EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this
6th day of February, 1998 (the "Effective Date") by and among DOWNEY SAVINGS AND
LOAN ASSOCIATION, F. A. (the "Association"),  Downey Financial Corp., a Delaware
Corporation,  ("Downey")  and  James  W.  Lokey  ("Executive")  (all of whom are
sometimes hereinafter referred to collectively as the "Parties").

RECITALS

     A. Whereas, Executive has been employed by the Association as its President
and Chief  Executive  Officer since  February 18, 1997 and Executive is also the
President and Chief Executive Officer of the Association's parent unitary thrift
holding company, Downey and;

     B.  Whereas,  the  Association  desires to continue to avail  itself of the
skill,  knowledge and  experience of Executive in order to ensure the successful
management of the Association's business.

     C. Whereas,  the Parties  hereto desire to specify the terms of Executive's
employment  as President  and Chief  Executive  Officer of the  Association  and
Executive's  position and duties as  President  and Chief  Executive  Officer of
Downey.

     NOW,  THEREFORE,  IN  CONSIDERATION  OF  THE  MUTUAL  PROMISES,  COVENANTS,
AGREEMENTS, CONDITIONS AND UNDERTAKINGS HEREINAFTER SET FORTH, THE PARTIES AGREE
AS FOLLOWS:

     1. TERM.  The  Association  hereby employs  Executive and Executive  hereby
accepts  employment  with the  Association  for the  period  beginning  with the
Effective  Date of this  Agreement  and  ending on March 1,  1999 (the  "Term"),
subject to prior  termination of this Agreement as hereinafter  provided.  Where
used herein,  "Term" shall refer to the entire period of employment of Executive
by the  Association  whether  for the period  provided  above and as extended or
terminated earlier as hereinafter provided.

     2. DUTIES; PERFORMANCE

     (a) For Association. Executive shall hold the office of President and Chief
Executive  Officer  of  the  Association  and  perform  the  duties  customarily
performed by such officer of a savings  association,  and  including the general
supervision  and  operation  of the  business  and  affairs of the  Association,
reporting to the applicable  regulatory  authorities regarding the activities of
the Association  subject to the direction of and the powers vested by law in the
Board  of  Directors  of the  Association  (the  "Association  Board")  and  the
Association's  stockholder.  The  Parties  hereto  acknowledge  and  agree  that
Executive  shall be  nominated as a Class 1 Director of the  Association  at the
Association's  1998  Annual  Meeting  of  Stockholders  and  that,  if  elected,
Executive  shall  serve  as a Class 1  Director  of the  Association  until  the
Association's  1999 Annual  Meeting of  Stockholders  and until his successor is
duly elected and qualified.

     (b) For  Downey.  Executive  shall hold the office of  President  and Chief
Executive Officer of Downey and perform the duties customarily performed by such
officer of a unitary thrift holding company,  including the general  supervision
and  operation  of the  business  and  affairs  of Downey and  reporting  to the
applicable regulatory authorities regarding the activities of Downey, subject to
the direction of and the powers


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vested by law in the Board of Directors  of Downey (the "Downey  Board") and the
Downey  stockholders.  The Parties hereto  acknowledge  and agree that Executive
shall be  nominated  as a Class 1 Director  of Downey at  Downey's  1998  Annual
Meeting of Stockholders and that, if elected, Executive shall serve as a Class 1
Director of Downey until Downey's 1999 Annual Meeting of Stockholders  and until
his successor is duly elected and qualified.

     (c)  Performance of Duties.  Except as provided for herein,  the duties and
position  of  Executive  as  President  and  Chief  Executive   Officer  of  the
Association  and  Downey  hereunder  may be changed  only by the mutual  written
agreement of the Parties.  During the Term hereof,  Executive  shall perform the
services herein contemplated to be performed by Executive faithfully, diligently
and to the best of Executive's  ability and in compliance with  instructions and
policies of the respective  Boards of Directors of the  Association  and Downey,
the Association's  Charter and Bylaws, and Downey's Certificate of Incorporation
and  Bylaws and with all  applicable  laws and  regulations.  As a member of the
respective  Boards of Directors of the Association  and Downey,  Executive shall
faithfully,  diligently  and to the  best of  Executive's  ability  perform  the
services of a Director of the  Association  and Downey.  While an employee and a
Director of the Association and while serving as a Director of Downey, or any of
the Association's or Downey's  respective  subsidiaries,  Executive shall not be
entitled to any  retainer or Boards of  Directors  fees paid for  attendance  at
Association,  Downey or their  respective  subsidiaries'  Board of  Directors or
Board Committee meetings.

