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

                                   FORM 10-KSB

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

     For the fiscal year ended June 30, 1998

                                       OR

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

     Commission file number 0-22790

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

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

                    519 Sixth Avenue, Des Moines, Iowa 50309
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:            (515) 282-0236

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

                                      None

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

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

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

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

     State the issuer's revenue for the most recent fiscal year: $7.4 million.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the NASDAQ System as of September 4, 1998,  was $12.5  million.
(The  exclusion  from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)

     As of  September  23,  1998,  there were issued and  outstanding  1,554,392
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year ended
June 30, 1998. 

Part  III  of  Form  10-KSB  -  Proxy  Statement  for  1998  Annual  Meeting  of
Stockholders.


<PAGE>

                                     PART I

Item 1.  Description of Business

General

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

     At June 30, 1998, the Company had $89.8 million of assets and stockholders'
equity of $16.1 million (or 17.91% of total assets).

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

     The principal  business of the  Association  consists of attracting  retail
deposits  from the  general  public  and  investing  those  funds  primarily  in
one-to-four  family  residential  mortgage and commercial and multi-family  real
estate loans, and, to a lesser extent, construction and consumer loans primarily
in  the  Association's  market  area.  The  Association  also  invests  in  U.S.
Government and agency obligations and other permissible investments. At June 30,
1998,  substantially  all of the  Association's  real estate mortgage loans were
secured by properties located in Iowa.

     The Association's  revenues are derived primarily from interest on mortgage
loans and investments,  income from service charges and loan  originations,  and
income from real estate operations through its service  corporation  subsidiary.
The Association  does not originate  loans to fund leveraged  buyouts and has no
loans to foreign corporations or governments.

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

     The main  office of the  Association  is located at 519 Sixth  Avenue,  Des
Moines,  Iowa,  which is located in Polk County.  Its  telephone  number at that
address is (515)  282-0236.  The  Association  maintains one other office in Des
Moines,  Iowa.  The  Association  considers its primary  market area to comprise
parts of Polk, Dallas and Warren Counties.

Forward-Looking Statements

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

                                        2

<PAGE>


advise  readers  that the  factors  listed  above  could  affect  the  Company's
financial  performance  and could cause the Company's  actual results for future
periods to differ  materially  from any opinions or  statements  expressed  with
respect to future periods in any current statements.

     The   Company   does   not   undertake--and   specifically   declines   any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or  unanticipated
events.

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 delay,  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.

Lending Activities

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

     While the  Association  primarily  focuses  its lending  activities  on the
origination of loans secured by first  mortgages on  owner-occupied  one-to-four
family  residences,  it also originates  multi-family and commercial real estate
and, to a lesser extent,  construction  and consumer loans in its primary market
area.  At June 30, 1998,  the  Association's  net loan  portfolio  totaled $69.0
million.

     The Loan  Committee of the  Association,  comprised  of executive  officers
Golden,  Wood and Black and loan officers Komma and Stravers,  has the immediate
responsibility  for the supervision of the  Association's  loan  portfolio.  The
Association's  loan policy requires full Board approval on all loans.  The Board
relies heavily on the recommendation of CEO Golden in making its decisions.  The
Board  of  Directors  has  responsibility  for the  overall  supervision  of the
Association's loan portfolio and in addition, reviews all foreclosure actions or
the taking of deeds-in-lieu of foreclosure.


                                        3

<PAGE>



     The  aggregate  amount of loans that the  Association  is permitted to make
under  applicable  federal  regulations to any one borrower,  including  related
entities,  or the aggregate  amount that the Association  could have invested in
any one real  estate  project is  generally  the  greater  of 15% of  unimpaired
capital and surplus or $500,000.  See "Regulation  Federal Regulation of Savings
Associations."  At June 30, 1998, the maximum amount which the Association could
have  lent  to  any  one  borrower  and  the  borrower's  related  entities  was
approximately  $1.6  million.  The  principal  balance  of  the  largest  amount
outstanding  to  any  one  borrower,   or  group  of  related   borrowers,   was
approximately $1.5 million at June 30, 1998. Currently,  it is the Association's
general  policy to limit its loans to one  borrower  to the  maximum  regulatory
limit. The Association  reserves the right to discontinue,  adjust or create new
lending programs to respond to its needs and to competitive factors.


                                        4

<PAGE>



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

<TABLE>
<CAPTION>
                                                                                    June 30,
                                            ---------------------------------------------------------------------------------------
                                                       1998                           1997                         1996
                                            ---------------------------------------------------------------------------------------
                                              Amount         Percent          Amount        Percent        Amount          Percent
                                            ---------------------------------------------------------------------------------------
                                                                            (Dollars in Thousands)
<S>                                          <C>                <C>         <C>                <C>         <C>                <C>   
Real Estate Loans
 One-to-four family ....................     $ 44,441           63.41%      $ 44,582           63.93%      $42,842            66.07%
 Multi-family and Commercial ...........       23,115           32.98         20,469           29.35        17,997            27.76
 Construction or development ...........        1,535            2.19          3,549            5.09         3,126             4.82
                                             --------      ----------       --------      ----------      --------       ----------
     Total real estate loans ...........       69,091           98.58         68,600           98.37        63,965            98.65

Other Loans:
 Consumer Loans:
  Deposit account ......................          159            0.23            242             .35           176              .27
  Home improvement .....................           --              --             --              --             1               --
  Other ................................          838            1.19            891            1.28           698             1.08
                                             --------      ----------       --------      ----------      --------       ----------
     Total consumer loans ..............          997            1.42          1,133            1.63           875             1.35
                                             --------      ----------       --------      ----------      --------       ----------
     Total loans .......................       70,088          100.00%        69,733          100.00%       64,840           100.00%
                                                           ==========                     ==========                     ==========
Less:
 Loans in process ......................         (605)                          (999)                       (1,567)
 Deferred fees and discounts ...........         (297)                          (335)                         (325)
 Allowance for losses ..................         (206)                          (221)                         (240)
                                             --------                       --------                      --------
 Total loans receivable, net(1) ........     $ 68,980                       $ 68,178                      $ 62,708
                                             ========                       ========                      ========
</TABLE>



                                        5

<PAGE>



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

<TABLE>
<CAPTION>
                                                                                    June 30,
                                            ---------------------------------------------------------------------------------------
                                                       1998                           1997                         1996
                                            ---------------------------------------------------------------------------------------
                                              Amount         Percent          Amount        Percent        Amount          Percent
                                            ---------------------------------------------------------------------------------------
                                                                            (Dollars in Thousands)
<S>                                           <C>               <C>         <C>                <C>         <C>               <C>   
Fixed Rate Loans:
 Real estate:
  One-to-four family ....................     $ 21,041           30.02%      $ 14,119           20.25%     $ 12,340           19.03%
  Multi-family and Commercial ...........       12,582           17.95          9,456           13.56         6,449            9.95
  Construction or development ...........        1,535            2.19          3,549            5.09         2,309            3.56
                                              --------      ----------       --------      ----------      --------      ----------
     Total real estate loans ............       35,158           50.16         27,124           38.90        21,098           32.54
 Consumer ...............................          997            1.42          1,133            1.62           875            1.35
                                              --------      ----------       --------      ----------      --------      ----------
     Total fixed-rate loans .............       36,155           51.58         28,257           40.52        21,973           33.89

