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                                              SECURITIES AND EXCHANGE COMMISSION
                                                          Washington, D.C. 20549
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                                                                       FORM 10-K
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(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934 for the fiscal year ended December 31, 2002.

| | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934 for the transition period from ______________ to
    ______________.
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                                                  Commission File Number 1-13578

                                                          DOWNEY FINANCIAL CORP.
                          (Exact name of registrant as specified in its charter)

                                                                        DELAWARE
                  (State or other jurisdiction of incorporation or organization)
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3501 Jamboree Road, Newport Beach, California           92660
(Address of principal executive offices)              (Zip Code)

I.R.S. Employer Identification No.:  33-0633413

Registrant's telephone number, including area code:  (949) 854-0300

Securities registered pursuant to Section 12(b) of the Act:

 TITLE OF EACH CLASS                             NAME OF EACH EXCHANGE
------------------------------                 -------------------------
 Common Stock, $0.01 par value                   New York Stock Exchange
                                                 Pacific Exchange

Securities   registered   pursuant   to   Section   12(g)  of  the   Act:   None
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     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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 |_|

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. |_|

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

     The aggregate  market value of the  registrant's  outstanding  Common Stock
held by  non-affiliates  on June 28, 2002,  based upon the closing sale price on
that  date  of  $47.30,   as  quoted  on  the  New  York  Stock  Exchange,   was
$1,016,518,482.

     At February 28, 2003,  27,928,722 shares of the Registrant's  Common Stock,
$0.01 par value, were outstanding.

     DOCUMENTS  INCORPORATED BY REFERENCE:  Portions of the  Registrant's  Proxy
Statement to be filed with the Securities and Exchange  Commission in connection
with  the  Annual  Meeting  of  Stockholders  to be  held  April  23,  2003  are
incorporated by reference in Part III hereof.

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<PAGE>
TABLE OF CONTENTS

ITEM
                                                                            PAGE
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PART I

   1.  BUSINESS ...........................................................    1
          General .........................................................    1
          Banking Activities ..............................................    2
             Lending Activities ...........................................    2
                      Loan and Mortgage-Backed Securities Portfolio .......    3
                      Residential Real Estate Lending .....................    3
                      Secondary Marketing and Loan Servicing Activities ...    5
                      Multi Family and Commercial Real Estate Lending .....    6
                      Construction Lending ................................    6
                      Commercial Lending ..................................    6
                      Consumer Lending ....................................    6
             Investment Activities ........................................    7
             Deposit Activities ...........................................    7
             Borrowing Activities .........................................    7
             Capital Securities ...........................................    7
             Earnings Spread ..............................................    8
             Asset/Liability Management ...................................    8
             Insurance Agency Activities ..................................    8
          Real Estate Investment Activities ...............................    8
          Competition .....................................................    9
          Employees   .....................................................    9
          Regulation  .....................................................    9
             General  .....................................................    9
             Regulation of Downey .........................................    9
             Regulation of the Bank .......................................   11
             Regulation of DSL Service Company ............................   17
          Taxation ........................................................   18
          Factors That May Affect Future Results Of Operations ............   18
   2.  PROPERTIES .........................................................   20
          Branches ........................................................   20
          Electronic Data Processing ......................................   20
   3.  LEGAL PROCEEDINGS ..................................................   20
   4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................   20

PART II

   5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS .............................................   21
   6.  SELECTED FINANCIAL DATA ............................................   22
   7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS .......................................   24
          Overview ........................................................   24
             Critical Accounting Policies .................................   25
          Results of Operations ...........................................   26
             Net Interest Income ..........................................   26
             Provision for Loan Losses ....................................   28
             Other Income .................................................   28
                      Loan and Deposit Related Fees .......................   29
                      Real Estate and Joint Ventures Held for Investment ..   29
                      Secondary Marketing Activities ......................   30
                      Other Category ......................................   31

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TABLE OF CONTENTS

ITEM
                                                                            PAGE
--------------------------------------------------------------------------------

PART II----(CONTINUED)

             Operating Expense ............................................   31
             Provision for Income Taxes ...................................   31
             Business Segment Reporting ...................................   31
                    Banking ...............................................   32
                    Real Estate Investment ................................   33
          Financial Condition .............................................   34
             Loans and Mortgage-Backed Securities .........................   34
             Investment Securities ........................................   38
             Investments in Real Estate and Joint Ventures ................   39
             Deposits .....................................................   41
             Borrowings ...................................................   42
             Capital Securities ...........................................   43
             Off-Balance Sheet Arrangements ...............................   43
                    Transactions with Related Parties .....................   44
             Asset/Liability Management and Market Risk ...................   44
             Problem Loans and Real Estate ................................   49
                    Non-Performing Assets .................................   49
                    Delinquent Loans ......................................   51
                    Allowance for Losses on Loans and Real Estate .........   53
             Capital Resources and Liquidity ..............................   59
                    Contractual Obligations and Other Commitments .........   60
             Regulatory Capital Compliance ................................   61
             Newly Adopted Accounting Principles ..........................   61
             Current Accounting Issues ....................................   62
             Sale of Subsidiary ...........................................   63
   7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........   64
   8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................   65
   9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURES ............................  112

PART III

  10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................  112
  11.  EXECUTIVE COMPENSATION .............................................  112
  12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT AND RELATED STOCKHOLDER MATTERS ......................  112
  13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................  112
  14.  CONTROLS AND PROCEDURES ............................................  112

PART IV

  15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
         ON FORM 8-K ......................................................  112
       AVAILABILITY OF REPORTS ............................................  114
       SIGNATURES .........................................................  115
       CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
          ACT OF 2002 .....................................................  116


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<PAGE>
PART I

     Certain   matters   discussed   in  this  Annual   Report  may   constitute
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995 and, as such, may involve risks and uncertainties.
These forward-looking statements relate to, among other things,  expectations of
the business  environment in which Downey Financial Corp.  ("Downey," "we," "us"
and "our") operates, projections of future performance,  perceived opportunities
in the market and statements  regarding  Downey's  mission and vision.  Downey's
actual results,  performance or achievements may differ  significantly  from the
results,   performance   or   achievements   expressed   or   implied   in  such
forward-looking  statements. For discussion of the factors that might cause such
a difference, see Business--Factors That May Affect Future Results on page 18.

ITEM 1. BUSINESS

GENERAL

     We were  incorporated in Delaware on October 21, 1994. On January 23, 1995,
after we obtained necessary  stockholder and regulatory  approvals,  we acquired
100% of the issued and  outstanding  capital  stock of Downey  Savings  and Loan
Association  (the  "Bank")  and the Bank's  stockholders  became  holders of our
stock.  Downey was thereafter  funded by the Bank and presently  operates as the
Bank's holding  company.  Our stock is traded on the New York Stock Exchange and
Pacific  Exchange  under the trading  symbol "DSL." Annual reports on Form 10-K,
quarterly  reports on Form 10-Q,  current reports on Form 8-K and all amendments
to  those  reports  are  available  free  of  charge  from  our  internet  site,
www.downeysavings.com,  by clicking on "Investor  Relations" located on our home
page and proceeding to "Corporate Filings."

     The Bank  was  formed  in 1957 as a  California-licensed  savings  and loan
association and converted to a federal charter in 1995. As of December 31, 2002,
it conducts  its  business  through 165 retail  deposit  branches,  including 93
full-service, in-store branches. Residential loans are originated or purchased:

     o    by branch managers and loan officers in our branches;

     o    by loan officers who solicit  loans from  realtors and other  business
          sources, including the internet;

     o    by  wholesale  loan  representatives  who obtain  loans  submitted  by
          mortgage brokers; and

     o    by  purchases of loans from  correspondent  banking  institutions  and
          mortgage bankers.

     The Bank is regulated or affected by the  following  governmental  entities
and laws:

     o    As a federally  chartered savings  association,  the Bank's activities
          and investments  are generally  governed by the Home Owners' Loan Act,
          as  amended,  and  regulations  and  policies  of the Office of Thrift
          Supervision (the "OTS").

     o    The  Bank  and  Downey  are  subject  to the  primary  regulatory  and
          supervisory jurisdiction of the OTS.

     o    As a federally insured depository  institution,  the Bank is regulated
          and  supervised  by the Federal  Deposit  Insurance  Corporation  (the
          "FDIC") with respect to some of its activities and investments.

     o    The Bank is a member of the Federal Home Loan Bank (the "FHLB") of San
          Francisco, which is one of the 12 regional banks for federally insured
          depository institutions comprising the Federal Home Loan Bank System.

     o    The  Bank's   savings   deposits  are  insured   through  the  Savings
          Association Insurance Fund ("SAIF") of the FDIC, an instrumentality of
          the United States government.

     o    The Bank is regulated by the Federal  Reserve with respect to reserves
          the Bank is required to maintain against deposits and other matters.

     General  economic  conditions,  the  monetary  and fiscal  policies  of the
federal  government  and the  regulatory  policies of  governmental  authorities
significantly  influence  our  operations.   Additionally,   interest  rates  on
competing  investments  and general market  interest rates influence our deposit
flows and the costs we incur on interest-bearing  liabilities,  which represents
our cost of funds.  Similarly,  market  interest  rates and other  factors  that
affect the supply of and demand for housing and the availability of funds affect
our loan volume and our yields on loans and mortgage-backed securities.

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<PAGE>
     Our primary  business  is banking  and we are also  involved in real estate
investments, each of which we discuss further below.

BANKING ACTIVITIES

     Our primary business is banking. Our banking activities focus on:

     o    attracting funds from the general public and institutions; and

     o    originating and investing in loans,  primarily residential real estate
          mortgage loans, investment securities and mortgage-backed securities.

These mortgage-backed securities include mortgage pass-through securities issued
by other  entities and securities  issued or guaranteed by  government-sponsored
enterprises like the Federal  National  Mortgage  Association,  the Federal Home
Loan Mortgage Corporation and the Government National Mortgage Association.

     Our primary sources of revenue from our banking business are:

     o    interest we earn on loans,  investment  securities and mortgage-backed
          securities;

     o    fees we earn in connection with loans and deposits;

     o    gains on sales of our loans, investment securities and mortgage-backed
          securities; and

     o    income we earn on loans and mortgage-backed  securities we service for
          investors.

     Our principal expenses in connection with our banking business are:

     o    interest  we  incur  on our  interest-bearing  liabilities,  including
          deposits, borrowings and capital securities; and

     o    general and administrative costs.

     Our primary sources of funds from our banking business are:

     o    deposits;

     o    principal  and  interest  payments  on our loans  and  mortgage-backed
          securities;

     o    proceeds from sales of our loans and mortgage-backed securities; and

     o    borrowings and capital securities.

Scheduled payments we receive on our loans and mortgage-backed  securities are a
relatively stable source of funds.  However,  the funds we receive from deposits
and the prepayment of loans and mortgage-backed securities vary widely. Below is
a detailed discussion of our banking activities.

LENDING ACTIVITIES

     Historically,   our  lending  activities  have  primarily   emphasized  our
origination of first mortgage loans secured by residential properties and retail
neighborhood  shopping centers.  To a lesser extent, our lending activities have
emphasized  our  origination  of real estate loans secured by  multi-family  and
commercial properties, including land and other properties with income producing
capabilities.  In addition,  we have provided  construction  loan  financing for
single family and  multi-family  residential  properties and  commercial  retail
neighborhood  shopping center projects.  These construction loan financings have
included  loans to joint  ventures,  which were being  engaged in by DSL Service
Company, a wholly owned subsidiary of the Bank, with other participants. We also
originate loans to businesses through our commercial banking operations.

     We originate  automobile loans directly through our branch network. We also
conducted an indirect  auto-lending  program through our purchase of new or used
automobile  sales  contracts  from auto dealers in California  and other western
states.  Downey Auto Finance  Corp., a previous  wholly owned  subsidiary of the
Bank,  operated this  indirect  auto-lending  program,  but was sold in February
2000.  For  more  information,  see  Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations--Financial  Condition--Sale  of
Subsidiary on page 63.

                                       2
<PAGE>
     Our primary focus continues to be our origination of adjustable rate single
family mortgage loans for portfolio, including subprime loans which carry higher
interest  rates.  In  addition,  we will  originate  for  portfolio  other loans
including:

     o    multi-family loans;

     o    commercial real estate loans;

     o    construction loans to developers;

     o    loans to individuals for the construction  and permanent  financing of
          single family homes; and

     o    consumer loans.

We will also continue our secondary  marketing  activities  of  originating  and
selling single family mortgage loans to various investors.

     For more  information,  see below  under  the  caption  entitled  Secondary
Marketing and Loan Servicing Activities on page 5. For additional information on
the  composition  of our  loan and  mortgage-backed  securities  portfolio,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial  Condition--Loans  and Mortgage-Backed  Securities on page
34.

LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO

     We carry  loans  receivable  held for  investment  at cost.  Our net  loans
receivable are adjusted for  amortization of premiums and accretion of discounts
which  are  recognized  in  interest  income  using  the  interest  method.  Our
investments in mortgage-backed  securities represent  participating interests in
pools of first  mortgage  loans  originated  and  serviced by the issuers of the
securities.  We carry  mortgage-backed  securities  held to  maturity  at unpaid
principal  balances,  which are adjusted for  unamortized  premiums and unearned
discounts.  We amortize premiums and discounts on mortgage-backed  securities by
using the interest  method over the remaining  period to  contractual  maturity,
adjusted for anticipated prepayments.

     We identify  loans that may be sold before their  maturity.  In our balance
sheets, we classify these as loans held for sale and record them at the lower of
amortized cost or fair value.  Amortized cost includes a basis adjustment to the
loan at funding  resulting  from the change in the fair value of the  associated
interest  rate  lock  derivative  from  the  date of  commitment  to the date of
funding.  We  recognize  net  unrealized  losses on these  loans,  if any,  in a
valuation allowance by making charges to our income.

     We carry  mortgage-backed  securities  available for sale at fair value. We
report net unrealized gains or losses on these securities net of income taxes in
stockholders'  equity and as a  separate  component  of our other  comprehensive
income until realized.

RESIDENTIAL REAL ESTATE LENDING

     Our primary  lending  activity is our origination of mortgage loans secured
by single family residential  properties consisting of one-to-four units located
primarily  in  California.  We provide  these  mortgage  loans for  borrowers to
purchase  residences or to refinance their existing  mortgages.  The residential
mortgage loans we originate typically have contractual maturities at origination
of 15 to 40 years.  To limit the interest rate risk associated with these 15- to
40-year maturities,  we, among other things,  principally  originate  adjustable
rate  mortgages  for  our  own  loan  portfolio.   For  more  information,   see
Asset/Liability  Management on page 8. We also originate  residential fixed rate
mortgage  loans to meet consumer  demand,  but we intend to sell the majority of
these loans in the secondary market, rather than hold them in our portfolio.  We
may, however,  place residential fixed rate loans in our portfolio of loans held
for  investment  if these  fixed rate loans are funded with  long-term  funds to
mitigate  interest rate risk. In addition,  we originate a small volume of fixed
rate loans for our own investment if they meet specific yield and other approved
guidelines,  or to facilitate our sale of real estate  acquired in settlement of
loans.  The average term of these fixed rate mortgage loans we originate for our
own portfolio historically has been significantly shorter than their contractual
maturity  due to loan  payoffs  as a result of home  sales or  refinancings  and
prepayments.  For more information,  see Secondary  Marketing and Loan Servicing
Activities on page 5.

                                       3
<PAGE>
     Our adjustable rate mortgages:

     o    generally  either begin with an incentive  interest rate,  which is an
          interest  rate below the  current  market  rate,  that  adjusts to the
          applicable  index  plus a defined  spread,  subject  to  periodic  and
          lifetime caps,  after one, three,  six or twelve months,  or are fixed
          for a period  of three to five  years  then  adjust  semi-annually  or
          annually thereafter;

     o    generally  provide  that  the  maximum  interest  rate  we can  charge
          borrowers  cannot exceed the  incentive  rate by more than six to nine
          percentage points,  depending on the type of loan and the initial rate
          offered; and

     o    limit  interest  rate  adjustments,  for loans  that  adjust  both the
          interest rate and payment amount simultaneously,  to 1% per adjustment
          period  for those  that  adjust  semi-annually  and 2% per  adjustment
          period for those that adjust annually.

     Most of our adjustable rate mortgages  adjust the interest rate monthly and
the payment amount annually. These monthly adjustable rate mortgages:

     o    have a lifetime interest rate cap, but no specified  periodic interest
          rate adjustment cap;

     o    have a periodic cap on changes in required monthly payments; and

     o    allow  for  negative  amortization,  which  is the  addition  to  loan
          principal of accrued  interest that exceeds the required  monthly loan
          payments.

If a loan incurs  significant  negative  amortization,  the loan-to-value  ratio
could  increase  which  creates  an  increased  risk that the fair  value of the
underlying  collateral  on the loan could be  insufficient  to satisfy fully the
outstanding  principal and interest.  A loan-to-value  ratio is the ratio of the
principal  amount of the loan to the lower of the sales price or appraised value
of the property securing the loan at origination. We currently impose a limit on
the  amount  of  negative   amortization.   The  principal   plus  the  negative
amortization cannot exceed 125% of the original loan amount, except for subprime
loans and loans with loan-to-value ratios of greater than 80% where the borrower
has obtained  private mortgage  insurance to reduce the effective  loan-to-value
ratio to  between  67% and 80%.  In those  two  instances,  the  principal  plus
negative  amortization  cannot  exceed  110% of the  original  loan  amount.  At
year-end  2002,  loans  with the  higher  125%  limit on  negative  amortization
represented 38% of our adjustable rate one-to-four  unit residential  portfolio.
We permit adjustable rate mortgages to be assumed by qualified borrowers.

     During 2002,  approximately  79% of our one-to-four  unit  residential real
estate loans were  originated or purchased  through  outside  mortgage  brokers.
These  mortgage  brokers  do not  operate  from  our  offices  and  are  not our
employees.   Our  branch  managers  and  residential  loan  officers  originated
approximately 21% of our one-to-four unit residential loans during 2002.

     We require  that our  residential  real estate loans be approved at various
levels of management,  depending upon the amount of the loan. On a single family
residential loan we originate for our portfolio, the maximum amount we generally
will lend is $1 million. Our average loan size, however, is much lower. In 2002,
our average loan size was $331,000.  We generally make loans with  loan-to-value
ratios not exceeding 80%. We will make loans with  loan-to-value  ratios of over
80%, if the borrower obtains private mortgage  insurance to reduce the effective
loan-to-value  ratio to between 67% and 80%, consistent with secondary marketing
requirements. In addition, we require that borrowers obtain hazard insurance for
all  residential  real estate loans covering the lower of the loan amount or the
replacement value of the residence.

     In our approval  process for the loans we originate or purchase,  we assess
both the value of the property securing the loan and the applicant's  ability to
repay the loan. Qualified appraisers on our staff or approved outside appraisers
establish  the  value  of  the  collateral  through  appraisals  or  alternative
valuation formats that meet regulatory requirements.  Appraisal reports prepared
by outside  appraisers are  selectively  reviewed by our staff  appraisers or by
approved fee appraisers.  We generally obtain  information about the applicant's
income, financial condition,  employment and credit history.  Typically, we will
verify an applicant's credit information for loans originated by our retail loan
representatives.  For loans submitted from outside mortgage brokers,  we require
the  mortgage  broker to  obtain,  review  and  verify  the  applicant's  credit
information and employment.

     We offer  one-to-four unit  residential  loans to borrowers who have or, in
the case of  purchases,  will have equity in their homes but whose credit rating
contains  exceptions  which  preclude them from  qualifying  for lower or better
market interest rates and terms. We refer to these lower rated credits, which we
characterize  as  "A-,"  "B"

                                       4
<PAGE>
and "C" loans, as subprime loans in our loan  portfolio.  Our subprime loans are
characterized  by lower  loan-to-value  ratios and higher average interest rates
than higher credit grade loans or "A" loans. We believe these lower credit rated
borrowers  represent an  opportunity  for us to earn a higher net return for the
risks we assume.  For further  information,  see  Regulation--Regulation  of the
Bank--Regulatory Capital Requirements on page 11.

     We currently  qualify  applicants of our  adjustable  rate mortgages at the
higher of the fully-indexed rate or:

     o    for prime borrowers:

          o    6.25% for owner occupied; or

          o    6.50% for non-owner occupied.

     o    for subprime borrowers:

          o    7.25% for owner occupied; or

          o    7.50% for non-owner occupied.

SECONDARY MARKETING AND LOAN SERVICING ACTIVITIES

     As part of our secondary  marketing  activities,  we originate  residential
real estate adjustable rate mortgages and fixed rate mortgages that we intend to
sell.  Accordingly,  we classify  these loans as held for sale and carry them at
the lower of cost or fair value.  Amortized cost includes a basis  adjustment to
the  loan at  funding  resulting  from  the  change  in the  fair  value  of the
associated interest rate lock derivative from the date of commitment to the date
of  funding.  These  loans  are  secured  by  first  liens on  one-to-four  unit
residential properties and generally have maturities of 30 years or less.

     We  believe   that   servicing   loans  for  others  can  be  an  important
asset/liability  management tool because it produces operating results which, in
response to changes in market interest  rates,  tend to move opposite to changes
in net interest income.  Because yields on adjustable rate mortgages take longer
to adjust to market  interest  rates than their  funding  sources,  net interest
income  associated  with these loans is expected to decline in periods of rising
interest rates and increase in periods of falling rates. In contrast,  the value
of a loan servicing portfolio normally:

          o    increases as interest rates rise and loan  prepayments  decrease;
               and

          o    declines as interest rates fall and loan prepayments increase.

In addition,  increased  levels of servicing  activities and the  opportunity to
offer our other financial  services in servicing loans for others can provide us
with additional income with minimal additional overhead costs.

     Depending upon market pricing for servicing, we sell loans either servicing
retained or servicing released. When we sell loans servicing retained, we record
gains or losses  from these  loans at the time of sale.  We  calculate  gains or
losses from our sale as the  difference  between the net sales  proceeds and the
allocated basis of the loans sold. We capitalize  mortgage  servicing  rights we
acquire  through  either our purchase or origination of mortgage loans we intend
to sell with  servicing  rights  retained.  We  allocate  the total  cost of the
mortgage  loans sold to both the mortgage  servicing  rights and to the mortgage
loans without mortgage  servicing rights based on their relative fair values. We
disclose our mortgage  servicing rights in our financial  statements and include
them as a component of the gain on sale of loans. We recognize impairment losses
on the mortgage  servicing  rights through a valuation  allowance and record any
associated  provision  as a  component  of loan  servicing  income  (loss),  net
category. For further information,  see Note 1 on page 72 and Note 10 on page 89
of Notes to the Consolidated Financial Statements.

     Generally,  we use hedging programs to manage the interest rate risk of our
secondary marketing activities. However, to-date we have not hedged our mortgage
servicing rights. For further  information,  see Asset/Liability  Management and
Market Risk on page 44.