     3. COMPENSATION.

     (a) Base Salary. For Executive's  services rendered  hereunder,  during the
Term  hereof,  the  Association  shall pay or cause to be paid a base  salary to
Executive at the rate of Three Hundred  Thousand  Dollars  ($300,000)  per annum
("Base  Salary"),  payable in conformity with the  Association's  normal payroll
periods and procedures.

     (b) Annual  Incentive Plan. In addition to Executive's Base Salary provided
for under  subparagraph 3(a) hereof,  Executive shall be eligible to participate
at a target of 50% of Executive's  Base Salary in Downey's Annual Incentive Plan
(the  "Annual  Incentive  Plan").  For  purposes  of  determining  the amount of
incentive  compensation to be provided to Executive  under the Annual  Incentive
Plan,  if any,  Executive's  performance  will be  measured  by the  results  of
Downey's  performance  against Downey's  Board-approved  annual Business Plan as
determined solely by the Board. The targeted amount shall be adjusted based upon
Executive's individual (40%) and corporate (60%) performance goals. In addition,
Downey's  Board shall  review the target  Annual  Incentive  Plan  participation
levels established for other key executives of the Association during 1998.

     (c) Long Term Incentive  Plan. In addition to  Executive's  Base Salary and
Annual Incentive Plan compensation provided for under subparagraphs 3(a) and (b)
hereof,  Downey's  Board of Directors  shall review its policy for  implementing
Downey's  1994  Long  Term  Incentive  Plan,  for  Executive  and for  other key
executives of the  Association to the extent  appropriate  for companies  within
Downey's peer performance group.

     (d) Extension of Agreement.  The Association's  Board shall annually review
Executive's  performance  and  determine  at the sole  discretion  of the  Board
whether to extend the Term of the Agreement for an additional term of one (1) or
more years. To that end and to accommodate the Parties' expressed  desires,  the


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Association's  Board shall review the Executive's  1998 performance on or before
November 30, 1998.

     4. PERSONAL TIME OFF (VACATION).  During the Term hereof Executive shall be
entitled  to paid  personal  time off,  the amount  and terms of which  shall be
governed by the vacation policy of the  Association for its senior  executive of
ricers, as in effect from time to time.

     5. GROUP  MEDICAL,  LIFE  INSURANCE  AND OTHER  BENEFITS.  Executive  shall
participate  in the  Association's  benefit  programs  which  benefits  shall be
governed by the Association's benefits policy for its senior executive officers,
as in effect from time to time.

     6. BUSINESS  EXPENSES.  Executive shall be entitled to reimbursement by the
Association or Downey,  as applicable,  for any ordinary and necessary  business
expenses  reasonably  incurred by Executive in the  performance  of  Executive's
duties and in acting for the  Association or Downey,  as applicable,  during the
Term of this Agreement,  provided that Executive  furnishes to the  Association,
for review and  approval  by the  Chairman  of the Board,  or Chair of the Audit
Committee,  adequate records and other  documentation as may be required for the
substantiation  of such expenditures as a business expense of the Association or
Downey, as applicable.

     7. TERMINATION.

     (a)  Termination  for Cause.  The  Association's  or Downey's Board may for
cause  terminate  Executive's  employment  at any time  during  the Term of this
Agreement.  In such event,  all rights of Executive  under this Agreement  shall
terminate and  Executive  shall have no right to receive  compensation  or other
benefits for any period after the effective date of such  termination for cause.
Termination  for cause  shall be defined  as  Executive's  personal  dishonesty,
willful  misconduct,   breach  of  fiduciary  duty  involving  personal  profit,
continuing  intentional or habitual failure to perform stated duties,  violation
of any law, (other than minor traffic violations or similar misdemeanor offenses
not involving moral turpitude),  or rule or regulation adopted by the Of lice of
Thrift  Supervision or Federal Deposit Insurance  Corporation or material breach
of any provision of this Agreement.