Adjustable Rate Loans:
 Real estate:
  One-to-four family ....................       23,400           33.39         30,463           43.69        30,502           47.04
  Multi-family and Commercial ...........       10,533           15.03         11,013           15.79        11,548           17.81
  Construction or development ...........           --              --             --              --           817            1.26
                                              --------      ----------       --------      ----------      --------      ----------
     Total real estate loans ............       33,933           48.42         41,476           59.48        42,867           66.11
 Consumer ...............................           --              --             --              --            --              --
                                              --------      ----------       --------      ----------      --------      ----------
     Total adjustable rate loans ........       33,933           48.42         41,476           59.48        42,867           66.11
                                              --------      ----------       --------      ----------      --------      ----------
     Total loans ........................       70,088          100.00%        69,733          100.00%       64,840          100.00%
                                                            ==========                     ==========                    ==========
Less:
 Loans in process .......................         (605)                          (999)                       (1,567)
 Deferred fees and discounts ............         (297)                          (335)                         (325)
 Allowance for loan losses ..............         (206)                          (221)                         (240)
                                              --------                       --------                      --------
    Total loans receivable, net .........     $ 68,980                       $ 68,178                      $ 62,708
                                              ========                       ========                      ========
</TABLE>



                                        6

<PAGE>



     The following  schedule  illustrates  the interest rate  sensitivity of the
Company's  loan  portfolio  at  June  30,  1998.  Mortgages  which  have  fixed,
adjustable  or  renegotiable  interest  rates  are  shown  as  maturing  at  the
contractual maturity date. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.


<TABLE>
<CAPTION>
                                                                                 Real Estate
                                          -----------------------------------------------------------------------------------------
                                                                  Multi-family and           Construction
                                          One-to-four family         Commercial              or Development           Consumer
                                          -------------------    ------------------       -------------------     -----------------
                                                     Weighted              Weighted                  Weighted              Weighted
                                                      Average               Average                   Average               Average
                                          Amount       Rate      Amount      Rate         Amount       Rate       Amount     Rate  
                                          ------     ---------   ------    ---------      ------     --------     ------   --------
                                                                                                (Dollars in Thousands)
<S>                                      <C>           <C>       <C>          <C>         <C>           <C>       <C>         <C>
Due During Years Ending June 30, (1)
1999 ................................    $   498       9.24%     $   607       9.46%      $ 1,249       9.47%     $   132      8.50%
2000 ................................        343       8.72           38      11.57          --         --            112      9.48
2001 ................................        591       9.12        1,287       8.89          --         --            283      8.95
2002-2006 ...........................      7,022       8.81        9,044       8.36          --         --            423      8.74
After 2006 ..........................     35,987       7.88       12,139      10.29           286       7.21           47     10.00

<CAPTION>
                                               Real Estate
                                           ---------------------
                                                  Total
                                           ---------------------
                                                        Weighted
                                                         Average
                                           Amount         Rate
                                           ------       --------
                                          (Dollars in Thousands)
<S>                                      <C>              <C>
Due During Years Ending June 30, (1)
1999 ................................    $  2,486         9.37%
2000 ................................         493         9.11
2001 ................................       2,161         8.96
2002-2006 ...........................      16,775         8.54
After 2006 ..........................      48,173         8.49
</TABLE>

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

     The total amount of loans due after June 30, 1999 which have fixed interest
rates is $33.7  million,  while the total  amount of loans due after  such dates
which have floating or adjustable interest rates is $33.9 million.



                                        7

<PAGE>


     One-to-four   family   Residential   Mortgage  Lending.   Residential  loan
originations of this type are generated by the Company's marketing efforts,  its
present  customers,  walk-in customers and referrals from real estate agents and
builders.  The Company focuses its lending efforts  primarily on the origination
of loans  secured  by first  mortgages  on  owner-occupied,  one-to-four  family
residences.  At June 30, 1998,  the  Company's  one-to-four  family  residential
mortgage loans totaled $44.4 million,  or  approximately  63.4% of the Company's
total gross loan portfolio.

     The Company  currently  offers ARM payment and fixed-rate  mortgage  loans.
During the year ended June 30, 1998, the Association  originated $2.4 million of
adjustable-rate  real estate  loans,  which were secured by  one-to-four  family
residential  real estate.  During the same period,  the Company  originated $8.2
million  of  fixed-rate  real  estate  loans,   secured  by  one-to-four  family
residential real estate. The Company's  one-to-four family residential  mortgage
originations  are  primarily in its market and  surrounding  areas,  and no such
loans were sold during the three year period ended June 30, 1998.

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

     Interest rates charged on these  fixed-rate  loans are priced  according to
market conditions,  although  management does not currently  anticipate offering
rates at the most competitive end of the market.  Residential loans generally do
not include prepayment penalties. As with all loans the Company originates,  the
Company retains its fixed-rate loans in its portfolio.

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

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

     Multi-Family  and  Commercial  Real  Estate  Lending.  The Company has also
engaged in commercial  and  multi-family  real estate lending in its market area
and surrounding  areas and has purchased  participation  interests in such loans
from other financial institutions throughout Iowa. At June 30, 1998, the Company
had $23.1  million of  commercial  and  multi-family  real estate  loans,  which
represented   33.0%  of  the  Company's  gross  loan   portfolio.   All  of  the
Association's  commercial and multi-family  real estate loans were performing in
accordance  with their repayment  terms. A substantial  portion of the Company's
multi-family and commercial real estate loans were secured by properties located
in Iowa. However, the Company had multi-family and commercial real estate loans,
with an 


                                       8
<PAGE>

aggregate  balance of $3.2  million  at June 30,  1998,  secured by real  estate
located in Texas, Colorado, Nebraska and Wisconsin.

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

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

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

                                                         June 30,
                                         ---------------------------------------
                                          1998            1997            1996
                                         -------         -------         -------
                                                      (In Thousands)

Multi-family ...................         $10,141         $ 8,231         $ 7,060
Nursing homes ..................           1,638           1,671           1,701
Churches .......................           1,208           1,164             321
Motels .........................           1,688           1,336           1,051
Shopping Centers ...............           1,568           1,155           1,244
Commercial Buildings ...........           6,872           6,912           6,620
                                         -------         -------         -------
     Total .....................         $23,115         $20,469         $17,997

     This  portfolio  grew by $2.6 million from fiscal 1997 to fiscal 1998,  and
the  portfolio  comprised a larger  percentage  in fiscal  1998,  33.0% of total
loans,  than it did in fiscal 1997,  when  commercial  loans  comprised 29.4% of
total loans.