     We may  exchange  loans we  originate  for sale  with  government-sponsored
agencies for mortgage-backed  securities collateralized by these loans. Our cost
for the  exchange,  a monthly  guaranty fee, is expressed as a percentage of the
unpaid principal balance and is deducted from interest income. The securities we
receive can be used to  collateralize  various types of our  borrowings at rates
that  frequently are more favorable than rates on other types of liabilities and
also carry a lower  risk-based  capital  requirement  than whole loans. We carry
these  mortgage-backed  securities available for sale at fair value. However, we
record no gain or loss on the exchange

                                       5
<PAGE>
in our  statement  of income  until the  securities  are sold to a third  party.
Before we sell these  securities to third  parties,  we show all changes in fair
value as a separate  component  of  stockholders'  equity as  accumulated  other
comprehensive income, net of income taxes.

MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING

     We have  provided  permanent  loans  secured  by  multi-family  and  retail
neighborhood  shopping center  properties.  Our major loan officers  conduct our
multi-family and commercial real estate lending activities.

     Multi-family and commercial real estate loans generally  entail  additional
risks as compared to single family residential mortgage lending. We subject each
loan,  including  loans to  facilitate  the sale of real  estate we own,  to our
underwriting standards, which generally include:

     o    our evaluation of the creditworthiness and reputation of the borrower;
          and

     o    the amount of the  borrower's  equity in the project as  determined on
          the basis of appraisal,  sales and leasing information on the property
          and cash flow projections.

     To protect the value of the security for our loan, we require  borrowers to
maintain  casualty  insurance  for the  loan  amount  or  replacement  cost.  In
addition,  for  non-residential  loans in excess of  $500,000,  we  require  the
borrower to obtain  comprehensive  general liability  insurance.  All commercial
real estate loans we originate must be approved by at least two of our officers,
one of  whom  must be the  originating  loan  account  officer  and the  other a
designated officer with appropriate loan approval authority.

CONSTRUCTION LENDING

     We  have  provided  construction  loan  financing  for  single  family  and
multi-family  residential  properties and commercial real estate projects,  like
retail  neighborhood  shopping  centers.  Our major  loan  officers  principally
originate these loans. We generally make construction loans at floating interest
rates  based  upon  the  prime or  reference  rate of a major  commercial  bank.
Generally,  we  require  a  loan-to-value  ratio of 75% or less on  construction
lending and we subject each loan to our underwriting standards.

     Construction  loans involve risks different from completed  project lending
because we advance loan funds based upon the security of the  completed  project
under  construction.  If the borrower  defaults on the loan, then we may have to
advance additional funds to finance the project's  completion before the project
can be sold.  Moreover,  construction  projects  are  affected by  uncertainties
inherent in estimating:

     o    construction costs;

     o    potential delays in construction time;

     o    market demand; and

     o    the accuracy of the value on the completed project.

     When providing  construction  loans, we require the general  contractor to,
among other things,  carry  contractor's  liability  insurance equal to specific
prescribed  minimum  amounts,  carry builder's risk insurance and have a blanket
bond against employee misappropriation.

COMMERCIAL LENDING

     We  originate  commercial  loans and  revolving  lines of credit  and issue
standby letters of credit for our middle market commercial  customers.  We offer
the various credit  products on both a secured and unsecured basis with interest
rates being either fixed or variable.  Our portfolio emphasis is toward secured,
floating  rate credit  facilities.  Our  commercial  banking group directs these
activities and focuses on our long-term,  relationship-based  customers. We also
utilize our retail branch network as a source of commercial customers,  with the
lending to these customers being typically managed by the branch manager.

CONSUMER LENDING

     The Bank originates  direct  automobile  loans,  home equity loans and home
equity  lines of credit,  and other  consumer  loan  products.  Before we make a
consumer  loan,  we assess the  applicant's  ability  to repay the loan and,  if
applicable,  the value of the  collateral  securing the loan.  The risk involved
with home equity loans and home

                                       6
<PAGE>
equity lines of credit is similar to the risk  involved  with  residential  real
estate  loans.  We offer  customers a credit  card  through a third  party,  who
extends the credit and services the loans made to our customers.

INVESTMENT ACTIVITIES

     As a federally  chartered savings  association,  the Bank's ability to make
securities  investments  is prescribed  under the OTS  regulations  and the Home
Owners' Loan Act.  The Bank's  authorized  officers  make  investment  decisions
within guidelines established by the Bank's Board of Directors. The Bank manages
these  investments in an effort to produce the highest yield,  while at the same
time  maintaining  safety  of  principal,  minimizing  interest  rate  risk  and
complying with applicable regulations.

     We carry  securities  held to maturity at amortized  cost.  We adjust these
costs  for  amortization  of  premiums  and  accretion  of  discounts,  which we
recognize  in interest  income using the interest  method.  We carry  securities
available  for sale at fair  value.  We  exclude  unrealized  holding  gains and
losses, or valuation allowances  established for net unrealized losses, from our
earnings and report them as a separate component of our stockholders'  equity as
accumulated other comprehensive income, net of income taxes, unless the security
is deemed other than temporarily  impaired.  If the security is determined to be
other than  temporarily  impaired,  we charge the  amount of the  impairment  to
operations.  For  further  information  on the  composition  of  our  investment
portfolio,  see Management's  Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition--Investment Securities on page 38.

DEPOSIT ACTIVITIES

     We prefer to use deposits  raised  through our retail  branch system as our
principal  source of funds for  supporting our lending  activities,  because the
cost of these funds  generally is less than that of  borrowings or other funding
sources with comparable maturities.  We traditionally have obtained our deposits
primarily  from  areas  surrounding  the  Bank's  branch  offices.  However,  we
occasionally raise some retail deposits through Wall Street activities.

     General  economic  conditions  affect  deposit  flows.  Funds may flow from
depository  institutions such as savings  associations into direct vehicles like
government  and corporate  securities  or other  financial  intermediaries.  Our
ability to attract  and retain  deposits  will  continue to be affected by money
market conditions,  prevailing interest rates and available competing investment
vehicles.  Generally,  state or federal  regulation  does not restrict  interest
rates we pay on deposits.

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations--Financial  Condition--Deposits on
page 41.

BORROWING ACTIVITIES

     Besides  deposits,  we  have  utilized  other  sources  to  fund  our  loan
origination  and other  business  activities.  We have at times  relied upon our
borrowings from the FHLB of San Francisco as an additional  source of funds. The
FHLB of San Francisco  makes  advances to us through  several  different  credit
programs it offers.

     From time to time, we obtain additional sources of funds by selling some of
our securities and mortgage loans under agreements to repurchase.  These reverse
repurchase  agreements are generally  short-term and are  collateralized  by our
mortgage-backed  or investment  securities and our mortgage  loans. We only deal
with  investment  banking firms that are  recognized as primary  dealers in U.S.
government securities or major commercial banks in connection with these reverse
repurchase agreements.  In addition, we limit the amounts of our borrowings from
any single institution.

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of  Operations--Financial  Condition--Borrowings
on page 42.

CAPITAL SECURITIES

     On July 23,  1999,  we issued $120  million in capital  securities  through
Downey  Financial  Capital  Trust  I.  The  capital   securities  pay  quarterly
cumulative  cash  distributions  at an annual rate of 10.00% of the  liquidation
value of $25 per share.  Of the $115 million of net  proceeds,  we invested $108
million as  additional  common stock of the Bank thereby  increasing  the Bank's
regulatory  core/tangible  capital by that same  amount.  The balance of the net
proceeds have been used for general corporate purposes.  For further information
regarding our capital securities,

                                       7
<PAGE>
see Note 16 on page 96 of Notes to Consolidated Financial Statements.

EARNINGS SPREAD

     Our  primary  source of earnings  comes from our net  interest  income.  We
determine our net interest income or the interest rate spread by calculating the
difference between:

     o    the  yield  we  earn  on  our  interest-earning   assets  like  loans,
          mortgage-backed securities and investment securities; and

     o    the cost we pay on our  interest-bearing  liabilities  like  deposits,
          borrowings and capital securities.

Our net interest income is also determined by the relative dollar amounts of our
interest-earning assets and interest-bearing liabilities.

     Our effective  interest rate spread,  which  reflects the relative level of
our interest-earning assets to our interest-bearing liabilities, equals:

     o    the difference between interest income on our interest-earning  assets
          and interest expense on our interest-bearing liabilities, divided by

     o    our average interest-earning assets for the period.

     For information regarding our net income and the components thereof and for
management's analysis of our financial condition and results of operations,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  beginning on page 24. For  information  regarding  the return on our
assets and other selected  financial  data, see Selected  Financial Data on page
22.

ASSET/LIABILITY MANAGEMENT

     Savings institutions are affected by interest rate risks to the degree that
their interest-bearing liabilities, consisting principally of customer deposits,
FHLB advances,  other borrowings and capital securities,  mature or reprice on a
different basis than their interest-earning  assets, which consist predominantly
of intermediate or long-term real estate loans. While having liabilities that on
average mature or reprice more frequently than assets may be beneficial in times
of  declining  interest  rates,  this  asset/liability  structure  may result in
declining net earnings during periods of rising  interest  rates.  Our principal
objectives are to actively  monitor and manage the effects of adverse changes in
interest rates on our net interest  income while  maintaining our asset quality.
To improve the rate  sensitivity  and maturity  balance of our  interest-earning
assets  and  liabilities,  we have  emphasized  the  origination  of loans  with
adjustable interest rates or relatively short maturities.  Loans with adjustable
interest rates have the beneficial effect of allowing the yield on our assets to
increase  during  periods of rising  interest  rates,  although these loans have
contractual   limitations   on  the   frequency  and  extent  of  interest  rate
adjustments.

     For further information,  see Lending Activities on page 2 and Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Financial  Condition--Asset/Liability  Management and Market Risk on
page 44.

INSURANCE AGENCY ACTIVITIES

     Downey Affiliated Insurance Agency was incorporated on January 25, 1995, as
Downey's wholly owned subsidiary.  We capitalized  Downey  Affiliated  Insurance
Agency on February 24, 1995 with $400,000.  In the 1995 second  quarter,  Downey
Affiliated  Insurance Agency commenced  operations at which time representatives
of Downey  Affiliated  Insurance  Agency were available in our branches to offer
annuity products. During 1996, Downey Affiliated Insurance Agency began offering
forced-placed casualty insurance policies on mortgage loans and stopped offering
annuity  products.  The offering of forced-placed  casualty  insurance  policies
ceased in April 1999.

REAL ESTATE INVESTMENT ACTIVITIES

     In addition to our primary  business of banking,  which has been  described
above,  we are also  involved in real estate  investment  activities,  which are
conducted  primarily  through DSL Service Company,  a wholly owned subsidiary of
the Bank. DSL Service Company is a diversified real estate  development  company
which was

                                       8
<PAGE>
established  in 1966 as a neighborhood  shopping  center and  residential  tract
developer. Today its capabilities include development, construction and property
management  activities  relating to its portfolio of projects  primarily  within
California,  but also in Arizona.  In addition to DSL Service Company developing
its own real estate projects,  it associates with other qualified  developers to
engage  in joint  ventures.  The  primary  revenue  sources  of our real  estate
investment  activities include net rental income and gains from the sale of real
estate  investments.   The  primary  expenses  of  our  real  estate  investment
activities are interest expense and general and administrative expense.

     Due to federal law, the Bank is prohibited  from making new  investments in
real estate  development and joint venture  operations and is required to deduct
the full amount of its  investment  in DSL Service  Company in  calculating  its
applicable  ratios under the core,  tangible and risk-based  capital  standards.
Savings associations  generally may invest in service corporation  subsidiaries,
like DSL Service Company, to the extent of 2% of the association's  assets, plus
up  to  an  additional  1% of  assets  for  investments  which  serve  primarily
community,   inner-city  or  community   development   purposes.   In  addition,
"conforming  loans" by the Bank to DSL's joint venture  partnerships are limited
to 50% of the Bank's risk-based capital.  "Conforming loans" are those generally
limited to 80% of  appraised  value,  bear a market rate of interest and require
payments  sufficient  to amortize the  principal  balance of the loan. We are in
compliance with each of these investment limitations.

     To the extent Downey or a subsidiary of Downey,  other than the Bank or its
subsidiaries,   makes  real  estate  investments,  the  above-mentioned  capital
deductions and  limitations  do not apply,  as they only pertain to the specific
investments by savings associations or their subsidiaries.

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations--Financial  Condition--Investments
in Real Estate and Joint Ventures on page 39.

COMPETITION

     We face  competition  both in attracting  deposits and in making loans. Our
most direct  competition for deposits has  historically  come from other savings
institutions  and from commercial  banks located in our principal  market areas,
including many large financial  institutions based in other parts of the country
or their subsidiaries.  In addition, we face additional significant  competition
for investors' funds from short-term money market securities and other corporate
and government  securities.  Our ability to attract and retain savings  deposits
depends,  generally,  on our ability to provide a rate of return,  liquidity and
risk comparable to that offered by competing  investment  opportunities  and the
appropriate level of customer service.

     We  experience  competition  for real estate loans  principally  from other
savings institutions, commercial banks, mortgage banking companies and insurance
companies.  We compete for loans principally through our interest rates and loan
fees we charge and our efficiency  and quality of services we provide  borrowers
and real estate brokers.

EMPLOYEES

     At December 31, 2002,  we had 2,352  full-time  employees and 640 part-time
employees.  We provide our  employees  with health and  welfare  benefits  and a
retirement  and  savings  plan.  Additionally,  we  offer  qualifying  employees
participation  in our stock purchase plan. Our employees are not  represented by
any union or collective bargaining group, and we consider our employee relations
to be good.

REGULATION

GENERAL

     Federal  and  state  law  extensively  regulate  savings  and loan  holding
companies and savings  associations.  This  regulation is intended  primarily to
protect  our  depositors  and  the  SAIF  and  is not  for  the  benefit  of our
stockholders. Below we describe some of the regulations applicable to us and the
Bank. We do not claim this  discussion is complete and qualify our discussion by
reference to applicable statutory or regulatory provisions.

REGULATION OF DOWNEY

     General.  We are a savings  and loan  holding  company  and are  subject to
regulatory  oversight  by the OTS. We are  required to register and file reports
with the OTS and are regulated and examined by the OTS. The OTS has  enforcement
authority  over us,  which also  permits the OTS to  restrict  or  prohibit  our
activities that it determines to be a serious risk to the Bank.

                                       9
<PAGE>
     Activities  Restrictions.  As a savings and loan holding  company with only
one savings and loan association subsidiary, we generally are not limited by OTS
activity  restrictions,  provided the Bank satisfies the qualified thrift lender
test or meets the definition of a domestic  building and loan association in the
Internal Revenue Code. If we acquire control of another savings association as a
separate  subsidiary  of Downey,  we would  become a multiple  savings  and loan
holding company. As a multiple savings and loan holding company, our activities,
other  than  the  activities  of the  Bank  or any  other  SAIF-insured  savings
association,  would become  subject to  restrictions  applicable to bank holding
companies unless these other savings associations were acquired in a supervisory
acquisition  and each also  satisfies the qualified  thrift lender test or meets
the definition of a domestic building and loan association.  Furthermore,  if in
the future we sold control of the Bank to any other company,  such company would
not succeed to our grandfathered  status as a unitary thrift holding company and
would be subject to the same business  activity  restrictions  as a bank holding
company.  For more  information,  see  Restrictions  on  Acquisitions  below and
Regulation of the Bank--Qualified Thrift Lender Test on page 13.

     Restrictions on Acquisitions.  We must obtain approval from the appropriate
bank regulatory  agencies  before  acquiring  control of any insured  depository
institution.  The OTS generally  prohibits  these types of  acquisitions if they
result in a  multiple  savings  and loan  holding  company  controlling  savings
associations  in more  than  one  state.  However,  the OTS  permits  interstate
acquisitions if the acquisition is authorized by specific state authorization or
a supervisory acquisition of a failing savings association.

     Federal  law  generally  provides  that no  "person,"  acting  directly  or
indirectly or through or in concert with one or more other persons,  may acquire
"control" of a federally insured savings  association unless the person gives at
least 60 days  written  notice to the OTS. The OTS then has the  opportunity  to
disapprove the proposed acquisition. In addition, no company may acquire control
of this type of an institution without prior OTS approval. These provisions also
prohibit,  among  other  things,  any  director or officer of a savings and loan
holding  company,  or any  individual  who owns or controls more than 25% of the
voting shares of a savings and loan holding company,  from acquiring  control of
any  savings  association  not a  subsidiary  of the  savings  and loan  holding
company, unless the acquisition is approved by the OTS.

     Financial   Holding  Company   Legislation.   On  November  12,  1999,  the
Gramm-Leach-Bliley   Act  of  1999  ("GLBA")  was  signed  into  law.  This  law
established a comprehensive  framework to permit  affiliations  among commercial
banks,  insurance  companies,  securities  firms  and  other  financial  service
providers by revising and  expanding  the Bank Holding  Company Act framework to
permit a  holding  company  to engage in a full  range of  financial  activities
through  a  new  entity  known  as a  "Financial  Holding  Company."  "Financial
activities"  is broadly  defined  to include  not only  banking,  insurance  and
securities activities,  but also merchant banking and additional activities that
the Federal Reserve Board,  in consultation  with the Secretary of the Treasury,
determines to be financial in nature,  related or  incidental to such  financial
activities,  or complementary  activities that do not pose a substantial risk to
the safety and soundness of  depository  institutions  or the  financial  system
generally.

     GLBA  provides  that no company may acquire  control of an insured  savings
association,  unless that company engages,  and continues to engage, only in the
financial  activities  permissible  for  a  Financial  Holding  Company,  unless
grandfathered  as a  unitary  savings  and loan  holding  company.  Downey  is a
grandfathered  unitary  savings and loan holding  company and we may continue to
operate  under  present law as long as we continue to control  only the Bank and
the Bank continues to meet the qualified thrift lender test.

     We do not believe that this law will have a material  adverse effect on our
operations in the  near-term.  However,  to the extent that GLBA permits  banks,
securities firms and insurance  companies to affiliate,  the financial  services
industry  may  experience  further  consolidation.  GLBA is intended to grant to
community  banks  certain  powers as a matter of right that larger  institutions
have  accumulated on an ad hoc basis and which unitary  savings and loan holding
companies, such as Downey, already possess. Nevertheless,  GLBA may increase the
competition  that we face from larger  institutions and other types of companies
offering financial products,  many of which may have greater financial resources
than we do. In addition,  GLBA may have an  anti-takeover  effect because it may
tend to limit the range of potential  acquirers  of Downey to other  savings and
loan holding companies and Financial Holding Companies.

     The  Sarbanes-Oxley  Act of 2002. On July 30, 2002, the  Sarbanes-Oxley Act
was signed into law. This new  legislation  addresses  accounting  oversight and
corporate governance matters, including:

     o    the  creation  of a  five-member  oversight  board  appointed  by  the
          Securities and Exchange Commission ("SEC") that will set standards for
          accountants and have investigative and disciplinary powers;

     o    the  prohibition of accounting  firms from providing  various types of
          consulting  services to public clients and requiring  accounting firms
          to rotate partners among public client assignments every five years;

                                     10
<PAGE>
     o    increased penalties for financial crimes;

     o    expanded disclosure of corporate  operations and internal controls and
          certification of financial statements;

     o    enhanced controls on and reporting of insider trading; and

     o    statutory separations between investment bankers and analysts.

Various aspects of the new legislation are dependent upon subsequent  rulemaking
by the SEC. We are currently  evaluating what impact the new legislation and its
implementing  regulations  will have upon our operations,  including a potential
increase in certain outside professional costs.

REGULATION OF THE BANK

     General.  The OTS and the FDIC  extensively  regulate  the Bank because the
Bank is a federally chartered,  SAIF-insured savings association.  The Bank must
ensure that its lending activities and its other investments comply with various
statutory and regulatory requirements. The Bank is also regulated by the Federal
Reserve.

     The OTS, in  conjunction  with the FDIC,  regularly  examines  the Bank and
prepares  reports for the Bank's Board of Directors to consider  with respect to
any deficiencies the OTS or the FDIC finds in the Bank's operations. Federal and
state laws also regulate the  relationship  between the Bank and its  depositors
and borrowers, especially in matters regarding the ownership of savings accounts
and the documents used by the Bank.

     The  Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities and financial condition. In addition, the Bank must obtain regulatory
approvals  before  entering  into  some   transactions   like  mergers  with  or
acquisitions  of other financial  institutions.  This regulation and supervision
establishes a comprehensive  framework of activities in which an institution may
engage and is intended  primarily  to protect the SAIF and our  depositors.  The
regulatory structure also gives the regulatory  authorities extensive discretion
in connection with their supervisory and enforcement  activities and examination
policies, including policies regarding the classification of assets and adequate
loan loss reserves for regulatory purposes.  Any change in regulations,  whether
by the OTS, the FDIC or the Congress,  could have a material  adverse  impact on
us, the Bank and our operations.

     Insurance  of Deposit  Accounts.  The SAIF,  as  administered  by the FDIC,
insures the Bank's deposit  accounts up to the maximum amount  permitted by law.
The  FDIC  may  terminate   insurance  of  deposits  upon  a  finding  that  the
institution:

     o    has engaged in unsafe or unsound practices;

     o    is in an unsafe or unsound condition to continue operations; or

     o    has violated any applicable law, regulation,  rule, order or condition
          imposed by the FDIC or the institution's primary regulator.

     The FDIC charges an annual  assessment  for the insurance of deposits based
on the risk a particular  institution poses to its deposit insurance fund. Under
this system as of December 31,  2002,  SAIF members paid within a range of 0% to
0.27% of  insured  domestic  deposits,  depending  upon the  institution's  risk
classification.  This risk  classification is based on an institution's  capital
group and supervisory subgroup assignment.

     The Bank also pays, in addition to its normal deposit  insurance premium as
a member  of the SAIF,  assessments  towards  the  retirement  of the  Financing
Corporation  Bonds  (known as FICO  Bonds)  issued in the 1980s to assist in the
recovery of the savings and loan industry. These assessments will continue until
the FICO  Bonds  mature  in 2017.  For the last  quarter  of fiscal  2002,  this
assessment was equal to approximately 0.017% of insured deposits.

     Regulatory  Capital  Requirements.  The Bank must meet  regulatory  capital
standards to be deemed in compliance with OTS capital requirements.  OTS capital
regulations  require  savings  associations  to meet the following three capital
standards:

     o    tangible capital equal to 1.5% of total adjusted assets;

     o    leverage  capital,  or "core  capital,"  equal to 3% of total adjusted
          assets for institutions such as the Bank; and

                                       11
<PAGE>
     o    risk-based capital equal to 8.0% of total risk-based assets.