     (b)  Termination  without  Cause.  The Board may  without  cause  terminate
Executive's  employment at any time during the Term of this  Agreement.  In such
event, Executive shall be entitled to receive as his sole and exclusive remedy a
severance  payment  equal to; (i) six (6) months of  Executive's  Base Salary as
provided for in subparagraph 3(a) of this Agreement,  (ii) Executive's  pro-rata
share of Downey's Annual Incentive Plan measured by the year-to-date  results of
Downey's  performance  against  Downey's Board approved  annual Business Plan as
determined solely by the Downey Board, as described in subparagraph 3(b) of this
Agreement and (iii) six (6) months of continued group medical and life insurance
benefits in the manner and on the terms  previously  provided to Executive  less
any amounts  required to be  deducted by the  Association  for federal and state
taxes or other applicable  requirements.  The severance payment shall be paid to
Executive upon the effectiveness of Executive's resignation from the Association
and Downey and their respective  Boards of Directors and the termination of this
Agreement, either in a lump sum or in accordance with the Association's standard
payroll  practices,  at  the  Association's  sole  discretion.  In the  event  a
severance  payment is paid to  Executive  under  this  subparagraph  7(b),  this
Agreement  shall be  terminated  and the  Association  and Downey  shall have no
further  obligation  to  Executive  under  this  Agreement,   including  without
limitation,  any  compensation or other  obligations  under  subparagraphs  3(a)
through (c) hereof,  provided,  however, if the termination without


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<PAGE>


cause  occurs  subsequent  to the end of a "Plan  Year" as defined in the Annual
Incentive  Plan,  but prior to the payment of the "Award" for such "Plan  Year",
Executive  shall be entitled to the "Award" for such "Plan Year" as if Executive
was still employed.  The parties hereto expressly acknowledge and agree that the
payment made by the Association to Executive upon a termination without cause as
provided for in this  subparagraph  7(b) will  constitute  full,  reasonable and
adequate  compensation  for any such  termination;  and that such payment  shall
Filly satisfy and discharge all  obligations  of the  Association  and Downey to
Executive in connection with such termination.

     (c)  Suspension  and Removal  Orders.  If  Executive  is  suspended  and/or
temporarily  prohibited from  participating in the conduct of the  Association's
affairs by a notice  served  under  Section  8(e)(3)  or 8(g)(1) of the  Federal
Deposit   Insurance  Act,  12  U.S.C.   Section   1818(e)(3)  and  (g)(l),   the
Association's obligations under this Agreement shall be suspended as of the date
of service,  unless  stayed by  appropriate  proceedings.  If the charges in the
notice are dismissed,  the  Association  may in its discretion (i) pay Executive
all or part of the  compensation  withheld  while  its  obligations  under  this
Agreement  were  suspended;  and (ii) reinstate (in whole or in part) any of its
obligations  which were  suspended.  If Executive is removed and/or  permanently
prohibited from participating in the conduct of the Association's  affairs by an
order issued under Section 8(e)(4) or 8(g)(1) of the Federal  Deposit  Insurance
Act,  (12  U.S.C.   Section  1818(e)(4)  or  (g)(l)),  all  obligations  of  the
Association under this Agreement shall terminate as of the effective date of the
order, but vested rights of the Parties shall not be affected.

     (d) Termination by Default. If the Association is in default (as defined in
Section  3(x)(1) of the Federal Deposit  Insurance  Act), all obligations  under
this Agreement shall  terminate as of the date of default,  but vested rights of
the Parties shall not be affected.

     (e) Supervisory  Assistance or Merger. All obligations under this Agreement
shall  be  terminated,   except  to  the  extent  that  it  is  determined  that
continuation  of the Agreement is necessary  for the continued  operation of the
Association  (i) by the  Director  of the  Office  of  Thrift  Supervision  (the
"Director") or his or her designee,  at the time the Federal  Deposit  Insurance
Corporation  enters into an agreement to provide  assistance  to or on behalf of
the  Association  under the authority  contained in Section 13(c) of the Federal
Deposit  Insurance  Act; or (ii) by the Director or his or her designee,  at the
time the  Director  or his or her  designee  approves  a  supervisory  merger to
resolve problems related to operation of the Association or when the Association
is  determined  by the  Director  to be in an unsafe or unsound  condition.  All
rights of the Parties that have already vested, however shall not be affected by
such action.

     (f)  Termination  by Executive.  Executive  may  terminate  his  employment
hereunder at any time upon thirty (30) days' written notice to the  Association.
In such event, Executive shall be entitled to the Base Salary, personal time off
and  other   benefits  which  have  accrued  prior  to  the  effective  date  of
termination.  However,  Executive  shall not be  entitled  to any other  form of
severance payment or other  compensation,  including,  without  limitation,  any
compensation under subparagraph 3(b) hereof.