     Construction   Lending.   The  Company   engages  in  limited   amounts  of
construction  lending to individuals for the construction of their residences as
well as to builders for the  construction  of single family homes and commercial
properties in the Company's  primary market area and surrounding  areas. At June
30, 1998, the Company had $1.5 million of gross construction loans.

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

     All construction  loans to builders require payment of interest only for up
to 12 months.  At June 30, 1998,  all of the Company's  construction  loans were
performing in accordance with their repayment terms.

     Because of the uncertainties inherent in estimating  construction costs and
the market for the  project  upon  completion,  it is  relatively  difficult  to
evaluate  accurately  the total loan funds  required to complete a project,  the
related  loan-to-value  ratios and the  likelihood  of  ultimate  success of the
project. Construction loans to borrowers other



                                       9
<PAGE>

than  owner-occupants  also  involve  many of the  same  risks  discussed  above
regarding  multi-family  and  commercial  real estate  loans and tend to be more
sensitive to general economic  conditions than many other types of loans.  Also,
the funding of loan fees and interest  during the  construction  phase makes the
monitoring of the progress of the project particularly  important,  as customary
early warning signals of project difficulties may not be present.

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

     Consumer loans may entail greater credit risk than do residential  mortgage
loans,  particularly in the case of consumer loans which are unsecured.  In such
cases, any repossessed  collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the  outstanding  loan balance as a result of
the greater likelihood of damage,  loss or depreciation.  In addition,  consumer
loan collections are dependent on the borrower's continuing financial stability,
and thus are more  likely to be  affected  by  adverse  personal  circumstances.
Furthermore,  the  application  of various  federal  and state  laws,  including
bankruptcy and  insolvency  laws, may limit the amount which can be recovered on
such loans.  At June 30, 1998,  none of the loans in the consumer loan portfolio
was non-performing.  There can be no assurance that delinquencies will not occur
in the future.

     The largest component of State Federal's  consumer loan portfolio  consists
of auto loans.  At June 30, 1998, such loans totaled  $765,000 or  approximately
1.09% of the  Association's  gross loan portfolio.  During the fiscal year ended
June 30, 1998, the Association  originated $418,000 in auto loans as compared to
$335,000  originated  in the same period ended June 30, 1997.  At June 30, 1998,
the  Association's  consumer loan portfolio totaled $1.0 million or 1.42% of its
total gross loan portfolio.

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

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

Originations and Purchases of Loans

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

     While the Company originates both adjustable-rate and fixed-rate loans, its
ability to originate  loans is dependent upon the relative  customer  demand for
loans in its market.  Demand is affected by the interest rate  environment.  The
Company is currently a portfolio lender.

     In fiscal 1998, the Company originated $16.5 million of loans,  compared to
$15.3  million  and $16.5  million in fiscal  1997 and 1996,  respectively.  The
Company has  experienced  significant  repayments of loans during the last three
fiscal years.  Principal  repayments in fiscal 1998 increased by $5.2 million to
$17.9 million from $12.7 million in fiscal 1997.

     The Company, in recent years, has not purchased mortgage-backed securities.



                                       10
<PAGE>

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

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

                                                      Year Ended June 30,
                                               ---------------------------------
                                                 1998         1997         1996
                                               -------      -------      -------
                                                         (In Thousands)
Originations by type:
 Adjustable rate:
  Real estate - one-to-four family ......      $ 2,361      $ 5,020      $ 6,532
              - commercial ..............           60           96          750
  Non-real estate - consumer ............           --           --           --
                                               -------      -------      -------
         Total adjustable-rate ..........        2,421        5,116        7,282
 Fixed rate:
  Real estate - one-to-four family ......        8,160      $ 4,910      $ 4,346
              - commercial ..............        5,399        4,625        3,966
  Non-real estate - consumer ............          540          667          913
                                               -------      -------      -------
         Total fixed-rate ...............       14,099       10,202        9,225
                                               -------      -------      -------
         Total loans originated .........       16,520       15,318       16,507

Purchases:
  Real estate - one-to-four family ......      $    --      $    --      $   139
              - commercial ..............        2,213          768          398
  Non-real estate - consumer ............           --           --           --
                                               -------      -------      -------
         Total loans ....................        2,213          768          537
  Mortgage-backed securities ............           --           --           --
                                               -------      -------      -------
         Total purchases ................        2,213          768          537
                                               -------      -------      -------

Sales and Repayments:
  Real estate - one-to-four family ......      $    --      $    --      $    --
              - commercial ..............           --           --           --
  Non-real estate - consumer ............           --           --           --
                  - commercial
                     business ...........           --           --           --
                                               -------      -------      -------
         Total loans ....................           --           --           --
  Mortgage-backed securities ............           --           --           --
                                               -------      -------      -------
         Total sales ....................           --           --           --
  Principal repayments ..................       18,241       12,735       11,512
                                               -------      -------      -------
         Total reductions ...............       18,241       12,735       11,512
                                               -------      -------      -------
Increase (decrease) in other items,
 net ....................................          310        2,118          756
                                               -------      -------      -------
         Net increase (decrease) ........      $   802      $ 5,469      $ 6,288
                                               =======      =======      =======

Non-Performing Assets and Classified Assets

     When a borrower  fails to make a required  payment on real  estate  secured
loans and consumer loans at fifteen days a late charge is automatically assessed
and a notice is sent. At 30 days after the payment is due, the Company generally
institutes  collection  procedures by mailing a delinquency notice. The customer
is contacted again, by notice and/or telephone, when the payment is 60 days past
due. In most cases, delinquencies are cured promptly; however, if a loan secured
by real estate or other  collateral  has been  delinquent for more than 90 days,
satisfactory  payment  arrangements  must  be  adhered  to or the  Company  will
initiate foreclosure or repossession.