     The OTS views its capital regulation requirements as minimum standards, and
it expects most  institutions to maintain capital levels well above the minimum.
In addition,  the OTS  regulations  provide that the OTS may  establish  minimum
capital  levels higher than those  provided in the  regulations  for  individual
savings  associations,  upon a  determination  that  the  savings  association's
capital  is or may  become  inadequate  in  view of its  circumstances.  The OTS
regulations   provide  that  higher  individual   minimum   regulatory   capital
requirements may be appropriate in circumstances  where, among others, a savings
association:

     o    has a high degree of exposure to interest rate risk,  prepayment risk,
          credit risk,  concentration  of credit risk,  other risks arising from
          nontraditional  activities,  or similar risks or a high  proportion of
          off-balance sheet risk;

     o    is growing, either internally or through acquisitions,  at a rate that
          presents supervisory issues; or

     o    may be  adversely  affected  by  activities  or the  condition  of its
          holding company, affiliates, subsidiaries or other persons, or savings
          associations with which it has significant business relationships.

The Bank is not  required  to meet any  individual  minimum  regulatory  capital
requirement.  At December 31, 2002, the Bank's  regulatory  capital exceeded all
minimum regulatory capital requirements.

     As a  result  of a  number  of  federally  insured  financial  institutions
extending their lending risk selection standards to attract lower credit quality
borrowers due to their loans having higher  interest rates and fees, the federal
banking regulatory  agencies jointly issued  Interagency  Guidelines on Subprime
Lending.  Subprime  lending  involves  extending credit to individuals with less
than perfect credit histories.

     The  guidelines  consider  subprime  lending a high-risk  activity  that is
unsafe  and  unsound  if the risks  associated  with  subprime  lending  are not
properly  controlled.  Specifically,  the 2002  guidelines  direct  examiners to
expect  regulatory  capital one and  one-half  to three  times  higher than that
typically set aside for prime assets for institutions that:

     o    have subprime assets equal to 25% or higher of Tier 1 capital, or

     o    have  subprime   portfolios   experiencing  rapid  growth  or  adverse
          performance trends, are administered by inexperienced  management,  or
          have inadequate or weak controls.

     Our subprime  portfolio,  pursuant to our definition,  represented  168% of
Tier 1 capital as of year-end 2002.  Subsequent to year end, the OTS notified us
that  beginning  March  31,  2003,  we will  need to risk  weight  our  subprime
residential  loans at 75% versus their current 50% risk  weighting.  This change
will increase the required regulatory capital associated with our subprime loans
by one  and  one-half  times  that  of  prime  residential  loans.  For  further
information  regarding  the impact of this  change to our  capital  ratios,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial Condition--Regulatory Capital Compliance on page 61.

     The Home Owners' Loan Act permits  savings  associations  not in compliance
with the OTS capital  standards to seek an exemption from penalties or sanctions
for  noncompliance.  The  OTS  will  grant  an  exemption  only  if the  savings
association  meets  strict  requirements.  In  addition,  the OTS must  deny the
exemption in some circumstances. If the OTS does grant an exemption, the savings
association still may be exposed to enforcement  actions for other violations of
law or unsafe or unsound practices or conditions.

     Prompt  Corrective  Action.  The OTS's prompt  corrective action regulation
requires  the OTS to  take  mandatory  actions  and  authorizes  the OTS to take
discretionary   actions  against  a  savings   association   that  falls  within
undercapitalized capital categories specified in the regulation.

     The regulation establishes five categories of capital classification:

     o    "well capitalized;"

     o    "adequately capitalized;"

     o    "undercapitalized;"

     o    "significantly undercapitalized;" and


                                     12
<PAGE>
     o    "critically undercapitalized."

     The regulation uses an institution's  risk-based capital,  leverage capital
and  tangible   capital   ratios  to   determine   the   institution's   capital
classification. At December 31, 2002, the Bank exceeded the capital requirements
of a well capitalized institution under applicable OTS regulations.

     Loans-to-One-Borrower.  Savings  associations  generally are subject to the
lending  limits  applicable  to national  banks.  With limited  exceptions,  the
maximum  amount that a savings  association  or a national  bank may lend to any
borrower,  including some related entities of the borrower,  at one time may not
exceed:

     o    15% of the unimpaired capital and surplus of the institution, plus

     o    an additional  10% of unimpaired  capital and surplus if the loans are
          fully secured by readily marketable collateral.

     Savings  associations  are  additionally  authorized  to make  loans to one
borrower, for any purpose:

     o    in an amount not to exceed $500,000; or

     o    by order of the Director of OTS, in an amount not to exceed the lesser
          of  $30,000,000  or 30% of  unimpaired  capital and surplus to develop
          residential housing, provided:

          o    the  purchase  price  of  each  single-family   dwelling  in  the
               development does not exceed $500,000;

          o    the  savings  association  is  in  compliance  with  its  capital
               requirements;

          o    the loans comply with applicable loan-to-value requirements; and

          o    the aggregate  amount of loans made under this authority does not
               exceed 15% of unimpaired capital and surplus.

     At  December  31,  2002,  the Bank's  loans-to-one-borrower  limit was $135
million based upon the 15% of unimpaired capital and surplus measurement.

     Qualified Thrift Lender Test. The OTS requires savings associations to meet
a qualified  thrift  lender test.  The test may be met either by  maintaining  a
specified  level of assets in qualified  thrift  investments as specified in the
Home Owners' Loan Act or by meeting the  definition of a "domestic  building and
loan  association."  Qualified  thrift  investments  are  primarily  residential
mortgages and related investments,  including some mortgage-related  securities.
The required percentage of investments under the Home Owners' Loan Act is 65% of
assets while the Internal Revenue Code requires investments of 60% of assets. An
association  must be in compliance with the qualified  thrift lender test or the
definition of domestic  building and loan association on a monthly basis in nine
out of every 12 months. Associations failing to meet the qualified thrift lender
test are  generally  allowed  only to engage in  activities  permitted  for both
national banks and savings associations.

     The FHLB  also  relies  on the  qualified  thrift  lender  test.  A savings
association  will  only  enjoy  full  borrowing  privileges  from an FHLB if the
savings  association is a qualified thrift lender.  As of December 31, 2002, the
Bank was in compliance with its qualified thrift lender test requirement and met
the definition of a domestic building and loan association.

     Affiliate Transactions.  Transactions between a savings association and its
"affiliates" are quantitatively  and qualitatively  restricted under the Federal
Reserve Act and regulations.  Affiliates of a savings association include, among
other entities, the savings association's holding company and companies that are
under common control with the savings association.

     In general, a savings association and its subsidiaries are limited in their
ability to engage in "covered transactions" with affiliates:

     o    to an amount equal to 10% of the association's capital and surplus, in
          the case of covered transactions with any one affiliate; and

     o    to an amount equal to 20% of the association's capital and surplus, in
          the case of covered transactions with all affiliates.

                                       13
<PAGE>
In addition,  a savings  association and its  subsidiaries may engage in covered
transactions  and  other  specified   transactions   only  on  terms  and  under
circumstances  that are  substantially the same, or at least as favorable to the
savings  association  or its  subsidiary,  as those  prevailing  at the time for
comparable  transactions with nonaffiliated  companies.  A "covered transaction"
includes:

     o    a loan or extension of credit to an affiliate;

     o    a purchase of investment securities issued by an affiliate;

     o    a purchase of assets from an affiliate, with some exceptions;

     o    the acceptance of securities  issued by an affiliate as collateral for
          a loan or extension of credit to any party; or

     o    the issuance of a guarantee,  acceptance or letter of credit on behalf
          of an affiliate.

In addition, under the OTS regulations:

     o    a savings association may not make a loan or extension of credit to an
          affiliate   unless  the   affiliate  is  engaged  only  in  activities
          permissible for bank holding companies;

     o    a savings  association  may not purchase or invest in securities of an
          affiliate other than shares of a subsidiary;

     o    a  savings  association  and  its  subsidiaries  may  not  purchase  a
          low-quality asset from an affiliate;

     o    covered  transactions  and  other  specified  transactions  between  a
          savings  association or its  subsidiaries  and an affiliate must be on
          terms and conditions  that are consistent  with safe and sound banking
          practices; and

     o    with some  exceptions,  each loan or  extension of credit by a savings
          association to an affiliate must be secured by collateral  with a fair
          value ranging from 100% to 130%,  depending on the type of collateral,
          of the amount of the loan or extension of credit.

     Regulations  generally  exclude all  non-bank and  non-savings  association
subsidiaries of savings associations from treatment as affiliates, except for:

     o    a financial subsidiary;

     o    a subsidiary controlled by one or more affiliates;

     o    an Employee Stock Option Plan ("ESOP"); or

     o    a subsidiary which the OTS or the Federal Reserve  determines to be an
          affiliate.

     The  regulations  also  require  savings  associations  to make and  retain
records that reflect  affiliate  transactions  in reasonable  detail and provide
that specified  classes of savings  associations may be required to give the OTS
prior notice of affiliate transactions.

     Capital  Distribution   Limitations.   A  savings  association  that  is  a
subsidiary of a savings and loan holding company, such as the Bank, must file an
application  or a notice with the OTS at least 30 days  before  making a capital
distribution.  Savings  associations are not required to file an application for
permission  to make a  capital  distribution  and need only file a notice if the
following conditions are met:

     o    they are eligible for expedited treatment under OTS regulations;

     o    they would remain adequately capitalized after the distribution;

     o    the annual amount of capital  distribution  does not exceed net income
          for  that  year to date  added  to  retained  net  income  for the two
          preceding years; and

     o    the capital  distribution would not violate any agreements between the
          OTS and the savings association or any OTS regulations.

                                       14
<PAGE>
     Any other  situation  would require an  application to the OTS. The OTS may
disapprove an application or notice if the proposed capital distribution would:

     o    make   the   savings   association   undercapitalized,   significantly
          undercapitalized or critically undercapitalized;

     o    raise safety or soundness concerns; or

     o    violate a statute,  regulation or agreement  with the OTS (or with the
          FDIC),  or a  condition  imposed  in an OTS  approved  application  or
          notice.

     Privacy.  Under the Financial  Services  Modernization Act, federal banking
regulators  adopted  rules  that  will  limit  the  ability  of banks  and other
financial  institutions to disclose  non-public  information  about consumers to
nonaffiliated  third parties.  Pursuant to those rules,  financial  institutions
must provide:

     o    initial notices to customers about their privacy policies,  describing
          the  conditions  under  which  they may  disclose  nonpublic  personal
          information to nonaffiliated third parties and affiliates;

     o    annual notices of their privacy policies to current customers; and

     o    a  reasonable  method for  customers  to "opt out" of  disclosures  to
          nonaffiliated third parties.

These privacy provisions affect how consumer  information is transmitted through
diversified financial companies and conveyed to outside vendors.

     USA  Patriot  Act of 2001.  On October  26,  2001,  the USA Patriot Act was
signed into law. The Patriot Act is intended to strengthen  U.S law  enforcement
and the  intelligence  communities'  ability to combat terrorism on a variety of
fronts.  The potential  impact of the Patriot Act on financial  institutions  is
significant  and wide  ranging.  The Patriot Act  contains  sweeping  anti-money
laundering and financial  transparency laws in addition to current  requirements
and requires various regulations, including:

     o    due diligence requirements for financial institutions that administer,
          maintain,  or manage private banks accounts or correspondent  accounts
          for non-US persons;

     o    standards for verifying customer identification at account opening;

     o    rules to promote cooperation among financial institutions, regulators,
          and law  enforcement  entities  in  identifying  parties  that  may be
          involved in terrorism or money laundering;

     o    reports  by   non-financial   businesses   filed  with  the   Treasury
          Department's   Financial   Crimes   Enforcement   Network   for   cash
          transactions exceeding $10,000; and

     o    the filing of suspicious  activities reports by securities brokers and
          dealers if they  believe a customer  may be  violating  U.S.  laws and
          regulations.

     On  July  23,  2002,  the  U.S.  Treasury  proposed  regulations  requiring
institutions to incorporate into their written money laundering plans a Board of
Director  approved  customer   identification  program  implementing  reasonable
procedures to:

     o    verify the identity of any person  seeking to open an account,  to the
          extent reasonable and practicable;

     o    maintain  records  of the  information  used to  verify  the  person's
          identity; and

     o    determine whether the person appears on any list of known or suspected
          terrorists or terrorist organizations.

"Account" is defined as a formal banking or business relationship established to
provide ongoing services,  dealings, or other financial transactions.  We do not
expect the proposed regulations will have a material impact on our operations.

     Activities of Subsidiaries.  A savings  association  seeking to establish a
new subsidiary, acquire control of an existing company or conduct a new activity
through a  subsidiary  must provide 30 days prior notice to the FDIC and the OTS
and conduct any activities of the subsidiary in compliance with  regulations and
orders  of the OTS.  The OTS may  require a savings  association  to divest  any
subsidiary  or  terminate  any activity  conducted by a subsidiary  that the OTS
determines  to pose a  serious  threat to the  financial  safety,  soundness  or
stability of the savings

                                       15
<PAGE>
association or to be otherwise inconsistent with sound banking practices.

     Community  Reinvestment Act and the Fair Lending Laws. Savings associations
have a  responsibility  under the  Community  Reinvestment  Act and  related OTS
regulations to help meet the credit needs of their  communities,  including low-
and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act
and the Fair Housing Act prohibit lenders from  discriminating  in their lending
practices  on the  basis of  characteristics  specified  in those  statutes.  An
institution's   failure  to  comply  with  the   provisions   of  the  Community
Reinvestment Act could, at a minimum,  result in regulatory  restrictions on its
activities and the denial of applications. In addition, an institution's failure
to comply with the Equal Credit  Opportunity  Act and the Fair Housing Act could
result in the OTS, other federal  regulatory  agencies as well as the Department
of Justice taking enforcement actions.

     Federal  Home Loan Bank  System.  The Bank is a member of the FHLB  system.
Among  other  benefits,  each FHLB  serves as a reserve or central  bank for its
members  within its assigned  region.  Each FHLB is financed  primarily from the
sale of consolidated  obligations of the FHLB system.  Each FHLB makes available
loans or advances to its members in compliance  with the policies and procedures
established by the Board of Directors of the individual FHLB.

     As an FHLB member,  the Bank is required to own capital stock in an FHLB in
an amount equal to the greater of:

     o    1% of its aggregate  outstanding  principal  amount of its residential
          mortgage loans, home purchase contracts and similar obligations at the
          beginning of each calendar year;

     o    5% of its FHLB advances or borrowings; or

     o    $500.

     At December 31, 2002, the Bank had $118 million of FHLB stock, an amount in
excess of our required investment of $108 million.

     The GLBA made significant reforms to the FHLB system, including:

     o    Expanded  Membership  - (i)  expands  the  uses  for,  and  types  of,
          collateral for advances;  (ii) eliminates bias toward qualified thrift
          lenders;  and (iii)  removes  capital  limits on  advances  using real
          estate  related  collateral  (e.g.,  commercial  real  estate and home
          equity loans).

     o    New Capital  Structure - each FHLB is allowed to establish two classes
          of stock: Class A is redeemable within six months of notice; and Class
          B is  redeemable  within five years  notice.  Class B is valued at 1.5
          times  the  value of Class A stock.  Each  FHLB  will be  required  to
          maintain minimum capital equal to 5% of equity.  Each FHLB,  including
          our FHLB of San  Francisco,  submitted  capital  plans for  review and
          approval by the Federal Housing Finance Board.

     o    Voluntary Membership - federally chartered savings associations,  such
          as the Bank, are no longer required to be members of the system.

     o    REFCorp  Payments  - changes  the  amount  paid by the  system on debt
          incurred in connection with the thrift crisis in the late 1980s from a
          fixed amount to 20% of net earnings after deducting certain expenses.

     The new  capital  plan for the FHLB of San  Francisco  was  approved by the
Federal  Housing  Finance Board on June 12, 2002.  The FHLB of San Francisco has
not yet  established  an  implementation  date for the new  capital  plan,  with
implementation  required by June 2005.  The Bank will  receive at least 240 days
written notice of the  implementation  date. The new capital plan incorporates a
single class of stock and  requires  each member to own stock in an amount equal
to the greater of:

     o    a membership stock requirement, or

     o    an activity based stock requirement.

     The new capital stock is redeemable on five years written  notice,  subject
to certain conditions.

     We do not believe that the initial  implementation  of the new capital plan
for the FHLB of San Francisco as approved  will have a material  impact upon our
financial condition, cash flows, or results of operations.  However, to maintain
membership,  the Bank could be required  to  purchase as much as 50%  additional
capital stock or sell

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<PAGE>
as much as 50% of its proposed  capital stock  requirement  at the discretion of
the FHLB of San Francisco.

     Federal  Reserve  System.  The  Federal  Reserve  requires  all  depository
institutions  to  maintain  non-interest-bearing  reserves at  specified  levels
against  their  transaction  accounts  and  non-personal  time  deposits.  These
transaction accounts include checking,  NOW and Super NOW checking accounts. The
balances  a  savings  association  maintains  to meet the  reserve  requirements
imposed  by the  Federal  Reserve  may be used to  satisfy  the OTS's  liquidity
requirements  that are imposed by the OTS. At December 31, 2002, the Bank was in
compliance with these requirements.

     Proposed  Legislation.  From time to time, new laws are proposed that could
have an effect on the financial institutions industry. For example,  legislation
is currently  being  considered in the U.S. House of  Representatives  Financial
Institutions Subcommittee which would:

     o    merge the Bank Insurance Fund ("BIF") and the SAIF;

     o    increase  the current  deposit  insurance  coverage  limit for insured
          deposits to $130,000 and index future coverage limits to inflation;

     o    increase deposit insurance coverage limits for municipal deposits;

     o    double deposit  insurance  coverage  limits for individual  retirement
          accounts; and

     o    smooth out bank deposit  insurance  premiums to avoid sharp  increases
          during times of recession.

While we cannot predict whether such proposals will eventually  become law, they
could have an effect on our operations and the way we conduct business.

REGULATION OF DSL SERVICE COMPANY

     DSL  Service  Company  is  licensed  as a  real  estate  broker  under  the
California  Real  Estate  Law and as a  contractor  with the  Contractors  State
License  Board.  Thus,  the real  estate  investment  activities  of DSL Service
Company, including development,  construction and property management activities
relating to its  portfolio  of  projects,  are governed by a variety of laws and
regulations.  Changes  occur  frequently  in the laws and  regulations  or their
interpretation by agencies and the courts.  DSL Service Company must comply with
various  federal,  state  and local  laws,  ordinances,  rules  and  regulations
concerning zoning,  building design,  construction,  hazardous waste and similar
matters.  Environmental  laws and regulations  also affect the operations of DSL
Service  Company,  including  regulations  pertaining to  availability of water,
municipal sewage treatment capacity, land use, protection of endangered species,
population density and preservation of the natural terrain and coastlines. These
and other requirements could become more restrictive in the future, resulting in
additional time and expense in connection with DSL Service Company's real estate
activities.

     With regard to environmental matters, the construction products industry is
regulated by federal, state and local laws and regulations pertaining to several
areas  including  human  health  and safety and  environmental  compliance.  The
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund  Amendments and Reauthorization Act of 1986, as well as
analogous laws in some states,  create joint and several  liability for the cost
of cleaning up or correcting releases to the environment of designated hazardous
substances. Among those who may be held jointly and severally liable are:

     o    those who generated the waste;

     o    those who arranged for disposal;

     o    those who owned or operated the disposal  site or facility at the time
          of disposal; and

     o    current owners.

     In  general,  this  liability  is  imposed  in  a  series  of  governmental
proceedings  initiated by the government's  identification of a site for initial
listing as a "Superfund site" on the National Priorities List or a similar state
list and the government's  identification of potentially responsible parties who
may be liable for cleanup costs. None of the DSL Service Company's project sites
is listed as a "Superfund site."

     In addition,  California courts have imposed  warranty-like  responsibility
upon  developers  of new housing for defects in structure  and the housing site,
including soil conditions. This responsibility is not necessarily dependent upon
a finding that the developer was negligent.

                                       17
<PAGE>
     As a licensed  entity,  DSL Service Company is also examined and supervised
by the California  Department of Real Estate and the  Contractors  State License
Board.

TAXATION

     Federal. Savings institutions are taxed like other corporations for federal
income tax  purposes,  and are  required to comply with income tax  statutes and
regulations  similar to those applicable to large  commercial  banks. The Bank's
bad debt deduction is determined  under the specific  charge-off  method,  which
allows  the Bank to take an income  tax  deduction  for loans  determined  to be
wholly or partially worthless.

     In addition to the regular income tax,  corporations are also subject to an
alternative  minimum  tax.  This  tax is  computed  at 20% of the  corporation's
regular  taxable  income,  after taking certain  adjustments  into account.  The
alternative minimum tax applies to the extent that it exceeds the regular income
tax liability.

     A corporation that incurs alternative  minimum tax generally is entitled to
take this tax as a credit  against its regular tax  liability  in later years to
the extent  that the  regular tax  liability  in these  later years  exceeds the
alternative minimum tax.

     State. The Bank uses California's  financial corporation income tax rate to
compute its  California  franchise tax  liability.  This rate is higher than the
California  non-financial  corporation  income tax rate  because  the  financial
corporation  rate  reflects an amount "in lieu" of local  personal  property and
business license taxes that are paid by non-financial  corporations,  but not by
banks or other financial corporations. The financial corporation income tax rate
was 10.84% for both 2002 and 2001.

     The Bank files a California  franchise  tax return on a combined  reporting
basis.  Other income and  franchise  tax returns are filed on a  separate-entity
basis in various other states. The Bank anticipates that additional state income
and  franchise  tax  returns  will be  required  in future  years as its lending
business expands nationwide.

     The Internal  Revenue  Service and various  state taxing  authorities  have
examined  the Bank's tax  returns  for all tax years  through  1997.  Management
believes it has adequately provided for potential exposure to issues that may be
raised by tax  auditors in the years  subsequent  to 1997,  which remain open to
review.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

     In  addition  to the  other  information  contained  in  this  report,  the
following  risks may  affect  us. If any of these  risks  occur,  our  business,
financial condition or operating results could be adversely affected.

     OUR CALIFORNIA  BUSINESS FOCUS AND ECONOMIC  CONDITIONS IN CALIFORNIA COULD
ADVERSELY AFFECT OUR OPERATIONS.

     Downey  is   headquartered  in  and  its  operations  are  concentrated  in
California.  As a result of this  geographic  concentration,  our results depend
largely upon economic and business  conditions in this state. The economy in our
market areas has exhibited  weakness.  Deterioration  of economic  conditions in
California  could have a material  adverse impact on the quality of our loan and
real estate portfolios and the demand for our products and services.

     SIGNIFICANT   CHANGES  IN  INTEREST  RATES  COULD   ADVERSELY   AFFECT  OUR
PERFORMANCE AND RESULTS OF OPERATIONS.

     If interest rates vary  substantially  from present levels, our results may
differ  materially from recent levels.  Changes in interest rates will influence
the growth of loans,  investments  and deposits and affect the rates received on
loans and investment securities and paid on deposits.  Changes in interest rates
also  affect the value of our  recorded  mortgage  servicing  rights on loans we
service for others,  generally  increasing  in value as interest  rates rise and
declining  as  interest   rates  fall.  If  interest   rates  were  to  increase
significantly,  the economic  feasibility of real estate  investment  activities
also could be adversely affected.

