acquired by:
      Employee stock ownership plan                       (341,270)       (413,940)
      Retention and recognition plan                            --          (9,636)
Net realized gains on available-for-sale securities        119,928          57,462
                                                      ------------    ------------
                                                        16,084,286      15,233,007
                                                      ------------    ------------
                                                      $ 16,211,520    $ 15,337,497
                                                      ============    ============
</TABLE>



                          Condensed Statement of Income

<TABLE>
<CAPTION>
                                                               Year ended June 30,
                                                   -----------------------------------------
                                                       1998           1997           1996
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>        
Operating income - interest and dividend income    $   255,172    $   194,709    $   167,429
Operating expenses                                      93,391         49,932         77,194
                                                   -----------    -----------    -----------


Income before undistributed income of subsidiary       161,781        144,777         90,235

Equity in undistributed income of subsidiary           854,374        770,240        827,699
                                                   -----------    -----------    -----------

Income before income tax                             1,016,155        915,017        917,934

Provision (credit) for income tax                       (1,124)        (6,308)        35,080
                                                   -----------    -----------    -----------

      Net income                                   $ 1,017,279    $   921,325    $   882,854
                                                   ===========    ===========    ===========
</TABLE>



<PAGE>


                         STATEFED FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE R - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - Continued

                        Condensed Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                       Year ended June 30,
                                                          -----------------------------------------
                                                              1998           1997           1996
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
Cash flows from operating activities:
      Net income                                          $ 1,017,279    $   921,325    $   882,854
      Dividends received from subsidiary                    1,000,000      1,000,000      1,000,000
      Deferred income taxes                                    11,876          5,692         (8,990)
      Adjustments to reconcile net income to net cash
        from operating activities:
           Equity in undistributed income of subsidiary      (854,374)      (770,240)      (827,701)
           Other                                                8,567         28,450         33,481
                                                          -----------    -----------    -----------
                 Net cash from operating activities         1,183,348      1,185,227      1,079,644

Cash flows from investing activities:
      Purchase of investment securities                       (63,559)       (51,444)       (64,587)
      Proceeds from sale of investment securities              50,000             --        253,420
      Proceeds from sale of real estate
        for development                                       240,000             --             --
      Investment in real estate for development              (390,479)      (938,671)      (442,550)
      Investment in and advances to subsidiary               (349,068)       519,411       (224,304)
      (Increase) decrease in contract notes
        receivable                                           (340,855)       (17,503)         6,206
      Payment received on ESOP debt                            68,770         68,770         68,770
      (Increase) decrease in other assets                      19,131             --        (88,557)
                                                          -----------    -----------    -----------
                                                             (766,060)      (419,437)      (491,602)
Cash flows from financing activities:
      Treasury stock purchased                               (184,375)      (620,825)      (418,750)
      Proceeds from options exercised                          67,231         76,380         58,990
      Dividends paid                                         (312,264)      (318,159)      (329,756)
                                                          -----------    -----------    -----------
                                                             (429,408)      (862,604)      (689,516)
                                                          -----------    -----------    -----------
Net increase in cash and cash equivalents                     (12,120)       (96,814)      (101,474)

Cash and cash equivalents, beginning of year                  706,956        803,770        905,244
                                                          -----------    -----------    -----------

      Cash and cash equivalents, end of year              $   694,836    $   706,956    $   803,770
                                                          ===========    ===========    ===========
</TABLE>


<PAGE>



                         STATEFED FINANCIAL CORPORATION
                             STOCKHOLDER INFORMATION

ANNUAL MEETING

     The Annual Meeting of  Stockholders  will be held at 2:00 p.m., Des Moines,
Iowa time on October 21, 1998 at 519 Sixth Avenue, Des Moines, Iowa.

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 and adjusted
for  the  Company's   stock  split  during  fiscal  1998.   The  prices  reflect
inter-dealer quotations without retail markup,  markdown or commissions,  and do
not necessarily represent actual transactions.

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


   QUARTER ENDED                               HIGH           LOW      DIVIDENDS
   -------------                               ----           ---      ---------
March 31, 1996............................     8.875          8.125      .050
June 30, 1996.............................     8.625          8.000      .050
September 30, 1996........................     8.375          7.500      .050
December 31, 1996.........................     8.625          8.125      .050
March 31, 1997............................     9.375          8.250      .050
June 30, 1997.............................     9.563          9.000      .050
September 30, 1997........................    11.438          9.500      .050
December 31, 1997.........................    14.750         10.875      .050
March 31, 1998............................    15.250         12.500      .050
June 30, 1998.............................    15.000         13.375      .050

----------

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 15, 1998 was $10.75.

At  September  15,  1998,  there were  1,549,392  shares of  StateFed  Financial
Corporation common stock issued and outstanding and there were approximately 700
holders of record.


SHAREHOLDERS AND GENERAL INQUIRIES            TRANSFER AGENT

John F. Golden, President and Chief           First Bankers Trust Company, N.A.
Executive Officer                             1201 Broadway
StateFed Financial Corporation                Quincy, IL 62301
519 Sixth Avenue                              (217) 228-8000
Des Moines, Iowa  50309

ANNUAL AND OTHER REPORTS

     A copy of StateFed Financial Corporation's Annual Report on Form 10-KSB for
the  year  ended  June 30,  1998 as  filed  with  the  Securities  and  Exchange
Commission,  may be  obtained  without  charge  by  contacting  John F.  Golden,
President and Chief Executive Officer, StateFed Financial Corporation, 519 Sixth
Avenue, Des Moines, Iowa, 50309.


<PAGE>


                         STATEFED FINANCIAL CORPORATION
                              CORPORATE INFORMATION


COMPANY AND ASSOCIATION ADDRESS

   519 Sixth Avenue                                  Telephone:  (515) 282-0236
   Des Moines, IA  50309                             Fax:        (515) 282-1160


DIRECTORS OF THE BOARD

John F. Golden
         Chairman of the Board, President and Chief
         Executive Officer of StateFed Financial
         Corporation and State Federal Savings and
         Loan Association of Des Moines

Harry A. Winegar
         Retired Consultant and Appraiser for Real
         Estate Appraisal firm located in Des Moines,
         Iowa

Sidney M. Ramey
         President of Peoples Abstract Company

Eugene M. McCormick
         Retired Dentist

Andra K. Black
         Executive Vice President and Secretary of
         StateFed Financial Corporation and State
         Federal Savings and Loan Association of Des
         Moines

Kevin J. Kruse
         Senior Vice President and Corporate Counsel
         for the Iowa's Community Bankers/Diversified
         Management Services, Inc.

Craig Wood
         Senior Vice President and Assistant Secretary
         of State Federal Savings and Loan
         Association of Des Moines and StateFed
         Financial Corporation


STATEFED FINANCIAL CORPORATION EXECUTIVE OFFICERS

John F. Golden
         President and Chief Executive Officer
         Chairman of the Board

Craig Wood
         Senior Vice President and Assistant Secretary

Andra K. Black
         Executive Vice President and Secretary


INDEPENDENT AUDITORS                          SPECIAL COUNSEL

Vroman, McGowen, Hurst,                       Silver, Freedman & Taff, L.L.P.
 Clark & Smith, P.C.                          1100 New York Avenue, N.W.
317 Sixth Avenue                              Seventh Floor
Suite 400                                     Washington, D.C.  20005
Des Moines, Iowa  50309