                                       11
<PAGE>

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

     The following table sets forth information  concerning  delinquent mortgage
and other loans at June 30,  1998.  The amounts  presented  represent  the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                                                  Real Estate
                                                ------------------------------------------------------------------------------------
                                                                                                           Commercial and
                                                           One-to-four family                               Multi-Family
                                                -------------------------------------          -------------------------------------
                                                Number          Amount        Percent          Number          Amount        Percent
                                                ------          ------        -------          ------          ------        -------
                                                                               (Dollars in Thousands)
<S>                                                 <C>         <C>             <C>                 <C>        <C>             <C>
Loans delinquent for:

 30-59 days ..........................              28          $1,459          3.28%               1          $  260          1.12%
 60-89 days ..........................               7             556          1.25                0               0             0
 90 days and over ....................               7             204          0.46                0               0             0
                                                ------          ------          ----           ------          ------          ----

     Total delinquent loans ..........              42          $2,219          4.99%               1          $  260          1.12%
                                                ======          ======          ====           ======          ======          ====
</TABLE>


     At June  30,  1998,  there  were no  delinquent  construction  loans  and 6
consumer loans for $41,000.  The ratio of delinquent  loans to total loans (net)
was 3.65% at June 30, 1998.

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

<TABLE>
<CAPTION>
                                                              June 30,
                                                  --------------------------------
                                                   1998         1997         1996
                                                  ------       ------       ------
                                                      (Dollars in Thousands)
<S>                                               <C>          <C>          <C>   
Non-accruing loans:
  One-to-four family .......................      $   96       $  810       $  330
                                                  ------       ------       ------
     Total .................................          96          810          330

Accruing loans delinquent more than 90 days:
  One-to-four family .......................           4          181          148
  Multi-family and commercial real estate ..          --           --           --
                                                  ------       ------       ------
     Total .................................           4          181          148

Foreclosed assets:
  One-to-four family .......................         484          334           --
  Multi-family and commercial real estate ..         805           --           --
                                                  ------       ------       ------
     Total .................................       1,289          334           --

Total non-performing assets ................      $1,389       $1,325       $  478
                                                  ======       ======       ======
Total as a percentage of total assets ......        1.55%        1.54%         .62%
                                                  ======       ======       ======
</TABLE>

     Non-Performing  Assets.  Included in total non-performing  assets are three
mortgage loans on  one-to-four  family  dwellings  totaling  $100,000.  One loan
totaling $72,000 has now been paid current.  One loan totaling $24,000 is in the
foreclosure process and no loss is expected.



                                       12
<PAGE>

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

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

     In connection  with the filing of its periodic  reports with the OTS and in
accordance with its classification of assets policy,  the Association  regularly
reviews  the loans in its  portfolio  to  determine  whether  any loans  require
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's  review  of its  assets,  at June 30,  1998,  the  Association  had
classified  a total of $1.1  million  of its  assets as  substandard,  none were
classified as doubtful, and none were classified as loss.

     At June 30, 1998, total  classified  assets comprised $1.3 million or 12.3%
of the Association's capital, or 1.50% of the Association's total assets.

     At June 30, 1998 the  Association  had a total of $1.3  million in property
acquired  in  settlement  of loans.  Included  in this  total is  $345,000  in a
one-family dwelling,  $139,000 in two duplexes,  and $805,000 in commercial real
estate. All of the properties are now earning income as they are all rented.

     Allowance for Loan Losses.  The  allowance  for loan losses is  established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity.  Such  evaluation,  which  includes  a review of loans for which  full
collectibility may not be reasonably assured,  considers among other matters the
estimated  fair  value  of  the  underlying  collateral,   economic  conditions,
historical  loan loss  experience and other factors that warrant  recognition in
providing for an adequate loan allowance.

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

     Although management believes that it uses the best information available to
determine  the  allowances,   unforeseen   market  conditions  could  result  in
adjustments and net earnings could be  significantly  affected if  circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.  Future  additions to the  Association's  allowances  will be the
result of periodic  loan,  property  and  collateral  reviews and thus cannot be
predicted in advance.  At June 30, 1998, the  Association  had a total allowance
for loan losses of $206,000 or 0.30% of loans receivable, net. See Notes A and E
of the Notes to Consolidated  Financial Statements and "Management's  Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report to Stockholders attached hereto as Exhibit 13.


                                       13
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Year Ended June 30,
                                                           -------------------------------
                                                           1998          1997         1996
                                                           -----        -----        -----
                                                               (Dollars in Thousands)
<S>                                                        <C>          <C>          <C>  
Balance at beginning of period ......................      $ 221        $ 240        $ 216

Charge-offs .........................................        (67)         (55)          --
Recoveries ..........................................         --           --           --
                                                           -----        -----        -----
Net charge-offs .....................................        (67)         (55)          --
Transfer to allowance for decline in
   value of foreclosed real estate ..................         --           --           --
Additions charged to operations .....................         52           36           24
                                                           -----        -----        -----
Balance at end of period ............................      $ 206        $ 221        $ 240
                                                           -----        -----        =====

Ratio of net charge-offs during the period to average
   loans outstanding during the period ..............        .10%         .08%        ---%
                                                           =====        =====        =====

Ratio of net charge-offs during the period to average
   non-performing assets ............................       4.69%        4.59%        ---%
                                                           =====        =====        =====
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                           June 30
                                                          ------------------------------------------------------------------------
                                                                 1998                        1997                     1996
                                                          --------------------       ---------------------      ------------------
                                                                      Percent                     Percent                  Percent
                                                                      of Loans                    of Loans                 of Loans
                                                                       in Each                    in Each                  in Each
                                                                      Category                    Category                 Category
                                                                      to Total                    to Total                 to Total
                                                          Amount       Loans         Amount        Loans        Amount      Loans
                                                          ------       -----         ------        -----        ------      -----
                                                                                  (Dollars In thousands)
<S>                                                        <C>          <C>           <C>          <C>           <C>         <C>   
One- to four- family ..............................        $ 67         63.41%        $ 67         63.93%        $ 64        66.07%
Multi-family and commercial real estate ...........          58         32.98           51         29.35           42        27.76
Construction ......................................          --          2.19           --          5.09           --         4.82
Consumer ..........................................          10          1.42           11          1.63           --         1.35
Unallocated .......................................          71            --           92            --          134           --
                                                           ----        ------         ----        ------         ----       ------
     Total ........................................        $206        100.00%        $221        100.00%        $240       100.00%
                                                           ====        ======         ====        ======         ====       ======
</TABLE>


                                       14
<PAGE>


Investment Activities

     State Federal must maintain  minimum levels of investments  that qualify as
liquid  assets  under  OTS  regulations.  Liquidity  may  increase  or  decrease
depending upon the  availability of funds and comparative  yields on investments
in relation to the return on loans. Historically,  the Association has generally
maintained its liquid assets above the minimum  requirements  imposed by the OTS
regulations  and at a level  believed  adequate to meet  requirements  of normal
daily activities, repayment of maturing debt and potential deposit outflows. The
Association's  investment policy objective in this regard sets the Association's
desired  liquidity  between 6% and 12%. As of June 30, 1998,  the  Association's
liquidity  ratio  (liquid  assets as a percentage  of net  withdrawable  savings
deposits and current borrowings) was 10.54%. See "Regulation - Liquidity."