     WE ARE SUBJECT TO GOVERNMENT  REGULATION AND FEDERAL  MONETARY  POLICY THAT
COULD  LIMIT OR  RESTRICT  OUR  ACTIVITIES,  WHICH  COULD  ADVERSELY  AFFECT OUR
OPERATIONS.

     The financial  services  industry is subject to extensive federal and state
supervision and  regulation.  Significant new laws or changes in, or repeals of,
existing laws may cause our results to differ materially. Further,

                                       18
<PAGE>
federal monetary policy, particularly as implemented through the Federal Reserve
System,  significantly  affects credit conditions for Downey,  primarily through
open market operations in United States government securities, the discount rate
for borrowings and reserve  requirements.  A material change in these conditions
would be likely to have a material impact on our results.

     COMPETITION MAY ADVERSELY AFFECT OUR PERFORMANCE.

     The banking and financial  services  business in our market areas is highly
competitive.  The increasingly  competitive environment is a result primarily of
changes in regulation,  changes in technology and product delivery systems,  and
the expectation of continued  consolidation  among financial services providers.
Increasing  levels  of  competition  in  the  banking  and  financial   services
businesses  may reduce  our  market  share or cause the prices we charge for our
products to decline.  Our results may differ in future periods  depending on the
nature or level of competition.

     IF A SIGNIFICANT  NUMBER OF BORROWERS,  GUARANTORS AND RELATED PARTIES FAIL
TO PERFORM AS REQUIRED BY THE TERMS OF THEIR LOANS, WE WILL SUSTAIN LOSSES.

     A significant  source of risk arises from the possibility  that losses will
be  sustained  because  borrowers,  guarantors  and related  parties may fail to
perform  in  accordance  with the terms of their  loans.  While we have  adopted
underwriting  and  loan  quality  monitoring  systems,   procedures  and  credit
policies,  including  the  establishment  and review of the  allowance  for loan
losses,  such policies and procedures,  may not prevent  unexpected  losses that
could materially affect our results.

     BECAUSE DOWNEY OPERATES AS A HOLDING COMPANY, CHANGES IN THE ABILITY OF THE
BANK TO PAY DIVIDENDS MAY ADVERSELY AFFECT DOWNEY'S ABILITY TO PAY DIVIDENDS.

     Although we have been paying regular  quarterly  dividends,  our ability to
pay dividends to our  stockholders  depends to a large extent upon the dividends
we receive from the Bank. Dividends paid by the Bank are subject to restrictions
under  various  federal  and state  banking  laws.  In  addition,  the Bank must
maintain  certain capital levels,  which may restrict the ability of the Bank to
pay  dividends to us. The Bank's  regulators  have the authority to prohibit the
Bank or us from  engaging  in unsafe or  unsound  practices  in  conducting  our
business.  As a  consequence,  the Bank  regulators  could  deem the  payment of
dividends  by the Bank to be an unsafe or  unsound  practice,  depending  on the
Bank's financial condition or otherwise, and prohibit such payments. If the Bank
were unable to pay  dividends to us, we might cease paying or reduce the rate or
frequency  at which we pay  dividends to  stockholders  until such time that the
Bank could again pay us dividends.

     TERRORIST  ACTIVITIES  COULD CAUSE  REDUCTIONS IN INVESTOR  CONFIDENCE  AND
SUBSTANTIAL VOLATILITY IN REAL ESTATE AND SECURITIES MARKETS.

     It is impossible to predict the extent to which  terrorist  activities  may
occur in the  United  States  or, if they  occur,  the extent of the effect on a
particular  security issue.  Moreover,  it is uncertain what effects any past or
future  terrorist  activities  and/or any consequent  actions on the part of the
United  States  Government  and others will have on the United  States and world
financial markets;  local, regional and national economies;  real estate markets
across the United  States;  and/or  particular  business  segments.  Among other
things,  reduced investor  confidence could result in substantial  volatility in
securities markets, a decline in real estate related investments and in increase
in defaults on loans. Such unexpected losses could materially affect our results
of operations.

                                       19
<PAGE>
ITEM 2. PROPERTIES

BRANCHES

     The  corporate  offices of Downey,  the Bank and DSL  Service  Company  are
located at 3501 Jamboree Road,  Newport Beach,  California  92660.  Part of that
corporate  facility  houses a branch  office  of the Bank.  Certain  departments
(warehousing,  record  retention,  etc.) are  located in other  owned and leased
facilities  in Orange  County,  California.  The majority of our  administrative
operations, however, are located in our corporate headquarters.

     At December 31, 2002, we had 165  branches.  We owned the building and land
occupied by 61 of our branches and we owned one branch  building on leased land.
We operate  branches in 103  locations  (including 93 in-store  locations)  with
leases or licenses  expiring at various dates through August 2011,  with options
to extend the term.

     The net book value of our owned branches, including the one on leased land,
totaled $84 million at December 31,  2002,  and the net book value of our leased
branch  offices  totaled $4 million at December 31, 2002.  The net book value of
our furniture and fixtures,  including electronic data processing equipment, was
$26 million at December 31, 2002.

     For additional information regarding our offices and equipment,  see Note 1
on page 72 and Note 8 on page 88 of Notes to Consolidated Financial Statements.

ELECTRONIC DATA PROCESSING

     We utilize a mainframe computer system and use various internally developed
and third-party vendors' software for retail deposit operations, loan servicing,
accounting and loan origination  functions,  including our operations  conducted
over  the  Internet.  The net  book  value  of our  electronic  data  processing
equipment,  including  personal  computers  and  software,  was $12  million  at
December 31, 2002.

ITEM 3. LEGAL PROCEEDINGS

     We have been named as a defendant in legal actions  arising in the ordinary
course of business, none of which, in the opinion of management, is material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were  submitted  to  shareholders  during the fourth  quarter of
2002.

                                       20
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock is traded on the New York Stock Exchange  ("NYSE") and the
Pacific  Exchange  ("PCX") under the trading symbol "DSL." At February 28, 2003,
we had  approximately  725  stockholders  of record (not including the number of
persons or  entities  holding  stock in nominee or street name  through  various
brokerage firms) and 27,928,722 outstanding shares of common stock.

     The following table sets forth for the quarters indicated the range of high
and low sale  prices  per  share of our  common  stock as  reported  on the NYSE
Composite Tape.

<TABLE>
<CAPTION>
                                      2002                                       2001
                    -----------------------------------------------------------------------------------
                     4th        3rd        2nd        1st        4th        3rd        2nd        1st
                   Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter
-------------------------------------------------------------------------------------------------------
<S>             <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
High ........   $   41.55  $   49.25  $   55.56  $   48.83  $   44.46  $   58.81  $   48.85  $   54.31
Low .........       31.32      33.34      46.70      41.84      32.98      40.61      41.44      39.45
End of period       39.00      34.25      47.30      45.60      41.25      44.13      47.26      45.30
=======================================================================================================
</TABLE>

     During 2002 and 2001, we paid  quarterly cash dividends of $0.09 per share,
or $0.36 per share annually. Total cash dividends were $10.1 million in 2002 and
$10.2 million in 2001. On February 21, 2003, we paid a $0.09 per share quarterly
cash dividend, aggregating $2.5 million.

     We may pay additional  dividends out of funds legally available therefor at
such times as the Board of  Directors  determines  that  dividend  payments  are
appropriate.  The Board of Directors'  policy is to consider the  declaration of
dividends on a quarterly basis.

     The  payment  of  dividends  by  the  Bank  to  Downey  is  subject  to OTS
regulations.   For  further   information   regarding  these  regulations,   see
Business--Regulation--Regulation  of the Bank--Capital  Distribution Limitations
on page 14.

                                       21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data)                          2002         2001         2000          1999         1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>           <C>           <C>            <C>
INCOME STATEMENT DATA
Total interest income ..........................................  $   633,038  $   808,381   $   784,360   $   533,751    $ 440,404
Total interest expense .........................................      317,640      502,811       521,885       326,273      266,057
------------------------------------------------------------------------------------------------------------------------------------
    Net interest income ........................................      315,398      305,570       262,475       207,478      174,347
Provision for loan losses ......................................          939        2,564         3,251        11,270        3,899
------------------------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses ........      314,459      303,006       259,224       196,208      170,448
------------------------------------------------------------------------------------------------------------------------------------
Other income, net:
    Loan and deposit related fees ..............................       47,220       50,486        30,089        20,097       15,645
    Real estate and joint ventures held for investment, net ....       10,250        3,885         8,798        19,302       22,363
    Secondary marketing activities:
      Loan servicing income (loss), net ........................      (39,629)     (11,373)       (3,628)        1,672          259
      Net gains on sales of loans and mortgage-backed securities       45,860       22,432         3,297        14,806        6,462
      Net gains on sales of mortgage servicing rights ..........          331          934          --            --           --
    Net gains (losses) on sales of investment securities .......          219          329          (106)          288           68
    Gain on sale of subsidiary (1) .............................         --           --           9,762          --           --
    Other ......................................................        2,431        1,843         2,342         3,113        2,556
------------------------------------------------------------------------------------------------------------------------------------
      Total other income, net ..................................       66,682       68,536        50,554        59,278       47,353
------------------------------------------------------------------------------------------------------------------------------------
Operating expense:
    General and administrative expense .........................      186,644      162,496       136,189       144,382      115,890
    Net operation of real estate acquired in settlement of loans           11          239           818            19          260
    Amortization of excess cost over fair value of branch
      acquisitions (2) .........................................         --            457           462           474          510
------------------------------------------------------------------------------------------------------------------------------------
      Total operating expense ..................................      186,655      163,192       137,469       144,875      116,660
------------------------------------------------------------------------------------------------------------------------------------
Net income (1) .................................................  $   112,293  $   120,181   $    99,251   $    63,804   $   57,973

PER SHARE DATA
Earnings per share--Basic (1) ..................................  $      3.99  $      4.26   $      3.52   $      2.27   $     2.06
Earnings per share--Diluted (1) ................................         3.99         4.25          3.51          2.26         2.05
Book value per share at end of period ..........................        29.47        26.01         22.15         18.91        17.08
Stock price at end of period ...................................        39.00        41.25         55.00         20.19        25.44
Cash dividends paid ............................................         0.36         0.36          0.36          0.35         0.32

SELECTED FINANCIAL RATIOS
Effective interest rate spread .................................         2.91%        2.91%         2.66%         2.88%        3.08%
Efficiency ratio (3) ...........................................        50.23        43.93         46.23         58.41        58.16
Return on average assets (1) ...................................         1.00         1.11          0.97          0.85         0.98
Return on average equity (1) ...................................        14.42        17.81         17.17         12.70        12.71
Dividend payout ratio ..........................................         9.02         8.45         10.22         15.44        15.33

LOAN ACTIVITY
Loans originated ...............................................  $10,445,978  $ 8,128,285   $ 5,218,368   $ 7,132,486   $4,071,262
Loans and mortgage-backed securities purchased .................    1,497,645      216,214        18,828        49,669        7,463
Loans and mortgage-backed securities sold ......................    7,103,861    4,553,944     1,662,600     2,386,958    1,740,416

BALANCE SHEET SUMMARY (END OF PERIOD)
Total assets ...................................................  $11,978,151  $11,105,030   $10,893,863   $ 9,407,540   $6,270,419
Loans and mortgage-backed securities ...........................   10,976,942   10,132,413    10,084,353     8,746,063    5,788,365
Investments, cash and cash equivalents .........................      590,092      551,823       439,968       299,698      215,086
Deposits .......................................................    9,238,350    8,619,566     8,082,689     6,562,761    5,039,733
Borrowings .....................................................    1,624,084    1,522,712     1,978,572     2,122,780      703,720
Capital securities .............................................      120,000      120,000       120,000       120,000         --
Stockholders' equity ...........................................      823,104      733,896       624,636       532,418      480,566
Loans serviced for others ......................................    8,316,236    5,805,811     3,964,462     2,923,778    1,040,264

AVERAGE BALANCE SHEET DATA
Assets .........................................................  $11,230,354  $10,850,683   $10,217,371   $ 7,501,228   $5,918,507
Loans ..........................................................   10,336,951   10,033,155     9,514,978     6,937,342    5,345,380
Deposits .......................................................    8,768,204    8,701,424     7,290,850     5,697,292    5,102,045
Stockholders' equity ...........................................      778,463      674,972       577,979       502,412      456,237
</TABLE>

                                       22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data)                          2002         2001         2000          1999         1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>         <C>         <C>         <C>
CAPITAL RATIOS
Average stockholders' equity to average assets .................        6.93%           6.22%       5.66%       6.70%       7.71%
Bank only--end of period (4):
    Core and tangible capital ..................................        6.92            7.10        6.42        6.27        6.83
    Risk-based capital .........................................       14.08           14.53       12.94       12.14       12.88

SELECTED ASSET QUALITY DATA (END OF PERIOD)
Total non-performing assets ....................................      $79,814        $ 92,632    $ 54,974    $ 39,194    $ 27,419
Non-performing assets as a percentage of total assets ..........        0.67%           0.83%       0.50%       0.42%       0.44%
Allowance for loan losses:
    Amount .....................................................      $34,999        $ 36,120    $ 34,452    $ 38,342    $ 31,517
    As a percentage of non-performing loans ....................       51.89%          46.76%      76.63%     116.25%     140.86%
====================================================================================================================================
<FN>
(1)  In 2000,  a $5.6 million  after-tax  gain was  recognized  from the sale of
     Downey Auto Finance Corp.  Excluding  the gain,  2000 net income would have
     been $93.6  million or $3.33 per share on a basic basis and $3.32 per share
     on a diluted basis,  the return on average assets would have been 0.92% and
     the return on average equity would have been 16.20%.
(2)  During the fourth  quarter of 2002, we adopted SFAS 147,  which required us
     to cease the amortization of goodwill as of January 1, 2002.
(3)  The amount of general and  administrative  expense  incurred for each $1 of
     net interest  income plus other income,  except for income  associated with
     real estate held for investment and securities gains or losses.
(4)  For more information  regarding these ratios,  see Management's  Discussion
     and Analysis of Financial  Condition  and Results of  Operations--Financial
     Condition--Regulatory Capital Compliance on page 61.
</FN>
</TABLE>

                                       23
<PAGE>
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     Certain   statements   under  this  caption   constitute   "forward-looking
statements"  under the Private  Securities  Litigation  Reform Act of 1995 which
involve risks and  uncertainties.  Our actual  results may differ  significantly
from the results  discussed  in such  forward-looking  statements.  Factors that
might  cause  such a  difference  include,  but are  not  limited  to,  economic
conditions, competition in the geographic and business areas in which we conduct
our operations,  fluctuations  in interest rates,  credit quality and government
regulation.   For  additional   information   concerning   these  factors,   see
Business--Factors That May Affect Future Results Of Operations on page 18.

OVERVIEW

     Our net  income  for 2002  totaled  $112.3  million or $3.99 per share on a
diluted  basis,  down from last  year's  record of $120.2  million  or $4.25 per
share, but second highest in Downey's  history.  During the year, we repurchased
306,300 shares of common stock at an average price per share of $39.73,  leaving
$38  million  of the  $50  million  authorization  available  for  future  share
repurchases.

     The decline in our net income between years reflected lower net income from
our banking operations,  as net income from our real estate operations increased
$5.5 million to $6.2 million due  primarily to higher gains from sales and lower
operating  expense.  Net  income  from our  banking  operations  totaled  $106.1
million, down $13.4 million due to the following:

     o    a $28.3  million  higher loss from loan  servicing  due  primarily  to
          higher  provisions to the valuation  allowance for mortgage  servicing
          rights  reflecting the continued decline in market interest rates that
          increased  the actual and  expected  rate of  prepayments  on loans we
          service for others;

     o    a $26.3  million  increase in  operating  expense due to higher  costs
          associated  with the increased  number of branch  locations and higher
          loan origination activity; and

     o    a $7.3 million  decline in loan  related fees due to lower  prepayment
          fees.

Those unfavorable items were partially offset by the following:

     o    a  $23.4  million  increase  in  net  gains  on  sales  of  loans  and
          mortgage-backed  securities  due to a record  volume  of sales and the
          favorable impact from the SFAS 133 valuation of derivatives associated
          with the sale of loans;

     o    a  $9.8  million  increase  in  net  interest  income  due  to  higher
          interest-earning assets;

     o    a $4.1 million increase in deposit related fees; and

     o    a $1.6 million decline in provision for loan losses.

     For 2002,  our return on average assets was 1.00% and our return on average
equity was 14.42%.  These compare to our 2001 returns of 1.11% on average assets
and 17.81% on average equity.

     Our single family loan originations  increased from $8.0 billion in 2001 to
a record $10.7 billion in 2002, of which $6.2 billion were  originated  for sale
in  the  secondary  market.   Of  the  2002  total,  $4.5  billion   represented
originations  of loans  for  portfolio,  of which  $520  million  were  subprime
credits. In addition to single family loans, we originated $269 million of other
loans during the year, including $181 million of construction and land loans.

     Our assets  increased  $873 million or 7.9% during 2002 to $12.0 billion at
year end,  following a 1.9% increase during 2001. We primarily  funded our asset
growth with deposits that  increased  $619 million or 7.2% to a record  year-end
level of $9.2 billion at December 31, 2002.

     Non-performing  assets totaled $80 million at December 31, 2002,  down from
$93  million a year ago.  The  decrease  was due  primarily  to a decline in our
residential  non-performers.  When measured as a percentage of total assets, our
non-performing  assets  dropped from 0.83% at year-end 2001 to 0.67% at year-end
2002.

                                       24
<PAGE>
     At December 31, 2002, the Bank exceeded all regulatory  capital tests, with
capital-to-asset  ratios of 6.92% for both  tangible and core capital and 14.08%
for risk-based  capital.  These capital levels are significantly above the "well
capitalized"  standards defined by the federal banking regulators of 5% for core
and tangible capital and 10% for risk-based  capital.  For further  information,
see  Business--Regulation--Regulation of the Bank--Insurance of Deposit Accounts
on page 11, Financial  Condition--Investments  in Real Estate and Joint Ventures
on page 39 and Financial Condition--Regulatory Capital Compliance on page 61.

CRITICAL ACCOUNTING POLICIES

     We  have  established   various   accounting   policies  which  govern  the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  our  financial  statements.  Our  significant
accounting  policies are  described in the Notes to the  Consolidated  Financial
Statements  beginning on page 72. Certain accounting policies require us to make
significant  estimates  and  assumptions  which  have a  material  impact on the
carrying  value of certain assets and  liabilities,  and we consider these to be
critical accounting policies.  The estimates and assumptions we use are based on
historical experience and other factors, which we believe to be reasonable under
the  circumstances.   Actual  results  could  differ  significantly  from  these
estimates  and  assumptions  which could have a material  impact on the carrying
value of assets and  liabilities  at the balance  sheet dates and our results of
operations for the reporting periods.

     We believe the following are critical  accounting policies that require the
most significant estimates and assumptions that are particularly  susceptible to
significant change in the preparation of our financial statements:

     o    Allowance   for  losses  on  loans  and  real   estate.   For  further
          information,   see   Financial   Condition--Problem   Loans  and  Real
          Estate--Allowance  for Losses on Loans and Real  Estate on page 53 and
          Note 1 of Notes to the Consolidated Financial Statements on page 72.

     o    Valuation of mortgage servicing rights. For further  information,  see
          Note 1 on page 72 and Note 10 on page 89 of Notes to the  Consolidated
          Financial Statements.

     o    Valuation of expected rate lock commitments.  For further information,
          see  Note 1 on  page  72 and  Note  20 on  page  101 of  Notes  to the
          Consolidated Financial Statements.

                                       25
<PAGE>
RESULTS OF OPERATIONS

NET INTEREST INCOME

     Net interest  income is the  difference  between the interest and dividends
earned  on  loans,   mortgage-backed   securities  and   investment   securities
("interest-earning  assets") and the interest paid on deposits,  borrowings  and
capital  securities  ("interest-bearing  liabilities").  The spread  between the
yield on interest-earning  assets and the cost of  interest-bearing  liabilities
and the  relative  dollar  amounts of these assets and  liabilities  principally
affects net interest income.

     Our net interest  income totaled $315.4 million in 2002, up $9.8 million or
3.2% from 2001 and $52.9  million or 20.2%  greater than 2000.  The  improvement
during 2002 reflected higher interest-earning  assets, as our effective interest
rate spread was unchanged. Our average interest-earning assets increased by $343
million or 3.3% to $10.8 billion.  Our effective  interest rate spread  averaged
2.91% in both 2002 and 2001, up from 2.66% in 2000.

     The  following  table  presents  for the years  indicated  the total dollar
amount of:

     o    interest income from average interest-earning assets and the resultant
          yields; and

     o    interest  expense  on  average  interest-bearing  liabilities  and the
          resultant costs, expressed as rates.

     The table also sets forth our net interest income, interest rate spread and
effective  interest rate spread. The effective interest rate spread reflects the
relative level of interest-earning  assets to  interest-bearing  liabilities and
equals:

     o    the difference between interest income on interest-earning  assets and
          interest expense on interest-bearing liabilities, divided by

     o    average interest-earning assets for the year.

     The table also sets forth our net interest-earning  balance--the difference
between the average balance of  interest-earning  assets and the average balance
of total deposits,  borrowings and capital  securities--for the years indicated.
We included non-accrual loans in the average interest-earning assets balance. We
included  interest from non-accrual  loans in interest income only to the extent
we received  payments and to the extent we believe we will recover the remaining
principal  balance of the loans. We computed average balances for the year using
the average of each month's daily average balance during the years indicated.