     (g) Disability. In the event that Executive shall fail, because of illness,
Incapacity or injury, to render the services  contemplated by this Agreement for
two  (2)  consecutive  calendar  months,  or  for  shorter  periods  aggregating
forty-five  (45)  or  more  business  days  in any  twelve  (12)  month  period,
Executive's  employment  hereunder  may  be  terminated  by  written  notice  of
termination  from the  Association to Executive.  In the event that  Executive's
employment is terminated within the meaning of this


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<PAGE>

subparagraph 7(g), Executive shall receive the difference between any disability
payments provided by the  Association's  insurance plans and his base salary, at
the  rate  then in  effect,  for the  remaining  Term  of this  Agreement.  Such
termination pursuant to this subparagraph 7(g) shall not affect any rights which
Executive  may have at the time of  termination,  pursuant to any  insurance  or
other death benefit,  bonus,  retirement or stock award plans or arrangements of
the  Association,  or any stock  option  plan or any options  thereunder,  which
rights  shall  continue  to be  governed  by the  provisions  of such  plans and
arrangements.

     (h) Death. If Executive's employment is terminated by reason of Executive's
death,  this  Agreement  shall  terminate  without  further  obligations  of the
Association to Executive (or Executive's heirs or legal  representatives)  under
this Agreement,  other than for (1) payment of the sum of (A)  Executive's  Base
Salary through the date of termination to the extent not  theretofore  paid, (B)
any  compensation  previously  deferred by Executive  (together with any accrued
interest or earnings  thereon),  and (C) any accrued  vacation pay, all of which
shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum
in cash  within  thirty (30) days after the date of  termination  or any earlier
time  required  by  applicable  law;  (2)  payment  to  Executive's   estate  or
beneficiary  as  applicable,  any amount  then due  pursuant to the terms of any
applicable welfare benefit plan; and (3) Executive's  pro-rata share of Downey's
Annual  Incentive  Plan  measured  by  the  year-to-date   results  of  Downey's
performance  against  Downey's Board approved Annual Business Plan as determined
solely by the Downey Board as described in subparagraph 3(b) of this Agreement.

     8.  DISCLOSURE OR USE OF TRADE SECRETS.  During the Term hereof,  Executive
will  have  access  to  and  become  acquainted  with  what  Executive  and  the
Association  acknowledge are trade secrets,  including,  but not limited to, the
following:   knowledge  or  data  concerning  the  Association,   including  its
operations,  employees  and  business,  and the  identity  of  customers  of the
Association,  including knowledge of their financial condition,  their financial
needs and their methods of doing  business.  Executive shall not use or disclose
any trade secrets or, directly or indirectly, cause them to be used or disclosed
in any way,  either during the Term hereof or for a period of one (1) year after
the termination of this Agreement, except as required by the Association, in the
Association's  sole  discretion,  or as may be  required by Court  order,  or by
applicable  statutes,  rules or  regulations of any federal or state agency with
supervisory authority over the Association.

     9.  RETURN OF  DOCUMENTS.  Executive  expressly  agrees  that all  manuals,
documents,  files, reports,  studies,  instruments or other material used and/or
developed by Executive  (excluding  Executive's  personal day  calendar) for the
Association  during the Term of this Agreement or prior thereto while  Executive
was employed by the Association are solely the property of the Association,  and
that Executive has no right title or interest therein.  Upon termination of this
Agreement,  Executive  or  Executive's  representative  shall  promptly  deliver
possession  of all of  that  property,  including  any  copies  thereof,  to the
Association  in  good  and  usable  condition.   Notwithstanding  the  foregoing
sentence,  Executive  shall be entitled to retain  copies of Board  packages and
related materials (collectively, "Board materials") provided to Executive in his
capacity  as  the  Chief  Executive   Officer  of  the  Association.   Executive
acknowledges that Board materials contain confidential information regarding the
Association.  Executive  shall  take all  necessary  and  appropriate  action to
preserve  the  confidentiality  of  Board  materials  remaining  in  Executive's
possession following termination of this Agreement.  Executive shall not provide
Board  materials or copies thereof,  nor disclose any information  regarding the
contents thereof,  to any other person or entity,  except with the express prior
consent  of  the  Association  or  unless  Executive  is  compelled  to do so by
applicable law, regulation or court order.