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

     Generally,  the  investment  policy of the  Association  is to invest funds
among  various   categories  of  investments  and  maturities   based  upon  the
Association'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.

     Cash and Investments in Certificates of Deposit and Other  Investments.  At
June 30,  1998,  the  Company's  cash  and  interest-bearing  deposits  in other
financial  institutions  totaled $9.4  million,  or 10.47% of its total  assets.
Certificates of deposits invested in other institutions  totaled $1.5 million or
1.67% of its total  assets.  The  Association  has a $949,000  investment in the
common stock of the FHLB of Des Moines in order to satisfy the  requirement  for
membership  in such  institution.  The Company has $1.3  million or 1.45% of its
total assets invested in corporate  securities,  which includes preferred common
stocks and mutual  funds.  The Company  has $1.4  million or 1.56% of its assets
invested  in  federal  agency  securities.  See Note D of Notes to  Consolidated
Financial  Statements in the Annual Report to  Stockholders  attached  hereto as
Exhibit 13.

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



                                       15
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          June 30,
                                                            -----------------------------------------------------------------------
                                                                    1998                     1997                       1996
                                                            -------------------       -------------------       -------------------
                                                             Book         % of         Book        % of          Book         % of
                                                             Value        Value        Value       Value         Value        Total
                                                            -------      ------       -------      ------       -------      ------
                                                                                    (Dollars in Thousands)
<S>                                                         <C>           <C>         <C>          <C>          <C>           <C>   
Investment Securities:
     Corporate equity securities .....................      $ 1,301       35.23%      $ 1,221       27.58%      $   723       23.34%
     Federal agency debt securities ..................        1,443       39.07         2,256       50.96         1,624       52.44
FHLB stock ...........................................          949       25.70           950       21.46           750       24.22
                                                            -------      ------       -------      ------       -------      ------
     Total investment securities and FHLB
      stock ..........................................      $ 3,693      100.00%      $ 4,427      100.00%      $ 3,097      100.00%
                                                            =======      ======       =======      ======       =======      ======

Other Interest-Earning Assets:
  Interest-bearing deposits with banks ...............      $ 9,107       86.03%      $ 3,453       43.80%      $ 2,413       35.26%
  Certificates of deposit invested
   in other institutions .............................        1,479       13.97         4,430       56.20         4,430       64.74
                                                            -------      ------       -------      ------       -------      ------
     Total ...........................................      $10,586      100.00%      $ 7,883      100.00%      $ 6,843      100.00%
                                                            =======      ======       =======      ======       =======      ======
Average remaining life or term to repricing of
    certificates of deposit ..........................       1 year                    1 year                   2 years
</TABLE>


Contractual maturities of federal agency debt securities are shown below:

                                                        June 30, 1998
                                                   -----------------------
                                                                    Weighted
                                                     Book           Average
                                                    Value            Yield
                                                   --------          -----
                                                    (Dollars in Thousands)
Due in one year or less                             $   ---           ---%
Due after one year through five years                   307           7.81
Due after five years through ten years                  310           7.32
Due after ten years                                     826           7.85
                                                   --------
                                                     $1,443
                                                   ========

                                       16
<PAGE>



Sources of Funds

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

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

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

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

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

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

                                                Year Ended June 30,
                                      ----------------------------------------
                                        1998            1997            1996
                                      --------        --------        --------
                                               (Dollars in Thousands)

Opening balance ................      $ 50,346        $ 45,732        $ 45,596
Deposits .......................        57,637          58,944          45,658
Withdrawals ....................       (57,179)        (56,885)        (47,952)
Interest credited ..............         2,868           2,555           2,430
                                      --------        --------        --------

Ending balance .................      $ 53,672        $ 50,346        $ 45,732
                                      ========        ========        ========

Net increase (decrease) ........      $  3,326        $  4,614        $    136
                                      ========        ========        ========

Percent increase (decrease) ....          6.61%          10.09%           0.30%
                                      ========        ========        ========



                                       17
<PAGE>


         The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity as
of June 30, 1998.

<TABLE>
<CAPTION>
                                                   Maturity
                                 ------------------------------------------------
                                                 Over        Over
                                 3 Months       3 to 6      6 to 12       Over
                                  or Less       Months      Months      12 months      Total
                                 --------      -------      -------     ---------     -------
                                                    (Dollars in Thousands)
<S>                               <C>          <C>          <C>          <C>          <C>    
Certificates of deposit less
 than $100,000 .............      $ 6,894      $ 6,213      $ 9,832      $13,098      $36,037
Certificates of deposit of
 $100,000 or more ..........        1,616        1,716        3,164        1,788        8,284
                                  -------      -------      -------      -------      -------
Total certificates of
 deposit ...................      $ 8,510      $ 7,929      $12,996      $14,886      $44,321
                                  =======      =======      =======      =======      =======
</TABLE>

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

     State Federal's borrowings historically have consisted of advances from the
FHLB of Des Moines upon the  security  of a blanket  collateral  agreement  of a
percentage of unencumbered  loans. Such advances can be made pursuant to several
different credit programs,  each of which has its own interest rate and range of
maturities.  At June  30,  1998,  the  Association  had  $19.0  million  in FHLB
advances.

     At June 30, 1998,  the  Association  had no repurchase  agreements or other
borrowings not mentioned above outstanding.

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

<TABLE>
<CAPTION>
                                                               Year Ended June 30,
                                                      -----------------------------------
                                                       1998          1997          1996
                                                      -------       -------       -------
                                                             (Dollars In Thousands)
<S>                                                   <C>           <C>           <C>    
Maximum Balance:
  FHLB advances ................................      $19,000       $19,000       $15,000
                                                      =======       =======       =======

Average Balance:
  FHLB advances ................................      $18,992       $18,500       $11,846
                                                      =======       =======       =======


 Weighted average interest rate of FHLB advances         5.98%         6.34%         5.73%
                                                      =======       =======       =======
</TABLE>


                                       18
<PAGE>

Service Corporation Activities

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

     State  Federal  has one service  corporation,  State  Service  Corporation,
located in Des Moines,  Iowa.  State Service  Corporation was organized by State
Federal in 1976. State Service Corporation owns and operates a 60-unit apartment
complex, in Pleasant Hill, Iowa.

     During the fiscal year ended June 30,  1998,  State  Service  Corporation's
gross revenues from property management activities (consisting of rental income)
totaled  approximately   $303,000  and  expenses  (consisting  of  depreciation,
interest,  property  taxes,  management  fees, and  maintenance)  were $258,000.
Income tax expense totaled $26,000 for 1998.  State Service  Corporation has not
had significant  capital  expenditures  with regard to its real estate operation
over the past three fiscal  years.  Revenues  from State  Service  Corporation's
interest  income on real estate  contracts  totaled  $19,000.  See Note K to the
Notes  to  Consolidated  Financial  Statements  in the  1998  Annual  Report  to
Stockholders attached hereto as Exhibit 13.