                                       26
<PAGE>
<TABLE>
<CAPTION>
                                                       2002                            2001                           2000
                                       ---------------------------------------------------------------------------------------------
                                                               Average                        Average                        Average
                                          Average               Yield/    Average              Yield/    Average              Yield/
(Dollars in Thousands)                    Balance    Interest    Rate     Balance    Interest   Rate     Balance    Interest   Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>       <C>     <C>          <C>       <C>     <C>          <C>       <C>
Interest-earning assets:
   Loans .............................  $10,336,951  $612,762   5.93%  $10,033,155  $782,784   7.80%  $ 9,514,978  $760,538   7.99%
   Mortgage-backed securities ........       76,250     3,637   4.77        13,747       726   5.28        15,959     1,060   6.64
   Investment securities .............      420,142    16,639   3.96       443,386    24,871   5.61       346,192    22,762   6.57
------------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets ...   10,833,343   633,038   5.84    10,490,288   808,381   7.71     9,877,129   784,360   7.94
Non-interest-earning assets ..........      397,011                        360,395                        340,242
------------------------------------------------------------------------------------------------------------------------------------
   Total assets ......................  $11,230,354                    $10,850,683                    $10,217,371
====================================================================================================================================
Transaction accounts:
   Non-interest-bearing checking .....  $   306,890  $   --     --  %  $   302,628  $   --     --  %  $   209,221  $   --     --  %
   Interest-bearing checking (1) .....      421,590     1,391   0.33       406,666     2,057   0.51       381,269     3,520   0.92
   Money market ......................      113,862     1,929   1.69        93,964     2,436   2.59        89,495     2,544   2.84
   Regular passbook ..................    3,042,839    69,113   2.27     1,118,287    34,553   3.09       796,212    27,841   3.50
------------------------------------------------------------------------------------------------------------------------------------
    Total transaction accounts .......    3,885,181    72,433   1.86     1,921,545    39,046   2.03     1,476,197    33,905   2.30
Certificates of deposit ..............    4,883,023   172,108   3.52     6,779,879   385,809   5.69     5,814,653   345,398   5.94
------------------------------------------------------------------------------------------------------------------------------------
   Total deposits ....................    8,768,204   244,541   2.79     8,701,424   424,855   4.88     7,290,850   379,303   5.20
Borrowings ...........................    1,410,762    60,936   4.32     1,219,484    65,793   5.40     2,118,497   130,419   6.16
Capital securities ...................      120,000    12,163  10.14       120,000    12,163  10.14       120,000    12,163  10.14
------------------------------------------------------------------------------------------------------------------------------------
   Total deposits, borrowings and
    capital securities ...............   10,298,966   317,640   3.08    10,040,908   502,811   5.01     9,529,347   521,885   5.48
Other liabilities ....................      152,925                        134,803                        110,045
Stockholders' equity .................      778,463                        674,972                        577,979
------------------------------------------------------------------------------------------------------------------------------------
   Total liabilities and
    stockholders' equity .............  $11,230,354                    $10,850,683                    $10,217,371
====================================================================================================================================
Net interest income/interest rate
   spread ............................               $315,398   2.76%               $305,570   2.70%               $262,475   2.46%
Excess of interest-earning assets over
   deposits, borrowings and capital
   securities ........................  $   534,377                    $   449,380                    $   347,782
Effective interest rate spread .......                          2.91                           2.91                           2.66
====================================================================================================================================
<FN>
(1)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

                                       27
<PAGE>
     Changes in our net interest  income are a function of both changes in rates
and  changes  in  volumes  of  interest-earning   assets  and   interest-bearing
liabilities. The following table sets forth information regarding changes in our
interest  income and  expense  for the years  indicated.  For each  category  of
interest-earning  assets  and  interest-bearing  liabilities,  we have  provided
information on changes attributable to:

     o    changes in  volume--changes in volume multiplied by comparative period
          rate;

     o    changes in  rate--changes  in rate  multiplied by  comparative  period
          volume; and

     o    changes  in  rate/volume--changes  in rate  multiplied  by  changes in
          volume.

Interest-earning  asset  and  interest-bearing  liability  balances  used in the
calculations  represent  annual average  balances  computed using the average of
each month's daily average balance during the years indicated.

<TABLE>
<CAPTION>
                                                  2002 Versus 2001                              2001 Versus 2000
                                                   Changes Due To                                Changes Due To
                                    ---------------------------------------------------------------------------------------------
                                                                Rate/                                          Rate/
(In Thousands)                        Volume       Rate        Volume      Net         Volume       Rate      Volume     Net
---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>          <C>        <C>          <C>        <C>         <C>       <C>
Interest income:
   Loans ...........................  $  23,702   $(188,031)   $ (5,693)  $(170,022)   $ 41,418   $(18,182)   $  (990)  $ 22,246
   Mortgage-backed securities ......      3,301         (70)       (320)      2,911        (147)      (217)        30       (334)
   Investment securities ...........     (1,304)     (7,311)        383      (8,232)      6,393     (3,345)      (939)     2,109
---------------------------------------------------------------------------------------------------------------------------------
     Change in interest income .....     25,699    (195,412)     (5,630)   (175,343)     47,664    (21,744)    (1,899)    24,021
---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
   Transaction accounts:
     Interest-bearing checking (1) .         75        (715)        (26)       (666)        234     (1,591)      (106)    (1,463)
     Money market ..................        516        (844)       (179)       (507)        127       (224)       (11)      (108)
     Regular passbook ..............     59,465      (9,153)    (15,752)     34,560      11,262     (3,240)    (1,310)     6,712
---------------------------------------------------------------------------------------------------------------------------------
       Total transaction accounts        60,056     (10,712)    (15,957)     33,387      11,623     (5,055)    (1,427)     5,141
   Certificates of deposit .........   (107,941)   (146,844)     41,084    (213,701)     57,336    (14,515)    (2,410)    40,411
---------------------------------------------------------------------------------------------------------------------------------
     Total interest-bearing deposits    (47,885)   (157,556)     25,127    (180,314)     68,959    (19,570)    (3,837)    45,552
   Borrowings ......................     10,320     (13,119)     (2,058)     (4,857)    (55,386)   (15,373)     6,133    (64,626)
   Capital securities ..............       --          --          --          --          --         --         --         --
---------------------------------------------------------------------------------------------------------------------------------
     Change in interest expense ....    (37,565)   (170,675)     23,069    (185,171)     13,573    (34,943)     2,296    (19,074)
---------------------------------------------------------------------------------------------------------------------------------
Change in net interest income ......  $  63,264   $ (24,737)   $(28,699)  $   9,828    $ 34,091   $ 13,199    $(4,195)  $ 43,095
=================================================================================================================================
<FN>
(1)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

PROVISION FOR LOAN LOSSES

     Provision for loan losses was $0.9 million in 2002,  down from $2.6 million
in  2001  and  $3.3  million  in  2000.  The  decrease  is due  primarily  to an
improvement in asset quality from a year ago.

     For further information,  see Financial  Condition--Problem  Loans and Real
Estate--Allowance for Losses on Loans and Real Estate on page 53.

OTHER INCOME

     Our total other income was $66.7  million in 2002,  down from $68.5 million
in 2001,  but up from $50.6 million in 2000.  The decline in our other income in
2002 was  primarily  due to a larger  addition to the  valuation  allowance  for
mortgage  servicing  rights.  The addition was reflected  within the category of
loan  servicing  loss and was  necessary  due to the drop in long-term  interest
rates,  which  resulted in an increase in the actual and projected rate at which
loans  serviced  for others are  expected to prepay,  thereby  shortening  their
expected  average life.  In addition,  the decline in long-term  interest  rates
reduced  the  expected  value of  associated  custodial  accounts.  The  pre-tax
addition was $36.6  million,  up from $10.6 million during 2001 and $6.1 million
during 2000.  Excluding  the  valuation  allowances  additions,  our total other
income would have been $103.3 million in 2002, up $24.2 million or

                                       28
<PAGE>
30.5%  from the  adjusted  2001  level and up $46.7  million  or 82.4%  from the
adjusted 2000 level. This adjusted increase was primarily due to the following:

     o    a  $23.4  million  increase  in  net  gains  on  sales  of  loans  and
          mortgage-backed securities;

     o    a $6.4 million increase in income from real estate held for investment
          due to higher gains from sales; and

     o    a $4.1 million increase in deposit related fees.

Those  favorable  items were partially  offset by a $7.3 million decline in loan
related fees and a $2.2 million  increase in the adjusted loss  associated  with
our loan servicing activity.

     Total other income  increased  $18.0 million during 2001 due primarily to a
$20.4  million  increase in loan and deposit  related  fees and a $20.1  million
increase in net gains on sales of loans, mortgage-backed securities and mortgage
servicing rights.  Those favorable items were partially offset by the absence of
a $9.8 million pre-tax gain associated with our sale of the indirect  automobile
finance subsidiary in 2000, an increase of $7.7 million in loan servicing losses
as well as a decline  of $4.9  million  in  income  from  real  estate  held for
investment. Below is a further discussion of the major other income categories.

LOAN AND DEPOSIT RELATED FEES

     Loan and deposit  related fees  totaled  $47.2  million in 2002,  down from
$50.5 million in 2001,  but up from $30.1 million in 2000. Our current year loan
related  fees  declined  $7.3  million  from  2001,  due to a  decline  in  loan
prepayment  fees.  This decline was partially  offset by a $4.1 million or 22.8%
increase  in our deposit  related  fees,  primarily  due to higher fees from our
checking accounts.

     The following  table presents a breakdown of loan and deposit  related fees
during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                               2002      2001      2000
-------------------------------------------------------------------------
<S>                                         <C>       <C>       <C>
Loan related fees:
    Prepayment fees .....................   $15,999   $23,839   $11,195
    Other fees ..........................     9,258     8,764     5,527
Deposit related fees:
    Automated teller machine fees .......     7,328     6,524     5,792
    Other fees ..........................    14,635    11,359     7,575
-------------------------------------------------------------------------
      Total loan and deposit related fees   $47,220   $50,486   $30,089
=========================================================================
</TABLE>

REAL ESTATE AND JOINT VENTURES HELD FOR INVESTMENT

     Income from our real estate and joint ventures held for investment  totaled
$10.3  million in 2002,  up from $3.9  million in 2001 and $8.8 million in 2000.
The current  year  increase of $6.4  million  over 2001  reflected  two factors.
First,  our net gains from sales  increased by $5.9 million to $6.4 million.  Of
the increase, $4.8 million was related to joint venture projects reported in the
category  equity in net income from joint  ventures.  Second,  our interest from
joint venture advances increased by $0.6 million.

     The table below sets forth the key  components  comprising  our income from
real estate and joint venture operations during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                                   2002      2001      2000
-------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>       <C>       <C>
Rental operations, net of expenses ..........................................   $ 2,102   $ 2,245   $ 2,572
Equity in net income from joint ventures ....................................     5,476       736     3,224
Interest from joint venture advances ........................................     1,024       468       887
Net gains on sales of wholly owned real estate ..............................     1,200       129     2,981
(Provision for) reduction of losses on real estate and joint ventures .......       448       307      (866)
-------------------------------------------------------------------------------------------------------------
    Total income from real estate and joint ventures held for investment, net   $10,250   $ 3,885   $ 8,798
=============================================================================================================
</TABLE>

     For additional information,  see Financial  Condition--Investments  in Real
Estate and Joint  Ventures on page 39,  Financial  Condition--Problem  Loans and
Real Estate--Allowance for Losses on Loans and Real Estate on page 53 and Note 6
of Notes to Consolidated Financial Statements on page 83.

                                       29
<PAGE>
SECONDARY MARKETING ACTIVITIES

     A loss of $39.6 million was recorded in loan  servicing  from our portfolio
of loans serviced for others during 2002, compared to a loss of $11.4 million in
2001 and $3.6  million in 2000.  The higher loss in 2002  primarily  reflected a
$36.6  million  provision to the  valuation  allowance  for  mortgage  servicing
rights,  up from $10.6 million in 2001. The current year valuation  addition was
associated with the decline in the fair value of our mortgage  servicing  rights
due to the drop in long-term  interest  rates,  which resulted in an increase in
the actual and projected rate at which loans serviced for others are expected to
prepay,  thereby shortening their expected average life. Excluding the valuation
additions,  we  incurred a loss of $3.0  million  in 2002 in the loan  servicing
category, compared to a loss of $0.8 million in 2001. When a loan we service for
others  prepays,  we  benefit  from the use of those  proceeds  from the time of
repayment until we are required to remit the funds to the investor. That benefit
results in a reduction of our borrowing costs within net interest  income.  Most
of our loan  servicing  agreements,  however,  require us to pay interest to the
investor  up to the  date we  remit  funds  to  them.  Therefore,  when the loan
prepays,  we  remit to the  investor  more  interest  than we  collect  from the
borrower.  That additional  interest cost, which we call pay-off and curtailment
interest losses,  appears as a reduction to income from servicing activities and
totaled $5.1  million in 2002,  up from $2.7 million in 2001 and $0.5 million in
2000.  At  December  31,  2002,  we serviced  $8.3  billion of loans for others,
compared to $5.8 billion at December 31, 2001,  and $4.0 billion at December 31,
2000.

     The  following  table  presents a breakdown of the  components  of our loan
servicing loss for the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                          2002        2001       2000
------------------------------------------------------------------------
<S>                                  <C>         <C>         <C>
Income from servicing operations .   $ 11,419    $  9,028    $  8,414
Amortization of MSRs .............    (14,435)     (9,813)     (5,968)
Provision for impairment .........    (36,613)    (10,588)     (6,074)
------------------------------------------------------------------------
    Total loan servicing loss, net   $(39,629)   $(11,373)   $ (3,628)
========================================================================
</TABLE>

     Sales of loans and  mortgage-backed  securities we originated  increased in
2002 to a record  $6.0  billion  from $4.6  billion in 2001 and $1.7  billion in
2000.  Net gains  associated  with these sales totaled $45.6 million in 2002, up
from $22.4  million in 2001 and $3.3  million in 2000.  Included  in the current
year was a $6.1  million  gain  associated  with the SFAS 133  impact of valuing
derivatives associated with the sale of loans compared to a $6.0 million loss in
2001.  Excluding  the SFAS 133 gain,  a gain of $39.5  million or 0.66% of loans
sold was  realized,  up  slightly  from 0.62% in 2001.  Net gains  included  the
capitalization  of mortgage  servicing  rights of $53.2  million in 2002,  $44.4
million in 2001 and $18.5 million in 2000.

     The following table presents a breakdown of the components of our net gains
(losses)  on sales of  loans  and  mortgage-backed  securities  for the  periods
indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                            2002         2001         2000
------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C>
Mortgage servicing rights ..........................................   $ 53,236     $ 44,391     $ 18,510
All other components excluding SFAS 133 (1) ........................    (13,474)     (15,995)     (15,213)
SFAS 133 (2) .......................................................      6,098       (5,964)        --
------------------------------------------------------------------------------------------------------------
    Total net gains on sales of loans and mortgage-backed securities   $ 45,860     $ 22,432     $  3,297
============================================================================================================
Secondary marketing gain excluding SFAS 133 as percent of
    associated sales ...............................................       0.66%        0.62%        0.20%
============================================================================================================
<FN>
(1)  Included a $0.3  million gain  associated  with the sale of $1.0 billion of
     mortgage-backed securities purchased during 2002.
(2)  On January 1, 2001, SFAS 133 was adopted.
</FN>
</TABLE>

     In addition to sales of loans and mortgage-backed  securities, we also sold
mortgage  servicing  rights related to $172 million of loans serviced for others
during 2002 at an  incremental  gain of $0.3 million above the carrying value of
the associated mortgage servicing rights. This compares to sales of $602 million
in 2001 for a gain of $0.9 million.

     For additional  information  concerning mortgage servicing rights, see Note
10 of Notes to Consolidated Financial Statements on page 89.

                                       30
<PAGE>
OTHER CATEGORY

     The all other  category of other income  totaled  $2.4 million in 2002,  up
from $1.8 million in 2001 and $2.3 million in 2000.

OPERATING EXPENSE

     Our  operating  expense  totaled  $186.7  million in 2002,  up from  $163.2
million in 2001 and $137.5 million in 2000. The current year increase was due to
higher general and administrative  expense,  which increased by $24.1 million or
14.9%.  That  increase  was  primarily  due to higher costs  associated  with an
increased number of branch locations and higher loan origination activity.

     The  following  table  presents a breakdown  of key  components  comprising
operating expense during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                              2002       2001       2000
---------------------------------------------------------------------------------------------------------
<S>                                                                      <C>        <C>        <C>
Salaries and related costs ...........................................   $119,514   $ 99,935   $ 82,522
Premises and equipment costs .........................................     30,694     26,016     23,220
Advertising expense ..................................................      4,418      4,410      4,786
SAIF insurance premiums and regulatory assessments ...................      3,078      3,051      2,626
Professional fees ....................................................      1,435      5,452      3,319
Other general and administrative expense .............................     27,505     23,632     19,716
---------------------------------------------------------------------------------------------------------
    Total general and administrative expense .........................    186,644    162,496    136,189
Net operation of real estate acquired in settlement of loans .........         11        239        818
Amortization of excess cost over fair value of branch acquisitions (1)       --          457        462
---------------------------------------------------------------------------------------------------------
    Total operating expense ..........................................   $186,655   $163,192   $137,469
=========================================================================================================
<FN>
(1)  During the fourth quarter of 2002,  Downey adopted SFAS 147, which required
     us to cease the  amortization  of  goodwill  as of  January  1, 2002 and to
     subject this asset to annual impairment testing.
</FN>
</TABLE>

PROVISION FOR INCOME TAXES

     Downey's  effective tax rate was 42.3% for both 2002 and 2001, and 42.4% in
2000. See Note 1 on page 72 and Note 15 on page 95 of Notes to the  Consolidated
Financial Statements for a further discussion of income taxes and an explanation
of the factors which impact Downey's effective tax rate.

BUSINESS SEGMENT REPORTING

     The previous discussion and analysis of the Results of Operations pertained
to our consolidated  results. This section discusses and analyzes the results of
operations of our two business segments--banking and real estate investment. For
a description of these business  segments and the accounting  policies used, see
Business  on page 1 and  Note 1 on page 72 and  Note 22 on page  106 of Notes to
Consolidated Financial Statements.

     The  following  table  presents by business  segment our net income for the
years indicated.

<TABLE>
<CAPTION>
(In Thousands)                         2002       2001      2000 (1)
--------------------------------------------------------------------
<S>                                 <C>        <C>        <C>
Banking net income ..............   $106,074   $119,454   $ 94,822
Real estate investment net income      6,219        727      4,429
--------------------------------------------------------------------
      Total net income ..........   $112,293   $120,181   $ 99,251
====================================================================
<FN>
(1)  Banking  included  a $5.6  million  after-tax  gain  related to the sale of
     subsidiary.
</FN>
</TABLE>

                                       31
<PAGE>
BANKING

     Net income from our banking operations totaled $106.1 million in 2002, down
from $119.5 million in 2001, but up from $94.8 million in 2000. The decrease was
primarily due to the following:

     o    a $28.3  million  higher loss from loan  servicing  due  primarily  to
          higher  provisions to the valuation  allowance for mortgage  servicing
          rights  reflecting the continued decline in market interest rates that
          increased  the actual and  expected  rate of  prepayments  on loans we
          service for others;

     o    a $26.3  million  increase in  operating  expense due to higher  costs
          associated  with the increased  number of branch  locations and higher
          loan origination activity; and

     o    a $7.3 million  decline in loan  related fees due to lower  prepayment
          fees.

Those unfavorable items were partially offset by the following:

     o    a  $23.4  million  increase  in  net  gains  on  sales  of  loans  and
          mortgage-backed  securities  due to a record  volume  of sales and the
          favorable impact from the SFAS 133 valuation of derivatives associated
          with the sale of loans;

     o    a  $9.8  million  increase  in  net  interest  income  due  to  higher
          interest-earning assets;

     o    a $4.1 million or increase in deposit related fees; and

     o    a $1.6 million decline in provision for loan losses.

     During  2001,  net  income  from our  banking  operations  increased  $30.3
million,  excluding  the  after-tax  gain of $5.6  million  from the sale of our
indirect  automobile  finance  subsidiary during 2000. The adjusted increase was
primarily  due to a $43.3  million  increase  in net  interest  income,  a $20.1
million  increase in net gains from sales of loans,  mortgage-backed  securities
and mortgage  servicing  rights,  a $19.7  million  increase in loan and deposit
related fees,  and a $0.7 million  decline in provision  for loan losses.  These
favorable items were partially  offset by a $23.6 million  increase in operating
expenses and a $7.7 million increase in loan servicing losses.

     The table  below  sets  forth  banking  operational  results  and  selected
financial data for the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                                 2002         2001         2000 (1)
-----------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>
Net interest income ...................   $   315,353   $   305,573   $   262,232
Provision for loan losses .............           939         2,564         3,251
Other income:
    Gain on sale of subsidiary ........          --            --           9,762
    All other .........................        55,051        63,340        31,644
Operating expense .....................       185,859       159,604       135,996
Net intercompany income ...............           343           369           397
-----------------------------------------------------------------------------------
Income before income taxes ............       183,949       207,114       164,788
Income taxes ..........................        77,875        87,660        69,966
-----------------------------------------------------------------------------------
   Net income .........................   $   106,074   $   119,454   $    94,822
===================================================================================
AT DECEMBER 31,
Assets:
   Loans and mortgage-backed securities   $10,976,942   $10,132,413   $10,084,353
   Other ..............................       995,470       966,942       806,201
-----------------------------------------------------------------------------------
     Total assets .....................    11,972,412    11,099,355    10,890,554
-----------------------------------------------------------------------------------
Equity ................................   $   823,104   $   733,896   $   624,636
===================================================================================
<FN>
(1)  Included a $5.6 million after-tax gain related to the sale of subsidiary.
</FN>
</TABLE>

                                       32
<PAGE>
REAL ESTATE INVESTMENT

     Net income from our real estate investment  operations totaled $6.2 million
in 2002, up from $0.7 million in 2001 and $4.4 million in 2000. The increase was
primarily attributed to higher gains from sales and lower operating expenses, as
2001 included expense  pertaining to litigation  matters associated with certain
joint venture partners.

     During 2001, net income from our real estate investment operations declined
$3.7  million  primarily  due to lower  gains from  sales,  lower  recapture  of
valuation allowances, and higher operating expenses.

     The table below sets forth real estate investment  operational  results and
selected financial data for the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                                        2002       2001        2000
------------------------------------------------------------------------------------
<S>                                                <C>        <C>         <C>
Net interest income (loss) .....................   $     45   $     (3)   $    243
Other income ...................................     11,631      5,196       9,148
Operating expense ..............................        796      3,588       1,473
Net intercompany expense .......................        343        369         397
------------------------------------------------------------------------------------
Income before income taxes .....................     10,537      1,236       7,521
Income taxes ...................................      4,318        509       3,092
------------------------------------------------------------------------------------
   Net income ..................................   $  6,219   $    727    $  4,429
====================================================================================
AT DECEMBER 31,
Assets:
   Investments in real estate and joint ventures   $ 33,890   $ 38,185    $ 17,641
   Other .......................................     14,174      2,003       3,584
------------------------------------------------------------------------------------
     Total assets ..............................     48,064     40,188      21,225
------------------------------------------------------------------------------------
Equity .........................................   $ 42,325   $ 34,513    $ 17,916
====================================================================================
</TABLE>

     For a further discussion regarding income from real estate investment,  see
Other Income--Real Estate and Joint Ventures Held For Investment on page 29, and
for information  regarding related assets, see Financial  Condition--Investments
in Real Estate and Joint Ventures on page 39.

                                       33
<PAGE>
FINANCIAL CONDITION

LOANS AND MORTGAGE-BACKED SECURITIES

     Total loans and  mortgage-backed  securities,  including  those we hold for
sale,  increased  $845  million or 8.3% from  year-end  2001 to a total of $11.0
billion  or 91.6% of  assets  at  December  31,  2002.  The  increase  primarily
represents a higher level of single  family  loans held for  investment  despite
continued high loan prepayments as a result of the low interest rate environment
and borrower  preference for fixed rate loans.  Our prepayment  speed during the
year was 39%, compared to 37% during 2001 and 18% during 2000.