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     10. NOTICES. All notices,  demands or other communications  hereunder shall
be in  writing  and shall be deemed to have  been  duly  given if  delivered  in
person,  or sent by United  States mail,  certified or  registered,  with return
receipt requested, as follows:

     If to Executive:

     James W. Lokey
     21401 Montbury Dr.
     Lake Forest, CA 92630

     If to the Association or Downey:

     Donald E. Royer, Esq.
     Executive Vice President and General Counsel
     Downey Savings and Loan Association, F. A.
     Suite 5000, Corporate Headquarters
     3501 Jamboree Road, North Tower
     Newport Beach, CA 92660

     The person or address to which  mailings  or  deliveries  shall be made may
change  from time to time by notice  given  pursuant to the  provisions  of this
Paragraph  10. Any  notice,  demand or other  communication  given  pursuant  to
provisions  of this  paragraph  shall be deemed  to have been  given on the date
actually  delivered or three (3) days following the date mailed, as the case may
be.

     11. GOVERNING LAW AND JURISDICTION. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California.  Each of the
Parties hereto consents to the jurisdiction of the California or federal courts,
as the case may be, for the enforcement of this Agreement.

     12.  ARBITRATION.  Any  controversy  or claim arising out of or relating to
this   Agreement  or  the  breach   thereof  shall  be  settled  by  arbitration
administered  by the  American  Arbitration  Association  under  its  Commercial
Arbitration  Rules, and judgment on the award rendered by the  arbitrator(s) may
be entered in any court having jurisdiction thereof.

     13.  ATTORNEYS'  FEES.  In the event a dispute  arises with respect to this
Agreement, the Party prevailing in such dispute shall be entitled to recover all
expenses,   including,  without  limitation,   reasonable  attorneys'  fees  and
expenses.

     14. BENEFIT OF AGREEMENT.  This Agreement shall inure to the benefit of and
be  binding   upon  the   Parties   hereto  and  their   respective   executors,
administrators,  successors and assigns;  provided,  however, that Executive may
not assign any interest in this Agreement  without the prior written  consent of
the Association.

     15. CAPTIONS AND PARAGRAPH  HEADINGS.  Captions and paragraph headings used
herein are for  convenience  only and are not a part of this Agreement and shall
not be used for construing it.


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<PAGE>


     16.  INVALID  PROVISIONS.  Should any  provision of this  Agreement for any
reason  be  declared  invalid,  void or  unenforceable  by a court of  competent
jurisdiction,  the validity and binding effect of any remaining portions of this
Agreement  shall remain in full force and effect as if this  Agreement  has been
executed with said provisions eliminated;  provided, however, that the remaining
provisions still reflect the intent of the parties to this Agreement.

     17. ENTIRE AGREEMENT.  This Agreement  contains the entire agreement of the
Parties with respect to the  employment  by the  Association  of  Executive.  It
supersedes any and all other agreements,  either oral or in writing, between the
Parties   hereto.   Each   Party  to  this   Agreement   acknowledges   that  no
representations,  inducement,  promises or agreements,  oral or otherwise,  have
been made by any Party,  or anyone acting on behalf of any Party,  which are not
embodied or expressly referred to herein, and that no other agreement, statement
or promise not  contained  in this  agreement  shall be valid or  binding.  This
Agreement  may not be  modified  or  amended by oral  agreement,  but only by an
agreement in writing signed by the Association and Executive. This Agreement may
be executed in counterparts.

     18. REVIEW BY COUNSEL.  Executive  acknowledges and agrees that he has been
provided  with adequate time and  opportunity  to review this  Agreement and the
terms and conditions  hereof with  Executive's own legal counsel and that he has
been  encouraged  to obtain such  independent  legal advice.  Executive  further
acknowledges  and agrees that he is  entering  into this  Agreement  with a full
understanding  of each of the terms and  conditions  hereof and that is doing so
voluntarily in consideration for the promises,  obligations and other rights set
forth herein.

     IN WITNESS  WHEREOF,  the Parties hereto have executed this Agreement as of
the day and year first above written.

                            DOWNEY SAVINGS AND LOAN ASSOCIATION, F. A.
                            (the "Association")


                            By:  /s/ Maurice L. McAlister          
                                 ----------------------------
                                 Maurice L. McAlister
                            Its: Chairman, Board of Directors

                            DOWNEY FINANCIAL CORP.
                            ("Downey")


                            By:  /s/ Maurice L. McAlister           
                                 ----------------------------
                                 Maurice L. McAlister
                            Its: Chairman, Board of Directors


                            James W. Lokey
                            ("Executive")


                             /s/ James W. Lokey                   
                            ----------------------------



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