                                   REGULATION

General

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

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

Federal Regulation of Savings Associations

     The  OTS  has   extensive   authority   over  the   operations  of  savings
associations.  As part of this  authority,  State  Federal is  required  to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC.  The last regular  examination of State Federal was as of December
31, 1997.  When these  examinations  are conducted by the OTS and the FDIC,  the
examiners may require the  Association to provide for higher general or specific
loan loss  reserves.  All  savings  associations  are  subject to a  semi-annual
assessment,  based upon the  savings  association's  total  assets,  to fund the
operations  of the OTS. The  Association's  OTS  assessment  for the fiscal year
ended June 30, 1998 was approximately $27,300.

     The  OTS  also  has  extensive   enforcement  authority  over  all  savings
institutions  and their  holding  companies,  including  State  Federal  and the
Holding Company.  This enforcement  authority includes,  among other things, the
ability to assess civil money penalties,  to issue  cease-and-desist  or removal
orders and to initiate injunctive actions. 



                                       19
<PAGE>

In general,  these  enforcement  actions may be initiated for violations of laws
and regulations and unsafe or unsound practices.  Other actions or inactions may
provide  the basis for  enforcement  action,  including  misleading  or untimely
reports  filed  with  the  OTS.  Except  under  certain  circumstances,   public
disclosure of final enforcement actions by the OTS is required.

     In  addition,  the  investment,  lending  and  branching  authority  of the
Association  is prescribed by federal law and it is prohibited  from engaging in
any activities not permitted by such laws. For instance,  no savings institution
may invest in non-investment grade corporate debt securities.  In addition,  the
permissible  level of  investment  by federal  associations  in loans secured by
non-residential real property may not exceed 400% of total capital,  except with
approval of the OTS. Federal savings  associations are also generally authorized
to  branch   nationwide.   State  Federal  is  in  compliance   with  the  noted
restrictions.

     The    Association's     general     permissible    lending    limit    for
loans-to-one-borrower  is equal to the greater of $500,000 or 15% of  unimpaired
capital  and  surplus  (except  for  loans  fully  secured  by  certain  readily
marketable  collateral,  in  which  case  this  limit  is  increased  to  25% of
unimpaired  capital and surplus).  At June 30, 1998, the  Association's  lending
limit under this  restriction  was $1.6 million.  State Federal is in compliance
with the loans-to-one-borrower limitation.

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

Insurance of Accounts and Regulation by the FDIC

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

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

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it  determines  that the  reserve  ratio of the  SAIF  will be less  than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     Effective  January 1, 1997,  the premium  schedule for BIF and SAIF insured
institutions   ranged  from  0  to  27  basis  points.   However,   SAIF-insured
institutions are required to pay a Financing  Corporation (FICO) assessment,  in
order to fund the  interest on bonds  issued to resolve  thrift  failures in the
1980s,  equal to  approximately  6.48  basis  points  for each $100 in  domestic
deposits,   while   BIF-insured   institutions   pay  an  assessment   equal  to
approximately



                                       20
<PAGE>

1.52 basis points for each $100 in domestic deposits. The assessment is expected
to be  reduced  to 2.43 basis  points no later  than  January 1, 2000,  when BIF
insured  institutions  fully participate in the assessment.  These  assessments,
which may be revised based upon the level of BIF and SAIF deposits will continue
until the bonds mature in the year 2017.

Regulatory Capital Requirements

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

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

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

     At June 30, 1998 the Association had tangible  capital of $9.4 million,  or
11.18% of adjusted total assets,  which is approximately  $8.1 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

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

     At June 30, 1998, the  Association  had core capital equal to $9.4 million,
or 11.18% of adjusted  total  assets,  which is $6.0  million  above the minimum
leverage ratio requirement of 3% as in effect on that date.

     The OTS risk-based  requirement requires savings associations to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of non-traditional  activities. At June 30, 1998, State Federal had
no capital  instruments  that qualify as  supplementary  capital and $206,000 of
general loss reserves, which was less than 0.41% of risk-weighted assets.

     Certain  exclusions from capital and assets are required to be made for the
purpose  of  calculating  total  capital.  Such  exclusions  consist  of  equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments. State Federal had no such
exclusions from capital and assets at June 30, 1998.



                                       21
<PAGE>

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

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

     On June 30,  1998,  the  Association  had total  capital  of $10.6  million
(including $9.4 million in core capital and $206,000 in qualifying supplementary
capital) and risk-weighted assets of $49.8 million or total capital of 19.31% of
risk-weighted  assets.  This amount was $5.4 million above the 8% requirement in
effect on that date.

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

     As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited  capital  maintenance   guarantee  with  respect  to  the  institution's
achievement of its capital requirements.

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

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

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



                                       22
<PAGE>

Limitations on Dividends and Other Capital Distributions

     OTS regulations  impose various  restrictions on savings  associations with
respect  to their  ability  to make  distributions  of  capital,  which  include
dividends,  stock  redemptions  or  repurchases,   cash-out  mergers  and  other
transactions  charged to the capital  account.  OTS regulations  also prohibit a
savings  association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result,  the  regulatory  capital  of the  association
would be reduced below the amount  required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.

     Generally,  savings  associations,  such as State Federal,  that before and
after the  proposed  distribution  meet  their  capital  requirements,  may make
capital  distributions  during any calendar year equal to the greater of 100% of
net  income for the  year-to-date  plus 50% of the amount by which the lesser of
the  association's  tangible,  core or  risk-based  capital  exceeds its capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However,  an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. State Federal may
pay dividends in accordance with this general authority.

     Savings  associations  proposing to make any capital distribution need only
submit  written  notice to the OTS 30 days prior to such  distribution.  Savings
associations  that do not,  or would  not meet  their  current  minimum  capital
requirements following a proposed capital distribution, however, must obtain OTS
approval  prior  to  making  such  distribution.  The  OTS  may  object  to  the
distribution  during that 30-day period based on safety and soundness  concerns.
See "- Regulatory Capital Requirements."

     The OTS has  proposed  regulations  that would  revise the current  capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory concern, and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Savings  associations  that would remain  adequately  capitalized  following the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings  association  may not make a capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

Liquidity

     All savings associations, including State Federal, are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. For a discussion of what the Association
includes  in  liquid  assets,  see  "Management's  Discussion  and  Analysis  of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources".  This  liquid  asset  ratio  requirement  may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.