     Our loan  originations,  including loans purchased,  totaled a record $10.9
billion in 2002,  up from $8.2  billion in 2001 and $5.2  billion in 2000.  This
current year increase primarily reflects record originations of one-to-four unit
residential loans of $10.6 billion,  of which  approximately $4.5 billion or 42%
were for  portfolio,  with the balance  for sale in the  secondary  market.  Our
origination of subprime loans totaled $520 million in 2002, up from $428 million
in 2001.

     The table below  presents  information  regarding  interest  rates and loan
origination  costs, net of fees collected on loans  originated  during the years
indicated.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                             2002         2001          2000          1999          1998
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>           <C>           <C>
Average interest rate on new loans ....................           5.43%         6.18%         6.10%         5.92%         6.45%
Total loan origination costs (net of fees) and premiums
    (net of discounts) deferred during the year (1) ...        $ 75,420      $ 36,497      $ 34,797      $ 53,181      $ 30,621
=================================================================================================================================
<FN>
(1)  The increase in 2002 reflects a borrower  preference for low  out-of-pocket
     cost loans  resulting  in both  higher  loan yields and higher net costs to
     Downey.
</FN>
</TABLE>

     We originate  one-to-four unit  residential  adjustable rate mortgages both
with and without loan origination fees. In adjustable rate mortgage transactions
for which we charge no  origination  fees,  we receive a larger  margin over the
index to which the loan  pricing is tied than in those in which we charge  fees.
In addition,  a prepayment  fee on these loans is generally  required if prepaid
within the first three years.  This trend towards loans with no origination fees
has generally  resulted in deferrable  loan  origination  costs  exceeding  loan
origination fees.

     Residential   one-to-four  unit  adjustable  rate  mortgage   originations,
including loans  purchased,  were $4.8 billion during 2002, up from $3.2 billion
in 2001 and $3.5 billion in 2000.  Refinancing activities related to residential
one-to-four unit loans, including new loans to refinance existing loans which we
or other lenders  originated,  constituted 78% of  originations  during the year
compared  to 75%  during  2001  and  42%  during  2000.  Refinancing  activities
increased from $6.0 billion in 2001 to $8.3 billion in 2002, as a lower interest
rate  environment  existed  throughout  most  of the  year.  During  2002,  loan
originations  for investment  consisted  primarily of adjustable  rate mortgages
which  provide for  negative  amortization  and are tied to COFI or the 12-month
moving average of the annual yields on actively traded U.S. Treasury  securities
adjusted to a constant  maturity of one year  ("MTA"),  indexes which lag behind
the  movement  in  market  interest   rates.   During  2002,  49%  of  portfolio
originations  represented monthly adjusting COFI rate mortgages, 20% represented
monthly  adjusting MTA rate  mortgages,  while 29%  represented  adjustable rate
loans  where the initial  rate is fixed for the first  three or five  years.  At
December  31,  2002,  $7.3  billion  of our  one-to-four  unit  adjustable  rate
mortgages  were  subject  to  negative  amortization,   of  which  $112  million
represented  the amount of negative  amortization  included in the loan balance.
For   further    information,    see    Business--Banking    Activities--Lending
Activities--Residential Real Estate Lending on page 3.

     Our origination of commercial real estate loans, including loans purchased,
totaled $1 million in 2002,  compared  to $7 million in 2001 and $24  million in
2000. Originations of loans secured by multi-family properties,  including loans
purchased,  totaled $3 million in 2002, compared to less than $1 million in both
2001 and 2000.

     During 2002, we originated $124 million of construction loans,  principally
for entry level and first time move-up residential tracts. This compares to $102
million in 2001 and $99 million in 2000.  Our  origination  of land  development
loans  totaled  $56  million in 2002,  compared  to $16  million in 2001 and $17
million in 2000.

     Origination of non-mortgage  commercial  loans totaled $14 million in 2002,
down from $18 million in 2001 and $19 million in 2000. A substantial majority of
these originations represented secured loans.

                                       34
<PAGE>
     Origination of automobile loans totaled $1 million in 2002,  compared to $5
million in 2001 and $57  million in 2000.  The  majority  of these  originations
during 2000  represented  our indirect  lending  program  that was  conducted by
Downey Auto Finance Corp., a former  subsidiary  sold in February 2000,  whereby
loans to finance the purchase of new or used  automobiles  were obtained through
preapproved  automobile dealers.  For further information  regarding Downey Auto
Finance Corp., see Sale of Subsidiary on page 63.

     During   2002,   we   purchased   $1.0   billion  of  30-year   fixed  rate
mortgage-backed  securities  due to a net  interest  spread of over 3% given the
steepness in the yield curve.  These  securities were sold in the fourth quarter
of 2002 due to interest rate volatility and the potential  adverse impact market
interest  rate  changes  could  have on the  carrying  value of the  investment.
Approximately $1.0 million was earned on the securities while owned.

     At December 31, 2002, our unfunded loan  application  pipeline totaled $2.3
billion.  Within that pipeline,  we had  commitments to borrowers for short-term
interest  rate locks of $996  million,  of which $790  million  were  related to
residential  one-to-four  unit loans being  originated for sale in the secondary
market.  Furthermore, we had commitments for undrawn lines and letters of credit
of $102  million  and loans in process of $88  million.  We believe  our current
sources of funds will enable us to meet these obligations.

                                       35
<PAGE>
     The following table sets forth the origination,  purchase and sale activity
relating to our loans and mortgage-backed securities during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                                                    2002         2001         2000        1999          1998
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>          <C>          <C>          <C>           <C>
INVESTMENT PORTFOLIO
Loans originated:
   Loans secured by real estate:
     Residential one-to-four units:
      Adjustable .........................................   $ 2,648,302  $ 1,800,777  $ 2,798,592  $ 3,100,154   $   943,736
      Adjustable -  subprime .............................       466,086      423,777      392,794    1,105,384       367,179
      Adjustable -  fixed for 3-5 years ..................       818,417      890,704       33,004        2,656          --
      Adjustable -  fixed for 3-5 years - subprime .......        47,794         --          3,117       77,168         5,107
-------------------------------------------------------------------------------------------------------------------------------
        Total adjustable residential one-to-four units ...     3,980,599    3,115,258    3,227,507    4,285,362     1,316,022
      Fixed ..............................................        40,245       16,443        9,167      262,923       192,436
      Fixed - subprime ...................................          --          4,708         --         12,238         6,020
     Residential five or more units:
      Adjustable .........................................         2,806         --           --            247           875
      Fixed ..............................................          --            125          678         --          13,229
-------------------------------------------------------------------------------------------------------------------------------
        Total residential ................................     4,023,650    3,136,534    3,237,352    4,560,770     1,528,582
     Commercial real estate ..............................         1,157          133       23,720       10,063        10,363
     Construction ........................................       124,168      101,716       98,330      149,143       111,534
     Land ................................................        56,362       16,242       16,530       56,851        48,357
   Non-mortgage:
     Commercial ..........................................        13,671       17,581       18,504       24,948         6,376
     Automobile ..........................................           855        4,825       56,576      233,948       175,193
     Other consumer ......................................        70,388       32,953       38,136       54,489        28,274
-------------------------------------------------------------------------------------------------------------------------------
      Total loans originated .............................     4,290,251    3,309,984    3,489,148    5,090,212     1,908,679
Real estate loans purchased:
   One-to-four units .....................................       460,263       88,057        9,178       36,317         4,343
   One-to-four units - subprime ..........................         6,439         --          8,595       12,912         1,833
   Other (1) .............................................          --          6,923        1,055          440         1,287
-------------------------------------------------------------------------------------------------------------------------------
     Total real estate loans purchased ...................       466,702       94,980       18,828       49,669         7,463
-------------------------------------------------------------------------------------------------------------------------------
       Total loans originated and purchased ..............     4,756,953    3,404,964    3,507,976    5,139,881     1,916,142
Loan repayments ..........................................    (3,911,209)  (3,715,163)  (1,981,802)  (1,823,585)   (1,855,157)
Other net changes (2) ....................................       (37,515)       2,029     (291,935)     (36,794)      (34,145)
-------------------------------------------------------------------------------------------------------------------------------
   Net increase (decrease) in loans held for investment ..       808,229     (308,170)   1,234,239    3,279,502        26,840
-------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO
Residential one-to-four units:
   Originated whole loans ................................     6,155,727    4,818,301    1,641,099    2,028,402     2,162,583
   Originated whole loans - subprime .....................          --           --         87,174       13,872          --
   Loans purchased .......................................        16,845        5,637          947         --            --
   Loans transferred from (to) the investment portfolio ..        (2,928)      (7,454)      54,993       42,570        (3,056)
   Originated whole loans sold ...........................      (919,211)    (737,773)    (687,512)    (999,594)   (1,130,303)
   Loans exchanged for mortgage-backed securities ........    (5,104,433)  (3,816,171)    (970,319)  (1,387,364)     (608,831)
   Other net changes .....................................        (5,386)      (4,762)     (10,815)      (9,263)       (8,111)
   Capitalized basis adjustment (3) ......................        12,414      (10,326)        --           --            --
-------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale ......       153,028      247,452      115,567     (311,377)       412,282
-------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
   Received in exchange for loans ........................     5,104,433    3,816,171      970,319    1,387,364        608,831
   Sold ..................................................    (6,184,650)  (3,816,171)    (975,088)  (1,387,364)      (610,113)
   Purchased .............................................     1,014,098      115,597         --           --             --
   Repayments ............................................       (51,956)      (6,523)      (7,031)      (9,936)       (15,129)
   Other net changes .....................................         1,347         (296)         284         (491)          (742)
-------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in mortgage-backed securities
      available for sale .................................      (116,728)     108,778      (11,516)     (10,427)       (17,153)
-------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale and
      mortgage-backed securities available for sale ......        36,300      356,230      104,051     (321,804)       395,129
-------------------------------------------------------------------------------------------------------------------------------
     Total net increase in loans
      and mortgage-backed securities .....................   $   844,529  $    48,060  $ 1,338,290  $ 2,957,698   $    421,969
===============================================================================================================================
<FN>
(1)  Primarily  five or more unit  residential  loans except for $6.7 million of
     commercial real estate loans in 2001, $1.1 million of construction loans in
     2000 and $0.6 million of commercial real estate loans in 1998.
(2)  Primarily  included  changes in  undisbursed  funds for lines of credit and
     construction loans,  changes in loss allowances,  loans transferred to real
     estate  acquired  in  settlement  of loans  or from  (to) the held for sale
     portfolio,  and the  change  in  interest  capitalized  on loans  (negative
     amortization).  Also  included in 2000 was $367  million of net  automobile
     loans sold as part of the sale of subsidiary.
(3)  Reflected  the  change in fair value of the rate lock  derivative  from the
     date of commitment to the date of funding.
</FN>
</TABLE>

                                       36
<PAGE>
     The  following   table  sets  forth  the   composition   of  our  loan  and
mortgage-backed  securities  portfolio at the dates  indicated.  At December 31,
2002,  approximately  95% of our real estate  loans were  secured by real estate
located in California,  principally  in Los Angeles,  Santa Clara,  Orange,  San
Diego and Alameda counties.

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                        --------------------------------------------------------------------
(In Thousands)                                               2002          2001         2000          1999          1998
----------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>           <C>           <C>          <C>
INVESTMENT PORTFOLIO
Loans secured by real estate:
     Residential one-to-four units:
        Adjustable ..................................    $ 6,739,243   $ 6,365,149   $ 7,098,689   $5,554,332   $3,614,053
        Adjustable - subprime .......................      1,297,280     1,424,656     1,633,917    1,532,780      574,720
        Adjustable - fixed for 3-5 years ............      1,697,953       999,528       101,711       90,551      107,675
        Adjustable - fixed for 3-5 years - subprime .         81,421        66,760        92,609       87,844        5,512
        Fixed .......................................        210,001       334,384       454,838      510,516      325,454
        Fixed - subprime ............................          7,412        15,303        17,388       18,777        8,719
----------------------------------------------------------------------------------------------------------------------------
         Total residential one-to-four units ........     10,033,310     9,205,780     9,399,152    7,794,800    4,636,133
     Residential five or more units:
        Adjustable ..................................          6,964         6,055        14,203       15,889       18,617
        Fixed .......................................          3,676         5,124         5,257        5,166       21,412
     Commercial real estate:
        Adjustable ..................................         40,373        40,900        37,374       37,419       39,360
        Fixed .......................................         31,042        71,609       127,230      110,908      101,430
     Construction ...................................        103,547        84,942       118,165      176,487      127,761
     Land ...........................................         53,538        22,028        26,880       67,631       44,859
Non-mortgage:
     Commercial .....................................         15,021        22,017        21,721       26,667       28,293
     Automobile (1) .................................         11,641        24,529        39,614      399,789      357,988
     Other consumer .................................         56,782        50,908        60,653       49,344       41,894
----------------------------------------------------------------------------------------------------------------------------
        Total loans held for investment .............     10,355,894     9,533,892     9,850,249    8,684,100    5,417,747
Increase (decrease) for:
     Undisbursed loan funds .........................        (95,002)      (61,280)      (72,328)    (125,159)    (108,414)
     Net deferred costs and premiums ................         96,744        77,916        79,109       67,740       31,021
     Allowance for losses ...........................        (34,999)      (36,120)      (34,452)     (38,342)     (31,517)
----------------------------------------------------------------------------------------------------------------------------
        Total loans held for investment, net ........     10,322,637     9,514,408     9,822,578    8,588,339    5,308,837
----------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET
Loans held for sale:
     Residential one-to-four units ..................        649,964       509,350       251,572      136,005      447,382
     Capitalized basis adjustment (2) ...............          2,088       (10,326)         --           --           --
----------------------------------------------------------------------------------------------------------------------------
        Total loans held for sale ...................        652,052       499,024       251,572      136,005      447,382
Mortgage-backed securities available for sale:
     Adjustable .....................................          2,253       101,562         6,050        7,700       10,996
     Fixed ..........................................           --          17,419         4,153       14,019       21,150
----------------------------------------------------------------------------------------------------------------------------
        Total mortgage-backed securities
           available for sale .......................          2,253       118,981        10,203       21,719       32,146
----------------------------------------------------------------------------------------------------------------------------
        Total loans held for sale and mortgage-backed
           securities available for sale ............        654,305       618,005       261,775      157,724      479,528
----------------------------------------------------------------------------------------------------------------------------
        Total loans and mortgage-backed securities ..    $10,976,942   $10,132,413   $10,084,353   $8,746,063   $5,788,365
============================================================================================================================
<FN>
(1)  The decline during 2000 primarily reflected the sale of subsidiary.
(2)  Reflected  the  change in fair value of the rate lock  derivative  from the
     date of commitment to the date of funding.
</FN>
</TABLE>

     We carry loans for sale at the lower of cost or fair value. At December 31,
2002, no valuation  allowance was required as the fair value exceeded book value
on an aggregate basis.

     At December 31, 2002, our residential  one-to-four units subprime portfolio
consisted of  approximately  87% "A-"  credit,  11% "B" credit and 2% "C" credit
loans.  At year end, the average  loan-to-value  ratio at origination  for these
loans was approximately 75%.

                                       37
<PAGE>
     We carry mortgage-backed securities available for sale at fair value which,
at December 31, 2002,  reflected an  unrealized  gain of less than $0.1 million.
The 2002 year-end  unrealized gain, less the associated tax effect, is reflected
within a separate component of other comprehensive income (loss) until realized.

     The table below sets forth the scheduled contractual maturities of our loan
and mortgage-backed securities portfolio at December 31, 2002.

<TABLE>
<CAPTION>
                                     Within      1-2        2-3        3-5        5-10        10-15       Beyond
(In Thousands)                       1 Year     Years      Years      Years      Years        Years      15 Years      Total
---------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>        <C>        <C>       <C>          <C>          <C>          <C>
Loans secured by real estate:
    Residential:
      One-to-four units:
        Adjustable by index: (1)
           COFI ...............    $ 81,793   $ 86,708   $ 91,918   $200,736  $  617,374   $  826,513   $4,881,828   $ 6,786,870
           MTA ................      15,479     16,223     17,004     36,500     107,766      136,299      756,824     1,086,095
           6-Month LIBOR ......      16,457     17,485     18,578     40,710     126,229      170,909      912,560     1,302,928
           Other, primarily CMT      10,137     10,741     11,382     24,842      76,295      101,938      451,481       686,816
        Fixed (1) .............      13,620     14,514     15,471     34,061     121,893      144,623      478,471       822,653
      Five or more units:
        Adjustable ............         199        213      2,956        440       1,377        1,779         --           6,964
        Fixed .................         152        158        166        931       1,027        1,219           23         3,676
      Commercial real estate:
        Adjustable ............       1,220      1,308      1,401      3,112      33,332         --           --          40,373
        Fixed .................       1,209      1,311      5,173      3,895      19,454         --           --          31,042
      Construction ............     103,547       --         --         --          --           --           --         103,547
      Land ....................      31,069     21,954         93        213         209         --           --          53,538
Non-mortgage:
    Commercial ................      13,231        155        166        365       1,104         --           --          15,021
    Automobile ................       4,780      5,242        678        941           -         --           --          11,641
    Other consumer (2) ........       2,920      3,151      3,399      2,724      44,588         --           --          56,782
---------------------------------------------------------------------------------------------------------------------------------
      Total loans                   295,813    179,163    168,385    349,470   1,150,648    1,383,280    7,481,187    11,007,946
Mortgage-backed securities, net          83         85         88        187         532          640          638         2,253
---------------------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-
      backed securities .......    $295,896   $179,248   $168,473   $349,657  $1,151,180   $1,383,920   $7,481,825   $11,010,199
=================================================================================================================================
<FN>
(1)  Included loans held for sale.
(2)  Included home equity line of credit loans,  which are interest  only,  with
     balances  due  at the  end of the  term.  All or  part  of the  outstanding
     balances may be paid off at any time during the term without penalty.
</FN>
</TABLE>

     At December 31, 2002,  the maximum amount the Bank could have loaned to any
one borrower, and related entities, under regulatory limits was $135 million, or
$225 million for loans  secured by readily  marketable  collateral,  compared to
$128 million or $214 million for loans secured by readily marketable  collateral
at  year-end  2001.  We do not expect  that these  regulatory  limitations  will
adversely impact our proposed lending activities during 2003.

INVESTMENT SECURITIES

     The following table sets forth the composition of our investment securities
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                        -------------------------------------------------------
(In Thousands)                                             2002       2001       2000       1999       1998
---------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>        <C>        <C>
Federal funds ........................................   $  2,555   $ 37,001   $ 19,601   $      1   $ 33,751
U.S. Treasury and agency securities available for sale    457,797    356,910    284,102    171,823    116,061
Corporate bonds available for sale ...................       --       45,445     21,513       --         --
Municipal bonds held to maturity .....................      6,216      6,388      6,550      6,728      6,764
---------------------------------------------------------------------------------------------------------------
    Total investment securities ......................   $466,568   $445,744   $331,766   $178,552   $156,576
===============================================================================================================
</TABLE>

                                       38
<PAGE>
     The following table sets forth the maturities of our investment  securities
and the weighted average yield of those securities at December 31, 2002.

<TABLE>
<CAPTION>
                                                                   After 1 Year
                                             1 Year or Less      Through 5 Years       After 5 Years            Total
                                         ------------------------------------------------------------------------------------
                                                     Weighted             Weighted           Weighted             Weighted
                                                      Average              Average             Average              Average
  (Dollars in Thousands)                    Amount     Yield     Amount     Yield    Amount     Yield     Amount     Yield
-----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>       <C>     <C>         <C>      <C>          <C>      <C>        <C>
Federal funds ......................         $2,555    0.75%   $   --      --  %    $ --         --  %    $  2,555   0.75%
U.S. Treasury and agency securities
    available for sale .............           --      --       456,790    3.08      1,007 (2)   2.40      457,797   3.08
Municipal bonds held to maturity (1)           --      --          --      --        6,216       3.68        6,216   3.68
-----------------------------------------------------------------------------------------------------------------------------
      Total ........................         $2,555    0.75%   $456,790    3.08%    $7,223       3.50%    $466,568   3.07%
=============================================================================================================================
<FN>
(1)  Yield on a fully tax-equivalent basis is 6.39%.
(2)  These securities were called on January 22, 2003.
</FN>
</TABLE>

INVESTMENTS IN REAL ESTATE AND JOINT VENTURES

     DSL Service Company participates as an owner of, or a partner in, a variety
of real estate development  projects,  principally retail neighborhood  shopping
centers and residential  developments,  most of which are located in California.
For additional  information regarding these real estate investments,  see Note 6
of  Notes  to  the  Consolidated  Financial  Statements  on  page  83.  We  have
substantially  completed  and leased most of the  neighborhood  shopping  center
projects--with a weighted average occupancy rate of 80% at December 31, 2002. At
December 31,  2002,  the Bank had loan  commitments  of $38 million to the joint
ventures, of which $21 million were outstanding.

     DSL Service  Company is entitled to interest on its equity  invested in its
joint venture  projects on a priority  basis after  third-party  debt and shares
profits and losses with the developer partner,  generally on an equal basis. DSL
Service  Company has obtained  guarantees  from the  principals of the developer
partners.  Partnership equity or deficit accounts are affected by current period
results of operations,  additional partner advances,  partnership  distributions
and partnership liquidations.

     As of December 31, 2002,  DSL Service  Company was involved  with two joint
venture  partners.  One of these  partners was the  operator of two  residential
housing  development  projects,  and the other partnership  involves vacant land
that was sold, but the  partnership  remains until a receivable  related to that
sale  is  collected.   DSL  Service   Company  had  seven  wholly  owned  retail
neighborhood shopping centers located in California and Arizona.

     Our investment in real estate and joint ventures amounted to $34 million at
December 31, 2002,  compared to $38 million at December 31, 2001 and $18 million
at December 31, 2000. During 2002, we sold wholly owned projects with a carrying
value of $22  million.  That  decline  was  partially  offset  by a $17  million
investment  in a  residential  joint  venture and a $1 million  investment  in a
shopping  center  development.  During  2001,  our  investment  increased by $20
million due  primarily to a $16 million  settlement  of  litigation  with former
joint venture partners wherein we became the sole owner of two shopping centers.

                                       39
<PAGE>
     The following table sets forth the condensed  balance sheets of DSL Service
Company's  joint ventures by property type at December 31, 2002, on a historical
cost  basis.  For  further  information  regarding  the  establishment  of  loss
allowances, see Problem Loans and Real Estate--Allowance for Losses on Loans and
Real Estate on page 53. It is  possible  that  certain of our real estate  joint
venture  partnerships  may require  consolidation  as a result of  applying  the
provisions  of  Financial  Accounting  Standards  Board  Interpretation  46. For
further information regarding this interpretation, see Current Accounting Issues
on  page  62.  For  further   information  on  our  real  estate  joint  venture
partnerships,  see  Note  6 on  page  83  of  Notes  to  Consolidated  Financial
Statements.

<TABLE>
<CAPTION>
                                                                              Note
                                                                           Receivable-
 (Dollars in Thousands)                                     Residential     Sold Land      Total
---------------------------------------------------------------------------------------------------
<S>                                                            <C>         <C>            <C>
ASSETS
Cash .......................................................   $ 4,060     $    11        $ 4,071
Projects under development .................................    44,170        --           44,170
Other assets ...............................................       214         360            574
---------------------------------------------------------------------------------------------------
                                                               $48,444     $   371        $48,815
===================================================================================================
LIABILITIES AND EQUITY
Liabilities:
    Notes payable to the Bank ..............................   $20,742     $  --          $20,742
    Other ..................................................     9,836         145          9,981
Equity:
    DSL Service Company (1) ................................    16,703         125         16,828
    Allowance for losses recorded by DSL Service Company (2)      --          --             --
    Other partners (2) .....................................     1,163         101          1,264
---------------------------------------------------------------------------------------------------
       Net equity ..........................................    17,866         226         18,092
---------------------------------------------------------------------------------------------------
                                                               $48,444     $   371        $48,815
===================================================================================================
Number of joint venture projects ...........................         2           1              3
===================================================================================================
<FN>
(1)  We included in these amounts  interest-bearing  joint venture advances with
     priority interest payments from joint ventures to DSL Service Company.
(2)  The aggregate other partners' equity of $1 million  represents their equity
     interest  in the  accumulated  retained  earnings of the  respective  joint
     ventures.  Those results  include the net profit on sales and the operating
     results of the real estate assets,  net of depreciation  and funding costs.
     Except for any  secured  financing  which has been  obtained,  DSL  Service
     Company has provided  all other  financing.  As part of our internal  asset
     review process,  we compare the fair value of the joint venture real estate
     assets to the secured  notes payable to the Bank and others and DSL Service
     Company's  equity  investment.  To the  extent  the fair  value of the real
     estate  assets  is less  than the  aggregate  of those  amounts,  we make a
     provision  to create a valuation  allowance.  No  valuation  allowance  was
     required at December 31, 2002.
</FN>
</TABLE>

     The  following  table sets forth by property type our  investments  in real
estate and related allowances for losses at December 31, 2002.

<TABLE>
                                                               Retail
                                                            Neighborhood
(Dollars in Thousands)                      Residential   Shopping Centers      Land       Total
----------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>             <C>         <C>
Investment in wholly owned projects .......   $   --         $ 16,828  (1)   $    291    $ 17,119
Investment in Affordable Housing Funds ....        851           --              --           851
Allowance for losses ......................       --             (805)           (103)       (908)
----------------------------------------------------------------------------------------------------
     Net investment in real estate projects   $    851       $ 16,023        $    188    $ 17,062
====================================================================================================
Number of projects ........................          1              7               3          11
====================================================================================================
<FN>
(1)  Included five free-standing  stores that are part of neighborhood  shopping
     centers totaling less than $1 million, which we counted as one project.
</FN>
</TABLE>

                                       40
<PAGE>
     Real estate  investments entail risks similar to those our construction and
commercial  lending  activities  present.  In addition,  California  courts have
imposed warranty-like  responsibility upon developers of new housing for defects
in  structure   and  the  housing  site,   including   soil   conditions.   This
responsibility  is not  necessarily  dependent upon a finding that the developer
was negligent.  Owners of real property also may incur  liabilities with respect
to environmental  matters,  including  financial  responsibility for clean-up of
hazardous waste or other conditions, under various federal and state laws.

DEPOSITS

     Our deposits  increased $619 million or 7.2% in 2002 and totaled a year-end
record of $9.2 billion at December 31,  2002.  Compared to the year-ago  period,
our lower-rate transaction  accounts--i.e.,  checking,  money market and regular
passbook--increased  $1.6  billion  or 56.2%,  which was  partially  offset by a
decrease in our  certificates of deposit of $1.0 billion or 18.0%. As depositors
seemed more  interested in liquidity  given the relatively low level of interest
rates, they moved monies from  certificates of deposit to transaction  accounts,
primarily  regular  passbook  accounts.  When  interest  rates begin to rise, we
expect the reverse to occur. Of the total increase in our deposits, $227 million
was associated  with 25 in-store  branches and 3 traditional  branches we opened
during 2002. At December 31, 2002, the average  deposit size of our  traditional
branches was $105 million,  while the average size of our in-store  branches was
$18 million, or $22 million excluding the 25 new in-store branches opened within
the past 12 months.

     The  following  table sets forth  information  concerning  our deposits and
weighted average rates paid at the dates indicated.

<TABLE>
<CAPTION>
                                                              December 31,
                                     --------------------------------------------------------------
                                              2002                2001                2000
                                     --------------------------------------------------------------
                                      Weighted            Weighted            Weighted
                                       Average             Average             Average
(Dollars in Thousands)                  Rate     Amount     Rate     Amount     Rate      Amount
---------------------------------------------------------------------------------------------------
<S>                                     <C>    <C>          <C>    <C>          <C>    <C>
Transaction accounts:
   Non-interest-bearing checking .      -- %   $  388,376   -- %   $  263,165   -- %   $  244,311
   Interest-bearing checking (1) .      0.25      422,417   0.35      423,776   0.78      395,640
   Money market ..................      1.37      120,105   2.01      108,747   2.88       89,408
   Regular passbook ..............      1.70    3,639,798   2.46    2,131,048   3.41      754,127
---------------------------------------------------------------------------------------------------
     Total transaction accounts ..      1.41    4,570,696   1.92    2,926,736   2.12    1,483,486
Certificates of deposit:
   Less than 2.00% ...............      1.57      919,864   1.94       99,654   1.51        1,366
   2.00-2.49 .....................      2.28      401,657   2.30      556,075   2.01          406
   2.50-2.99 .....................      2.79      528,557   2.74      315,125   2.63        4,585
   3.00-3.49 .....................      3.38    1,188,078   3.20      458,511   3.45           25
   3.50-3.99 .....................      3.89      700,250   3.84      532,634   3.97          384
   4.00-4.49 .....................      4.25      374,424   4.22      892,517   4.19       26,916
   4.50-4.99 .....................      4.80      473,399   4.76      555,885   4.82       80,844
   5.00 and greater ..............      5.63       81,425   5.94    2,282,429   6.36    6,484,677
---------------------------------------------------------------------------------------------------
     Total certificates of deposit      3.19    4,667,654   4.54    5,692,830   6.33    6,599,203
---------------------------------------------------------------------------------------------------
       Total deposits ............      2.31%  $9,238,350   3.65%  $8,619,566   5.56%  $8,082,689
===================================================================================================
<FN>
(1)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

                                       41
<PAGE>
     The following table shows at December 31, 2002 our  certificates of deposit
maturities by interest rate category.

<TABLE>
<CAPTION>
                               Less
                               Than       2.50% -     3.00% -     3.50% -     4.00% -       5.00%                    Percent
(Dollars in Thousands)        2.50%        2.99%       3.49%       3.99%       4.99%     and Greater    Total (1)    of Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>           <C>        <C>          <C>        <C>          <C>        <C>             <C>
Within 3 months ..........  $  481,561    $163,783   $  564,433   $165,296   $ 16,459     $30,310    $1,421,842      30.46%
3 to 6 months ............     292,336     258,177      135,748    291,760     17,776       5,737     1,001,534      21.46
6 to 12 months ...........     442,977      68,844      281,233    139,917    168,719       9,108     1,110,798      23.80
12 to 24 months ..........     104,057      33,554      161,085     55,026     17,428       6,740       377,890       8.09
24 to 36 months ..........         580       3,426       30,472     26,885    174,822      13,895       250,080       5.36
36 to 60 months ..........          10         773       15,107     21,366    452,619      15,635       505,510      10.83
Over 60 months ...........        --          --           --         --         --          --            --          --
-------------------------------------------------------------------------------------------------------------------------------
    Total ................  $1,321,521    $528,557   $1,188,078   $700,250   $847,823     $81,425    $4,667,654     100.00%
===============================================================================================================================
<FN>
(1)  Includes jumbo ($100,000 and over)  certificates of deposit of $511 million
     with maturities of 3 months or less, $331 million with maturities of 3 to 6
     months,  $362  million with  maturities  of 6 to 12 months and $392 million
     with a remaining term of over 12 months.
</FN>
</TABLE>

BORROWINGS

     At December 31, 2002, borrowings totaled $1.6 billion, up from $1.5 billion
at year-end  2001,  but down from $2.0  billion at year-end  2000.  The increase
during 2002 occurred in advances from the FHLB.

     The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.

<TABLE>
<CAPTION>
                                                                                December 31,
                                                    -----------------------------------------------------------------
(Dollars in Thousands)                                   2002         2001          2000         1999        1998
---------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>           <C>          <C>            <C>
Federal Home Loan Bank advances ...................  $1,624,084   $1,522,705    $1,978,348   $2,122,407     $695,012
Real estate notes .................................        --              7           224          373       8,708
---------------------------------------------------------------------------------------------------------------------
      Total borrowings ............................  $1,624,084   $1,522,712    $1,978,572   $2,122,780     $703,720
=====================================================================================================================
Weighted average rate on borrowings during the year       4.32%        5.40%         6.16%        5.46%       6.07%
Total borrowings as a percentage of total assets ..      13.56        13.71         18.16        22.56       11.22
=====================================================================================================================
</TABLE>

     The  following  table sets forth  certain  information  with respect to our
short-term borrowings.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                         2002          2001         2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>           <C>
FHLB advances with original maturities less than one year:
    Balance at end of year .............................................   $  341,234    $  671,300    $1,475,000
    Average balance outstanding during the year ........................      218,404       581,868     1,601,732
    Maximum amount outstanding at any month-end during the year ........      497,081     1,260,000     1,942,000
    Weighted average interest rate during the year .....................        2.12%         5.63%         6.38%
    Weighted average interest rate at end of year ......................        1.38          2.16          6.55
Securities sold under agreement to repurchase:
    Balance at end of year .............................................   $     --      $     --        $   --
    Average balance outstanding during the year ........................        7,494          --             753
    Maximum amount outstanding at any month-end during the year ........      182,358          --          39,250
    Weighted average interest rate during the year .....................        1.86%          -- %         6.10%
    Weighted average interest rate at end of year ......................         --            --            --
Total short-term borrowings:
    Total average short-term borrowings outstanding during the year ....   $  225,898    $  581,868    $1,602,485
    Total weighted average rate on short-term borrowings during the year        2.11%         5.63%         6.38%
===================================================================================================================
</TABLE>

                                       42
<PAGE>
     At year-end 2002, total  intermediate  and long-term  advances totaled $1.3
billion, up from $851 million at December 31, 2001. The weighted average rate on
our intermediate and long-term FHLB advances at year-end 2002 was 4.54%.

     The following  table sets forth the  associated  maturities at December 31,
2002.

<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------------------------------
<C>                                                   <C>
2003 ..............................................   $   72,700
2004 ..............................................      194,100
2005 ..............................................      415,750
2006 ..............................................       76,300
2007 ..............................................       65,000
Thereafter ........................................      459,000
-----------------------------------------------------------------
     Total intermediate and long-term FHLB advances   $1,282,850
=================================================================
</TABLE>

CAPITAL SECURITIES

     On July 23,  1999,  we issued $120  million in capital  securities  through
Downey  Financial  Capital  Trust  I.  The  capital   securities  pay  quarterly
cumulative  cash  distributions  at an annual rate of 10.00% of the  liquidation
value of $25 per share.  Interest expense on our capital  securities,  including
the  amortization of deferred  issuance  costs,  was $12.2 million for 2002. For
further information regarding our capital securities,  see Note 16 on page 96 of
Notes to Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

     We consolidate majority-owned  subsidiaries that we control. We account for
other  affiliates,  including  joint  ventures,  in  which  we  do  not  exhibit
significant  control  or  have  majority  ownership,  by the  equity  method  of
accounting.  For those  relationships in which there is less than 20% ownership,
we generally  carry them at cost. In the course of our business,  we participate
as a partner in real estate joint venture relationships through our wholly-owned
subsidiary,  DSL Service Company. It is possible that certain of our real estate
joint venture partnerships may require consolidation as a result of applying the
provisions  of  the  recently  issued  Financial   Accounting   Standards  Board
Interpretation  46. The  expected  financial  impact of this  interpretation  is
deemed to be immaterial.  For further information regarding this interpretation,
see Current Accounting Issues on page 62. For further information  regarding our
real estate joint venture partnerships,  see Note 6 of Notes to the Consolidated
Financial Statements on page 83.

     We enter into derivative financial instruments as part of our interest rate
risk management process, primarily related to our sale of loans in the secondary
market.  The  associated  fair  value  changes  to the  notional  amount  of the
derivative  instrument are recorded  on-balance  sheet. For further  information
regarding our derivative instruments,  see Asset/Liability Management and Market
Risk on page 44, Capital  Resources and  Liquidity--Contractual  Obligations and
Other Commitments on page 60 and Note 20 of Notes to the Consolidated  Financial
Statements on page 101.

     We also utilize  financial  instruments with off-balance  sheet risk in the
normal course of business to meet the financing  needs of our  customers.  These
financial  instruments  include commitments to originate fixed and variable rate
mortgage  loans  held  for   investment,   commitments  to  purchase  loans  and
mortgage-backed securities for our portfolio, letters of credit, lines of credit
and loans in process.  The  contract or  notional  amounts of these  instruments
reflect the extent of  involvement  we have in  particular  classes of financial
instruments.   For  further   information   regarding  these  commitments,   see
Asset/Liability  Management  and Market Risk on page 44,  Capital  Resources and
Liquidity--Contractual  Obligations and Other Commitments on page 60 and Note 20
of Notes to the Consolidated Financial Statements on page 101.

     We use the same credit policies in making  commitments to originate  loans,
lines of credit and letters of credit as we do for on-balance sheet instruments.
For  commitments to originate loans held for  investment,  the contract  amounts
represent  exposure to loss from market  fluctuations as well as credit loss. In
regard to these  commitments,  adverse  changes  from  market  fluctuations  are
generally  not hedged.  Downey  controls the credit risk of its  commitments  to
originate  loans  held for  investment  through  credit  approvals,  limits  and
monitoring procedures.

     We do not  dispose  of  troubled  loans  or  problem  assets  by  means  of
unconsolidated special purpose entities.

                                       43
<PAGE>
TRANSACTIONS WITH RELATED PARTIES

     There  are no  related  party  transactions  required  to be  disclosed  in
accordance with FASB Statement No. 57, Related Party  Disclosures.  Loans to our
executive  officers and directors  were made in the ordinary  course of business
and were made on substantially the same terms as comparable transactions.

ASSET/LIABILITY MANAGEMENT AND MARKET RISK

     Market risk is the risk of loss from adverse  changes in market  prices and
interest rates.  Our market risk arises primarily from interest rate risk in our
lending and deposit taking activities.  This interest rate risk primarily occurs
to the  degree  that our  interest-bearing  liabilities  reprice  or mature on a
different basis--generally more rapidly--than our interest-earning assets. Since
our  earnings  depend  primarily  on  our  net  interest  income,  which  is the
difference between the interest and dividends earned on interest-earning  assets
and the interest paid on interest-bearing  liabilities, our principal objectives
are to actively  monitor  and manage the effects of adverse  changes in interest
rates on net  interest  income  while  maintaining  asset  quality.  Our primary
strategy  to  manage  interest  rate risk is to  emphasize  the  origination  of
adjustable rate mortgages or loans with relatively  short  maturities.  Interest
rates on adjustable rate mortgages are primarily tied to COFI and MTA.

     In  addition  to the market  risk  associated  with our lending and deposit
taking  activities,  we also have  market  risk  associated  with our  secondary
marketing activities.  Changes in mortgage interest rates,  primarily fixed rate
mortgages,  impact the fair value of loans held for sale as well as our interest
rate lock  commitment  derivatives,  where we have committed to an interest rate
with a potential  borrower  for a loan we intend to sell.  Our  objective  is to
hedge  against  fluctuations  in interest  rates through use of forward sale and
purchase  contracts with  government-sponsored  enterprises  and whole loan sale
contracts with various  parties.  These contracts are typically  obtained at the
time the interest rate lock commitments are made.  Therefore,  as interest rates
fluctuate,  the changes in the fair value of our interest rate lock  commitments
and loans  held for sale tend to be offset by  changes  in the fair value of the
hedge  contracts.  The method used for assessing the  effectiveness of a hedging
derivative,  as well as the measurement approach for determining the ineffective
aspects of the hedge, is established at the inception of the hedge.  Although we
continue  to  hedge  as  previously  done,  SFAS  133,  as  applied  to our risk
management  strategies,  may  increase  or  decrease  reported  net  income  and
stockholders' equity,  depending on levels of interest rates and other variables
affecting the fair values of derivative  instruments and hedged items,  but will
have no effect on the overall economics of the transactions. We generally do not
enter into hedging contracts for speculative purposes.

     Changes in mortgage  interest  rates also impact the value of our  mortgage
servicing  rights.  Rising interest rates typically result in slower  prepayment
speeds on the loans  being  serviced  for  others  which  increase  the value of
mortgage  servicing rights.  Declining interest rates typically result in faster
prepayment  speeds  which  decrease  the  value of  mortgage  servicing  rights.
Currently, we do not hedge our mortgage servicing rights against that risk.

     Our  Asset/Liability  Management  Committee is responsible for implementing
the interest rate risk management policy which sets forth limits  established by
the Board of Directors  of  acceptable  changes in net  interest  income and net
portfolio value from specified  changes in interest  rates.  The OTS defines net
portfolio  value as the present  value of expected net cash flows from  existing
assets  minus  the  present  value of  expected  net cash  flows  from  existing
liabilities  plus the  present  value  of  expected  cash  flows  from  existing
off-balance sheet contracts.  Our Asset/Liability  Management Committee reviews,
among other items,  economic  conditions,  the interest rate outlook, the demand
for  loans,  the  availability  of  deposits  and  borrowings,  and our  current
operating results,  liquidity,  capital and interest rate exposure. In addition,
our Asset/Liability Management Committee monitors asset and liability maturities
and  repricing   characteristics   on  a  regular  basis  and  performs  various
simulations  and other  analyses to determine  the  potential  impact of various
business  strategies in controlling  interest rate risk and the potential impact
of those  strategies upon future earnings under various interest rate scenarios.
Based on these reviews,  our Asset/Liability  Management  Committee formulates a
strategy that is intended to implement the  objectives set forth in our business
plan without  exceeding the net interest  income and net portfolio  value limits
set forth in our interest rate risk policy.

                                       44
<PAGE>
     One measure of our  exposure  to  differential  changes in  interest  rates
between assets and  liabilities is shown in the following table which sets forth
the  repricing  frequency  of our major  asset and  liability  categories  as of
December 31, 2002,  as well as other  information  regarding  the  repricing and
maturity  differences  between our  interest-earning  assets and total deposits,
borrowings  and  capital  securities  in  future  periods.  We  refer  to  these
differences as "gap." We have determined the repricing  frequencies by reference
to  projected  maturities,  based upon  contractual  maturities  as adjusted for
scheduled repayments and "repricing  mechanisms"--provisions  for changes in the
interest  and dividend  rates of assets and  liabilities.  We assume  prepayment
rates on substantially  all of our loan portfolio based upon our historical loan
prepayment  experience and anticipated future prepayments.  Repricing mechanisms
on a number of our assets are subject to limitations, such as caps on the amount
that interest rates and payments on our loans may adjust, and accordingly, these
assets do not normally respond to changes in market interest rates as completely
or rapidly as our  liabilities.  The interest rate sensitivity of our assets and
liabilities  illustrated in the following table would vary  substantially  if we
used different assumptions or if actual experience differed from the assumptions
set forth.

<TABLE>
<CAPTION>
                                                                                  December 31, 2002
                                                   ------------------------------------------------------------------------------
                                                        Within       7 - 12        1 - 5        6 - 10      Over        Total
(Dollars in Thousands)                                 6 Months      Months        Years        Years     10 Years     Balance
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>          <C>         <C>           <C>
Interest-earning assets:
    Investment securities and FHLB stock .........(1) $  292,464  $  286,310  $    5,290   $      67  $     --      $   584,131
    Loans and mortgage-backed securities: ........(2)
     Loans secured by real estate:
       Residential:
         Adjustable ..............................     8,286,115     281,198   1,368,315        --          --        9,935,628
         Fixed ...................................       659,182      38,477     113,702      15,234       2,270        828,865
       Commercial real estate ....................        35,676       4,008       7,696      19,300       2,230         68,910
       Construction ..............................        43,980        --          --          --          --           43,980
       Land ......................................        22,273           7          52         613        --           22,945
     Non-mortgage loans:
       Commercial ................................         7,063        --          --          --          --            7,063
       Consumer ..................................        58,784       2,673       5,841        --          --           67,298
     Mortgage-backed securities ..................         2,253        --          --          --          --            2,253
---------------------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-backed securities ...     9,115,326     326,363   1,495,606      35,147       4,500     10,976,942
---------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets ...............    $9,407,790  $  612,673  $1,500,896   $  35,214   $   4,500    $11,561,073
=================================================================================================================================
Transaction accounts:
    Non-interest-bearing checking ................    $  388,376  $     --    $     --     $    --     $    --      $   388,376
    Interest-bearing checking ....................(3)    422,417        --          --          --          --          422,417
    Money market .................................(4)    120,105        --          --          --          --          120,105
    Regular passbook .............................(4)  3,639,798        --          --          --          --        3,639,798
---------------------------------------------------------------------------------------------------------------------------------
     Total transaction accounts ..................     4,570,696        --          --          --          --        4,570,696
Certificates of deposit ..........................(1)  2,423,376   1,110,798   1,133,480        --          --        4,667,654
---------------------------------------------------------------------------------------------------------------------------------
    Total deposits ...............................     6,994,072   1,110,798   1,133,480        --          --        9,238,350
Borrowings .......................................       401,234      12,700     751,150     459,000        --        1,624,084
Capital securities ...............................          --          --          --          --       120,000        120,000
---------------------------------------------------------------------------------------------------------------------------------
    Total deposits, borrowings and
     capital securities ..........................    $7,395,306  $1,123,498  $1,884,630   $ 459,000  $  120,000    $10,982,434
=================================================================================================================================
Excess (shortfall) of interest-earning assets over
    deposits, borrowings and capital securities ..    $2,012,484  $ (510,825) $ (383,734)  $(423,786) $ (115,500)   $   578,639
Cumulative gap ...................................     2,012,484   1,501,659   1,117,925     694,139     578,639
Cumulative gap - as a % of total assets:
    December 31, 2002 ............................        16.80%      12.54%       9.33%       5.80%       4.83%
    December 31, 2001 ............................        12.01        4.76        7.91        4.71        3.86
    December 31, 2000 ............................        28.66        7.13        5.94        3.13        3.13
=================================================================================================================================
<FN>
(1)  Based upon contractual maturity and repricing date.
(2)  Based upon contractual maturity, repricing date and projected repayment and
     prepayments of principal.
(3)  Included amounts swept into money market deposit accounts and is subject to
     immediate repricing.
(4)  Subject to immediate repricing.
</FN>
</TABLE>

                                       45
<PAGE>
     Our  six-month gap at December 31, 2002 was a positive  16.80%.  This means
that more interest-earning assets mature or reprice within six months than total
deposits,  borrowings  and  capital  securities.  This  compares  to a  positive
six-month gap of 12.01% at December 31, 2001 and 28.66% at December 31, 2000. We
originated and purchased approximately $4.7 billion during 2002 and $3.4 billion
during  both  2001  and  2000  of  loans  and  mortgage-backed  securities  with
adjustable  interest  rates or  maturities  of five years or less.  These  loans
represented  approximately 99% during both 2002 and 2001, and 97% during 2000 of
all loans and mortgage-backed securities originated and purchased for investment
during these periods.