     In addition,  short-term liquid assets (e.g.,  cash, certain time deposits,
certain bankers  acceptances and short-term United States Treasury  obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable  deposit accounts and current  borrowings.  Penalties may be
imposed  upon   associations   for  violations  of  either  liquid  asset  ratio
requirement.  At June 30, 1998,  the  Association  was in  compliance  with both
requirements,  with an overall  liquid  asset  ratio of 10.54% and a  short-term
liquid assets ratio of 10.54%.



                                       23
<PAGE>

Accounting

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

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


                                       24
<PAGE>

Qualified Thrift Lender Test

     All savings associations, including the Association, are required to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative, the Savings Association may maintain 60% of its assets specified in
Section  770(a)(19) of the Internal Revenue Code. Under either test, such assets
primarily consist of residential housing related loans and investments.  At June
30,  1998,  the  Association  met the test and has always met the test since its
effectiveness.

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

Community Reinvestment Act

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

     The federal banking agencies,  including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's  compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years,  the  Association  may be  required  to devote  additional  funds for
investment and lending in its local community.  The Association examined for CRA
compliance in 1990 and received a rating of satisfactory.

Transactions with Affiliates

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

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on

                                       25
<PAGE>

loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

Holding Company Regulation

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

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

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

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

Federal Securities Law

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

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

Federal Reserve System

     The Federal Reserve Board requires all depository  institutions to maintain
non-interest  bearing  reserves at specified  levels  against their  transaction
accounts (primarily checking, NOW and Super NOW checking accounts).  At June 30,
1998, the  Association was in compliance  with these reserve  requirements.  The
balances  maintained  to meet the  reserve  requirements  imposed by the Federal
Reserve Board may be used to satisfy liquidity  requirements that may be imposed
by the OTS. See "-- Liquidity."

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



                                       26
<PAGE>

Federal Home Loan Bank System

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

     As a member,  State  Federal is required to purchase and maintain  stock in
the FHLB of Des Moines.  At June 30,  1998,  State  Federal had $949,000 in FHLB
stock,  which  was in  compliance  with this  requirement.  In past  years,  the
Association has received substantial  dividends on its FHLB stock. Over the past
five fiscal years such  dividends  have averaged 7.39% and were 6.81% for fiscal
year 1998.

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

     For the fiscal year ended June 30, 1998,  dividends paid by the FHLB of Des
Moines to State Federal totaled $64,700,  which constitutes a $400 increase from
the amount of  dividends  received in the fiscal year ended June 30,  1997.  The
$16,000  dividend  received  for the  quarter  ended June 30,  1998  reflects an
annualized rate of 7.0%, the same rate for the same quarter ended June 30, 1997.

Federal and State Taxation

     Prior to the year ended June 30,  1997,  savings  associations  such as the
Association that meet certain  definitional tests relating to the composition of
assets and other conditions  prescribed by the Internal Revenue Code of 1986, as
amended (the "Code"),  were permitted to establish reserves for bad debts and to
make annual  additions  thereto which may, within specified  formula limits,  be
taken as a  deduction  in  computing  taxable  income  for  federal  income  tax
purposes.  The amount of bad debt reserve deduction for  "non-qualifying  loans"
are computed  under the  experience  method.  The amount of the bad debt reserve
deduction for  "qualifying  real  property  loans"  (generally  loans secured by
improved real estate) was to be computed under either the  experience  method or
the percentage of taxable income method (based on an annual election). Under the
experience  method, the bad debt reserve deduction is an amount determined under
a formula based  generally upon the bad debts actually  sustained by the savings
association over a period of years.

     The  percentage  of  specially  computed  taxable  income  that was used to
compute a savings  association's bad debt reserve deduction under the percentage
of taxable income method (the  "percentage  bad debt  deduction") was 8% for the
years 1987-1995.  The percentage bad debt deduction thus computed was reduced by
the  amount  permitted  as  a  deduction  for  non-qualifying  loans  under  the
experience method. The availability of this percentage-of-taxable- income method
permitted  qualifying  savings  associations  to be taxed  at a lower  effective
federal  income  tax  rate  than  that  applicable  to  corporations   generally
(approximately  31.3%  assuming  the  maximum  percentage  bad debt  deduction).
Pursuant to changes in Federal tax law enacted in August  1996,  the  percentage
bad debt deduction has been  eliminated for tax years  beginning  after December
31, 1995.

     The federal tax legislation enacted in August 1996 imposes a requirement to
recapture into taxable  income the portion of the qualifying and  non-qualifying
loan reserves in excess of the  "base-year"  balances of such reserves.  For the
Association,  the  base-year  reserves are the balances as of December 31, 1987.
Recapture of the excess  reserves  will occur over a six-year  period which will
begin for the bank  either in fiscal  year 1997,  1998,  or 1999,


                                       27
<PAGE>

depending on whether it meets certain residential lending requirements. The Bank
previously established,  and will continue to maintain, a deferred tax liability
with  respect to its  Federal tax bad debt  reserves in excess of the  base-year
balances;  accordingly,  the  legislative  changes  will have no effect on total
income tax expense for financial reporting purposes.

     Also,  under the  August  1996  legislation,  the  Association's  base-year
Federal tax bad debt reserves are "frozen" and subject to current recapture only
in very limited circumstances.  Generally,  recapture of all or a portion of the
base-year reserves will be required if the Association pays a dividend in excess
of its current or accumulated  earnings or profits,  redeems any of its stock or
is  liquidated.  The  Association  has not  established  a deferred  federal tax
liability under Statement of Financial Accounting Standards ("SFAS") No. 109 for
its base-year Federal tax bad debt reserves,  as it does not anticipate engaging
in any of the transactions that would cause such reserves to be recaptured.  The
unrecognized deferred tax liability was $520,000 at June 30, 1998.

     In addition to the regular  income  tax,  corporations,  including  savings
associations such as the Association, generally are subject to a minimum tax. An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association,  are also subject to an environmental tax equal to 0.12% of the
excess of alternative  minimum  taxable income for the taxable year  (determined
without regard to net operating  losses and the deduction for the  environmental
tax) over $2 million.

     The  Association  and its subsidiary  have not been audited by the IRS with
respect to consolidated  federal income tax returns within the past three years.
With respect to years  examined by the IRS,  either all  deficiencies  have been
satisfied or  sufficient  reserves  have been  established  to satisfy  asserted
deficiencies.  In the  opinion  of  management,  any  examination  of still open
returns  (including  returns of subsidiaries  and  predecessors  of, or entities
merged into, the Association)  would not result in a deficiency which could have
a material adverse effect on the financial  condition of the Association and its
consolidated subsidiaries.

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

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

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

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



                                       28
<PAGE>

Competition

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

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

     The Association's primary concentration is Des Moines, Iowa. There are four
savings  institutions,  over 13  commercial  banks and  approximately  35 credit
unions in the Association's market area. The Association  estimates its share of
the savings market in its primary market area to be approximately 1.0%.

Employees

     At June  30,  1998,  the  Company  and  its  subsidiary  had a total  of 17
employees.  The  Association's  employees are not  represented by any collective
bargaining group. Management considers its employee relations to be good.


                                       29
<PAGE>

Item 2.  Properties

     The  Association  conducts  its  business  at its main office and one other
location in its primary market area. The following table sets forth  information
relating to each of the Association's offices as of June 30, 1998.

     The Association  owns its branch office and its main office.  The total net
book  value  of  the  Association's  premises  and  equipment  (including  land,
building,  furniture, fixtures and equipment) at June 30, 1998 was $1.6 million.
See Note I of Notes to Consolidated Financial Statements in the Annual Report to
Stockholders attached hereto as Exhibit 13.

<TABLE>
<CAPTION>
                                                                                     Total
                                                                                  Approximate
                                      Date                  Square             Net Book Value at
      Location                      Acquired               Footage               June 30, 1998
      --------                      --------               -------               -------------
<S>                             <C>                         <C>                    <C>
Main Office:
  519 Sixth Avenue              January 3, 1995             3,300                  $743,100
  Des Moines, Iowa

Branch Office:
  4018 University                     1985                  4,000                  $323,200
  Des Moines, Iowa
</TABLE>

     The  Association  also owns a parcel of land located in Clive,  Iowa with a
net book value of $321,000 at June 30, 1998. The  Association  conducts its data
processing through a service bureau, NCR Corporation.  The net book value of the
data processing and computer  equipment  utilized by the Association at June 30,
1998 was $131,900.  The net book value of other  furniture and equipment at June
30, 1998 was $44,500.

Item 3.  Legal Proceedings

     State  Federal is involved  from time to time as  plaintiff or defendant in
various  legal  actions  arising in the  normal  course of its  business.  State
Service Corporation, the Association's wholly-owned subsidiary is not a party to
any legal  action.  While the ultimate  outcome of these  proceedings  cannot be
predicted with certainty,  it is the opinion of management,  after  consultation
with counsel representing State Federal in the proceedings,  that the resolution
of these  proceedings  should  not have a  material  effect  on State  Federal's
consolidated financial position or results of operations.

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

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation of proxies or otherwise, during the quarter ended June 30, 1998.


                                     PART II

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

     Page 42 of the  attached  1998  Annual  Report  to  Stockholders  is herein
incorporated  by  reference.  The  dividend  payout  ratio for June 30, 1998 was
30.7%.


                                       30
<PAGE>

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

     Pages 4 through 15 of the attached 1998 Annual Report to  Stockholders  are
herein incorporated by reference.

Item 7.  Financial Statements

     The  following  information  appearing in the  Company's  Annual  Report to
Stockholders  for the year ended June 30, 1998 is  incorporated  by reference in
this Annual Report on Form 10-KSB as Exhibit 13.

Annual Report Section                                   Pages in Annual Report
---------------------                                   ----------------------
Independent Auditors' Report                                      16

Consolidated Balance Sheets as of
 June 30, 1998 and 1997                                           17

Consolidated Statements of Income
 for the Years Ended June 30, 1998,
 1997 and 1996                                                    18

Consolidated Statements of
 Stockholders' Equity for Years
 Ended June 30, 1998, 1997 and 1996                               19

Consolidated Statements of Cash Flows
 for Years Ended June 30, 1998, 1997
 and 1996                                                         20

Notes to Consolidated Financial
 Statements                                                       21


     With the exception of the aforementioned information,  the Company's Annual
Report to  Stockholders  for the year ended June 30, 1998 is not deemed filed as
part of this Annual Report on Form 10-KSB.

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

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



                                       31
<PAGE>

                                    PART III


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

Directors

     Information  concerning  directors and executive officers of the Company is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.

Item 10.  Executive Compensation

     Information  concerning  executive  compensation is incorporated  herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held in 1998,  a copy of which  will be filed not later than
120 days after the close of the fiscal year.

Item 11.  Security Ownership of Certain Beneficial
          Owners and Management                    

     Information  concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  Proxy
Statement for the Annual Meeting of  Stockholders  to be held in 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

Item 12.  Certain Relationships and Related Transactions

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.


                                       32
<PAGE>

                                     PART IV

Item 13.          Exhibits and Reports on Form 8-K
                  (a)  Exhibits

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

      3(ii)  By-Laws                                                          *

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

      9      Voting Trust Agreement                                          None

     10      Executive Compensation Plans and                                 *
             Arrangements

             (a)  Employment Contract between:                                *

                  (I)     John F. Golden and the Association

                  (ii)   Andra K. Black and the Association

                  (iii)  Craig Wood and the Association

             (b)  1993 Stock Option and Incentive                             *
                  Plan

             (c)  1993 Management Recognition and                             *
                  Retention Plan

             (d)  Deferred Compensation Agreement                             *

     11      Statement re:  computation of per                               None
             share earnings

     13      Annual Report to Security Holders                                13

     16      Letter re:  change in certifying                                None
             accountants

     18      Letter re:  change in accounting                                None
             principles

     21      Subsidiaries of Registrant                                       21

     22      Published report regarding                                      None
             matters submitted to vote
             of security holders

     23      Consents of Experts and Counsel                                  23

     24      Power of Attorney                                           Not required

     27      Financial Data Schedule                                         None

     28      Information from reports                                        None
             furnished to state insurance
             regulatory authorities

     99      Additional Exhibits                                             None

             (b)  Reports on Form 8-K

             A report on Form 8-K was filed on May 14, 1998, to report financial
             results for the quarter ended March 31, 1998.
</TABLE>

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


                                       33

<PAGE>

                                                    SIGNATURES

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

                                            STATEFED FINANCIAL CORPORATION

Date:     September 25, 1998                By: /s/ John F. Golden              
                                         .      --------------------------------
                                                John F. Golden
                                                (Duly Authorized Representative)

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

/s/  John F. Golden                              /s/ Craig Wood           
------------------------                      --------------------------
JOHN F. GOLDEN                                CRAIG WOOD
Chairman of the Board                         Director and Senior Vice
 President and Chief Executive                President
 Officer

Date:  September 25, 1998                     Date:  September 25, 1998     


/s/ Harry A. Winegar                          /s/ Eugene M. McCormick       
------------------------                      --------------------------
HARRY A. WINEGAR                              EUGENE M. MCCORMICK
Director                                      Director

Date:  September 25, 1998                     Date: September 25, 1998      


/s/ Sidney M. Ramey                           /s/ Kevin J. Kruse            
------------------------                     --------------------------
SIDNEY M. RAMEY                               KEVIN J. KRUSE
Director                                      Director

Date:  September 25, 1998                     Date: September 25, 1998    


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

                                              Date: September 25, 1998