     At  December  31,  2002,  essentially  all of our  interest-earning  assets
mature, reprice or are estimated to prepay within five years, compared to 99% at
December 31, 2001 and 98% at December 31, 2000. At December 31, 2002, loans held
for investment and  mortgage-backed  securities with  adjustable  interest rates
represented  92% of those  portfolios.  During 2003,  we will  continue to offer
residential  fixed rate loan products to our customers to meet customer  demand.
We primarily  originate  fixed rate loans for sale in the  secondary  market and
price  them  accordingly  to  create  loan  servicing  income  and  to  increase
opportunities  for  originating  adjustable  rate  mortgages.  However,  we  may
originate  fixed rate loans for investment  when funded with long-term  funds to
mitigate  interest rate risk and small  volumes to  facilitate  the sale of real
estate  acquired  through  foreclosure  or that  meet  required  yield and other
approved   guidelines.   For   further   information,    see   Business--Banking
Activities--Lending   Activities--Secondary   Marketing   and   Loan   Servicing
Activities on page 5.

     We are  better  protected  against  rising  interest  rates with a positive
six-month  gap.  However,  we remain  subject to possible  interest  rate spread
compression,  which would  adversely  impact our net interest income if interest
rates rise.  This is  primarily  due to the lag in  repricing  of the indices to
which our adjustable rate loans and mortgage-backed securities are tied, as well
as the repricing frequencies and periodic interest rate caps on these adjustable
rate loans and  mortgage-backed  securities.  The amount of such  interest  rate
spread compression would depend upon the frequency and severity of such interest
rate fluctuations.

     In  addition  to  measuring  interest  rate  risk  via a gap  analysis,  we
establish limits on, and measure the sensitivity of, our net interest income and
net portfolio value to changes in interest rates.  Changes in interest rates are
defined as instantaneous and sustained  movements in interest rates in 100 basis
point increments. We utilize an internally maintained asset/liability management
simulation  model to make the  calculations  which, for net portfolio value, are
calculated on a discounted cash flow basis.  First, we estimate our net interest
income for the next twelve months and the current net portfolio  value  assuming
no change in  interest  rates from those at period  end.  Once the base case has
been estimated, we make calculations for each of the defined changes in interest
rates, to include any associated differences in the anticipated prepayment speed
of loans.  We then compare those results  against the base case to determine the
estimated  change to net  interest  income  and net  portfolio  value due to the
changes in  interest  rates.  The  following  are the  estimated  impacts to net
interest  income and net portfolio  value from various  instantaneous,  parallel
shifts in interest  rates  based upon our asset and  liability  structure  as of
year-ends  2002  and  2001.   Since  we  base  these   estimates  upon  numerous
assumptions,  like the expected  maturities of our  interest-bearing  assets and
liabilities  and the shape of the  period-end  interest  rate yield  curve,  our
actual  sensitivity to interest rate changes could vary  significantly if actual
experience differs from those assumptions used in making the calculations.

<TABLE>
<CAPTION>
                                                         2002                                  2001
                                         ----------------------------------------------------------------------
                                                  Percentage Change in                  Percentage Change in
                                         ------------------------------------------------------------------------
Change in Interest Rates                   Net Interest      Net Portfolio       Net Interest      Net Portfolio
       (In Basis Points)                    Income(1)          Value (2)          Income (1)         Value (2)
-----------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                <C>                <C>
             +200 ......................     (4.8)%              21.0%             (11.3)%             6.0%
             +100 ......................     (2.4)               10.7               (5.9)              4.6
             (100) .....................      1.6               (13.4)               4.9              (5.4)
             (200) .....................(3)   N/A                 N/A                8.8              (5.2)
=================================================================================================================
<FN>
(1)  The percentage  change in this column represents net interest income for 12
     months in a stable interest rate environment versus the net interest income
     in the various rate scenarios.
(2)  The percentage  change in this column represents the net portfolio value of
     the Bank in a stable  interest  rate  environment  versus the net portfolio
     value in the various rate scenarios.
(3)  The  change in  interest  rates for 2002 is not  applicable  due to the low
     level of interest rates at December 31, 2002.
</FN>
</TABLE>

                                       46
<PAGE>
     The following table shows our financial  instruments  that are sensitive to
changes  in  interest  rates,   categorized  by  expected   maturity,   and  the
instruments'  fair values at December 31,  2002.  This data differs from that in
the gap table as it does not incorporate the repricing characteristics of assets
and liabilities.  Rather, it only reflects  contractual  maturities adjusted for
anticipated prepayments. Market risk sensitive instruments are generally defined
as on and off balance sheet  derivatives  and other financial  instruments.  Our
assets and liabilities  that do not have a stated maturity date, such as certain
deposits,  are  considered  to be long term in nature  and are  reported  in the
"thereafter"  column.  We do not  consider  these  financial  instruments  to be
materially  sensitive  to interest  rate  fluctuations,  and  historically,  the
balances have remained fairly  constant over various  economic  conditions.  The
weighted  average  interest rates for the various  fixed-rate and  variable-rate
assets and  liabilities  presented are based on the actual rates that existed at
December 31, 2002. The fair value of our financial  instruments is determined as
follows:

     o    Fed funds and FHLB Stock  equal  their book  values due to their short
          maturities.

     o    Investment securities and mortgage-backed  securities are based on the
          closing  market price  quotations  from  financial  market  monitoring
          firms.

     o    Loans held for sale are based on bid quotations from financial  market
          monitoring firms.

     o    Loans held for investment  takes into  consideration  discounted  cash
          flows  through  the  estimated   maturity  or  repricing  dates  using
          estimated market discount rates.

     o    Demand deposits,  money market and savings accounts are equal to their
          book values.

     o    Time  deposits and  borrowings  are based on the  discounted  value of
          contractual cash flows,  which is estimated using wholesale  borrowing
          rates offered for similar terms.

The degree of market risk inherent in loans with prepayment  features may not be
completely   reflected  in  the   disclosures.   Although  we  have  taken  into
consideration our historical  prepayment  trends to determine  expected maturity
categories,  prepayment features are triggered by changes in the market rates of
interest.  Unexpected  changes may increase the rate of prepayments  above those
anticipated.  As such,  the potential  loss from such market rate changes may be
significantly larger.

                                       47
<PAGE>
<TABLE>
<CAPTION>
                                                            Expected Maturity Date at December 31, 2002 (1)
                                  --------------------------------------------------------------------------------------------------
                                                                                                               Total         Fair
(Dollars in Thousands)                  2003        2004        2005         2006       2007     Thereafter   Balance        Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>         <C>         <C>          <C>        <C>         <C>          <C>
Investment securities
   and FHLB stock ................  $  572,625  $     --    $    5,290  $     --     $  --      $    6,216  $   584,131  $   584,117
   Average interest rate .........       3.52%        -- %       2.59%        -- %      --  %        3.68%        3.51%
Loans held for sale (2) ..........     652,052        --          --          --        --            --        652,052      668,336
   Average interest rate .........       5.88%        -- %        -- %        -- %      --  %         -- %        5.88%
Mortgage-backed securities
   available for sale ............         310         278         266         290        275          834        2,253        2,253
   Average interest rate .........       3.66%       3.66%       3.66%       3.68%      3.72%        3.75%        3.70%
Loans held for investment:
   Loans secured by real estate:
     Residential:
      Adjustable .................   2,314,864   1,491,518   1,201,246     962,894    773,238    3,145,056    9,888,816   10,040,990
        Average interest rate ....       5.70%       5.69%       5.67%       5.65%      5.63%        5.61%        5.66%
      Fixed ......................      89,436      53,075      31,501      18,710     11,720       19,183      223,625      227,344
        Average interest rate ....       7.55%       7.48%       7.38%       7.21%      6.96%        6.76%        7.38%
     Other .......................      48,208       4,190      25,171       3,887      3,963       50,416      135,835      143,978
      Average interest rate ......       7.52%       7.60%       7.73%       7.93%      7.95%        7.96%        7.75%
   Non-mortgage:
     Commercial ..................       5,418         142         153         163        173        1,014        7,063        7,780
      Average interest rate ......       5.84%       6.28%       6.28%       6.28%      6.28%        6.28%        5.94%
     Consumer ....................       5,701       4,142       1,607      55,848       --           --         67,298       68,882
      Average interest rate ......       6.48%       6.25%       6.09%       6.05%       -- %         -- %        6.10%
Interest-bearing advances to
   joint ventures ................      17,734        --          --          --         --           --         17,734       17,734
   Average interest rate .........      10.00%        -- %        -- %        -- %       -- %         -- %       10.00%
Expected rate lock commitments (3)       5,386        --          --          --         --           --          5,386       17,423
MSR's and loan servicing .........      14,114      11,494       8,559       6,220      4,546       12,796       57,729       58,168
   portfolio (4)
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets ..  $3,725,848  $1,564,839  $1,273,793  $1,048,012   $793,915   $3,235,515  $11,641,922  $11,837,005
====================================================================================================================================
Transaction accounts:
   Non-interest-bearing checking .  $   70,936  $   57,980  $   47,390  $   38,734   $ 31,659   $  141,677  $   388,376  $   388,376
   Interest-bearing checking (5) .      77,154      63,062      51,544      42,129     34,434      154,094      422,417      422,417
   Money market ..................      21,937      17,930      14,655      11,979      9,791       43,813      120,105      120,105
   Regular passbook ..............     664,801     543,377     444,130     363,011    296,707    1,327,772    3,639,798    3,639,798
------------------------------------------------------------------------------------------------------------------------------------
     Total transaction accounts ..     834,828     682,349     557,719     455,853    372,591    1,667,356    4,570,696    4,570,696
      Average interest rate ......       1.41%       1.41%       1.41%       1.41%      1.41%        1.41%        1.41%
Certificates of deposit ..........   3,534,174     377,890     250,080     134,257    371,253         --      4,667,654    4,705,950
   Average interest rate .........       2.92%       3.04%       4.18%       4.72%      4.68%         -- %        3.19%
Undesignated loan forward sale
   and purchase contracts, net ...       4,173        --          --          --         --           --          4,173        4,173
Designated forward sale contracts        7,711        --          --          --         --           --          7,711        7,711
Borrowings .......................     413,934     194,100     415,750      76,300     65,000      459,000    1,624,084    1,681,488
   Average interest rate .........       1.92%       4.17%       3.75%       4.72%      5.01%        5.33%        3.88%
Capital securities ...............        --          --          --          --         --        120,000      120,000      128,640
   Average interest rate .........        -- %        -- %        -- %        -- %       -- %       10.00%       10.00%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
   capital securities ............  $4,794,820  $1,254,339  $1,223,549  $  666,410   $808,844   $2,246,356  $10,994,318  $11,098,658
====================================================================================================================================
<FN>
(1)  Expected maturities are contractual  maturities adjusted for prepayments of
     principal.  We use a number of  assumptions  to  estimate  fair  values and
     expected   maturities.   For  assets,  we  base  expected  maturities  upon
     contractual  maturity,  projected  repayments and prepayments of principal.
     The  prepayment  experience  reflected  herein  is based on our  historical
     experience. Our average projected constant prepayment rate ("CPR") is 48.8%
     on our fixed-rate and 29.3% on our adjustable  rate mortgage  portfolio for
     interest-earning  assets,  excluding  investment  securities  which are not
     subject to prepayment except for call provisions,  if any. For deposits, in
     accordance  with  standard   industry   practice  and  our  own  historical
     experience,  we have  applied  "decay  factors,"  used to estimate  deposit
     runoff, of 20.0% per year. The actual maturities of these instruments could
     vary  substantially  if  future  prepayments  differ  from  our  historical
     experience.
(2)  Included  capitalized basis adjustment  reflecting the change in fair value
     of the rate  lock  derivative  from the date of  commitment  to the date of
     funding.
(3)  At December 31, 2002, the estimated fair value included mortgage  servicing
     rights  totaling  $6.9  million  not  to be  recognized  in  the  financial
     statements until the expected loans are sold.
(4)  The estimated fair value included mortgage  servicing rights acquired prior
     to January 1, 1996 when Downey began capitalizing the asset.
(5)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

                                       48
<PAGE>
     For further information regarding the sensitivity of our mortgage servicing
rights  to  changes  in  interest  rates,  see Note 10 of Notes to  Consolidated
Financial Statements on page 89. For further information regarding  commitments,
contingencies  and  hedging  activities,  see Note 20 of  Notes to  Consolidated
Financial Statements on page 101.

     The  following  table sets  forth the  interest  rate  spread  between  our
interest-earning assets and interest-bearing liabilities at the dates indicated.

<TABLE>
<CAPTION>
                                                              December 31,
                                            ---------------------------------------------
                                               2002     2001     2000     1999     1998
-----------------------------------------------------------------------------------------
<S>                                           <C>      <C>      <C>      <C>      <C>
Weighted average yield:
    Loans and mortgage-backed securities       5.83%    7.15%    8.45%    7.67%   7.72%
    Federal Home Loan Bank stock .......       5.24     5.31     5.52     5.60    5.44
    Investment securities ..............       3.07     3.54     6.45     6.12    5.40
-----------------------------------------------------------------------------------------
      Interest-earning assets yield ....       5.72     6.98     8.36     7.62    7.65
-----------------------------------------------------------------------------------------
Weighted average cost:
    Deposits ...........................       2.31     3.65     5.56     4.72    4.53
    Borrowings:
      Federal Home Loan Bank advances ..       3.88     3.73     6.26     5.77    5.47
      Other borrowings .................       --       7.88     8.12     7.88    8.69
-----------------------------------------------------------------------------------------
          Total borrowings .............       3.88     3.73     6.26     5.99    5.51
    Capital securities .................      10.00    10.00    10.00    10.00    --
-----------------------------------------------------------------------------------------
      Combined funds cost ..............       2.63     3.74     5.75     5.05    4.66
-----------------------------------------------------------------------------------------
          Interest rate spread .........       3.09%    3.24%    2.61%    2.57%   2.99%
=========================================================================================
</TABLE>

     The year-end  weighted  average  yield on our loan  portfolio  decreased to
5.83% at December 31, 2002,  from 7.15% at year-end 2001.  The weighted  average
rate on new loans  originated  during 2002 was 5.43%,  compared to 6.18%  during
2001 and 6.10% during 2000. At December 31, 2002, our  adjustable  rate mortgage
portfolio  of  single  family  residential  loans,   including   mortgage-backed
securities, totaled $9.9 billion with a weighted average rate of 5.75%, compared
to $9.0 billion  with a weighted  average rate of 7.11% at December 31, 2001 and
$9.0 billion with a weighted average rate of 8.47% at December 31, 2000.

PROBLEM LOANS AND REAL ESTATE

NON-PERFORMING ASSETS

     Non-performing  assets  consist of loans on which we have  ceased  accruing
interest (which we refer to as non-accrual loans), loans restructured at a below
market  rate,  real  estate  acquired  in  settlement  of loans and  repossessed
automobiles. Our non-performing assets totaled $80 million at December 31, 2002,
compared  to $93 million at  December  31, 2001 and $55 million at December  31,
2000.  The  decrease in our  non-performing  assets  during  2002 was  primarily
attributed to declines in our residential  one-to-four unit prime category of $7
million and subprime category of $3 million. Other non-accrual loans declined by
$2 million during the current year primarily due to a decline in commercial real
estate  non-performers  as a result of a  short-pay  that was  accepted  in full
consideration  of the loan. Of the total,  real estate acquired in settlement of
loans  represented  $12 million at December 31,  2002,  down from $15 million at
December  31,  2001,  but  up  from  $10  million  at  December  31,  2000.  Our
non-performing  assets as a  percentage  of total  assets was 0.67% at  year-end
2002, compared to 0.83% at year-end 2001 and 0.50% at year-end 2000.

                                       49
<PAGE>
     The  following  table  summarizes  our  non-performing  assets at the dates
indicated.

<TABLE>
<CAPTION>
                                                                            December 31,
                                                      -------------------------------------------------------
(Dollars in Thousands)                                    2002       2001       2000       1999       1998
-------------------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>        <C>        <C>        <C>
Non-accrual loans:
    Residential one-to-four units ...................   $34,504    $43,210    $20,746    $15,590    $15,571
    Residential one-to-four units - subprime ........    32,263     31,166     22,296     13,914      1,975
    Other ...........................................       681      2,668      1,708      3,477      4,829
-------------------------------------------------------------------------------------------------------------
      Total non-accrual loans .......................    67,448     77,044     44,750     32,981     22,375
Troubled debt restructure - below market rate (1) ...      --          203        206       --         --
Real estate acquired in settlement of loans .........    12,360     15,366      9,942      5,899      4,475
Repossessed automobiles .............................         6         19         76        314        569
-------------------------------------------------------------------------------------------------------------
   Total non-performing assets ......................   $79,814    $92,632    $54,974    $39,194    $27,419
=============================================================================================================
Allowance for loan losses:
    Amount ..........................................   $34,999    $36,120    $34,452    $38,342    $31,517
    As a percentage of non-performing loans .........     51.89%     46.76%     76.63%    116.25%    140.86%
Non-performing assets as a percentage of total assets      0.67       0.83       0.50       0.42       0.44
=============================================================================================================
<FN>
(1)  Represented one residential one-to-four unit loan.
</FN>
</TABLE>

     It is our policy to take  appropriate,  timely and  aggressive  action when
necessary to resolve  non-performing assets. When resolving problem loans, it is
our policy to determine  collectibility  under various  circumstances  which are
intended to result in our  maximum  financial  benefit.  We  accomplish  this by
either working with the borrower to bring the loan current or by foreclosing and
selling the asset. We perform  ongoing reviews of loans that display  weaknesses
and maintain  adequate  loss  allowances  on the loans.  For a discussion on our
internal  asset review  policy,  refer to Allowance for Losses on Loans and Real
Estate on page 53.

     All but $23 million of our non-performing  assets at December 31, 2002 were
located in California, compared to $20 million outside of California a year ago.

     We evaluate the need for appraisals of non-performing  assets on a periodic
basis.  We will generally  obtain a new appraisal when we believe that there may
have  been an  adverse  change in the  property  operations  or in the  economic
conditions  of the  geographic  market of the property  securing our loans.  Our
policy  is to  obtain  new  appraisals  at least  annually  for all real  estate
acquired in settlement of loans.

     Non-Accrual  Loans.  It is our  general  policy  to  account  for a loan as
non-accrual  when the loan  becomes 90 days  delinquent  or when  collection  of
interest  appears  doubtful.  In a number of cases,  loans may remain on accrual
status  past 90 days when we  determine  that  continued  accrual  is  warranted
because the loan is  well-secured  and in process of collection.  As of December
31, 2002, we had no loans 90 days or more  delinquent  which remained on accrual
status.  We reverse and charge against  interest income any interest  previously
accrued with respect to  non-accrual  loans.  We  recognize  interest  income on
non-accrual  loans to the extent that we receive payments and to the extent that
we believe we will  recover  the  remaining  principal  balance of the loan.  We
restore these loans to an accrual  status only if all past due payments are made
by the borrower and the  borrower  has  demonstrated  the ability to make future
payments of principal  and  interest.  At December 31, 2002,  non-accrual  loans
aggregating  $16  million  were less than 90 days  delinquent  relative to their
contractual terms.

     Troubled  Debt  Restructurings.  We  consider a  restructuring  of a debt a
troubled debt  restructuring  when we, for economic or legal reasons  related to
the borrower's financial  difficulties,  grant a concession to the borrower that
we would not otherwise grant.  Troubled debt restructurings may include changing
repayment  terms,  reducing the stated  interest rate or reducing the amounts of
principal and/or interest due or extending the maturity date. The  restructuring
of a loan is intended to recover as much of our  investment  as possible  and to
achieve the highest  yield  possible.  At December 31, 2002,  we had no troubled
debt restructurings on accrual status.

     Real  Estate  Acquired in  Settlement  of Loans.  Real  estate  acquired in
settlement of loans  consists of real estate  acquired  through  foreclosure  or
deeds in lieu of foreclosure and totaled $12 million at December 31, 2002.

                                       50
<PAGE>
DELINQUENT LOANS

     When a borrower fails to make required payments on a loan and does not cure
the  delinquency  within 60 days,  we  normally  record a notice of  default  to
commence  foreclosure  proceedings,  so long as we have given any required prior
notice to the borrower.  If the loan is not reinstated within the time permitted
by law for reinstatement, which is normally five business days prior to the date
set for the  non-judicial  trustee's  sale,  we may then sell the  property at a
foreclosure  sale.  In  general,  if we have  elected  to pursue a  non-judicial
foreclosure,  we are not permitted  under  applicable law to obtain a deficiency
judgment against the borrower,  even if the security property is insufficient to
cover the balance owed. At these  foreclosure  sales, we generally acquire title
to the property.

     At December 31, 2002,  loans  delinquent 30 days or more as a percentage of
total  loans was 0.86%,  down from 1.10% at  year-end  2001 but up from 0.66% at
year-end  2000.  The  decrease  from  prior  year  occurred  in every one of the
delinquent  categories,  most notably within our  residential  one-to-four  unit
categories. As a percentage of its loan category,  residential one-to-four units
decreased from 0.80% at year-end 2001 to 0.59% at year-end 2002,  while subprime
residential  one-to-four units decreased from 2.87% at year-end 2001 to 2.80% at
year-end  2002. A higher  incidence of delinquency is expected on subprime loans
as these  borrowers have a history of  delinquencies  for which we charge higher
interest rates to compensate for that risk. In addition, the loan-to-value ratio
on these loans is  generally  lower  thereby  providing  more equity  protection
against loss.

                                       51
<PAGE>
     The  following  table  indicates  the  amounts of our past due loans at the
dates indicated.

<TABLE>
<CAPTION>
                                                                                December 31,
                                               -------------------------------------------------------------------------------------
                                                                2002                                    2001
                                               -------------------------------------------------------------------------------------
                                                30-59     60-89     90+                 30-59     60-89     90+
(Dollars in Thousands)                           Days     Days    Days (1)   Total       Days     Days    Days (1)   Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $ 19,881   $  8,066   $ 27,333   $ 55,280   $ 19,170   $ 12,797   $ 33,449   $ 65,416
      One-to-four units - subprime .........     8,971      5,944     23,831     38,746     13,159      9,104     20,958     43,221
      Five or more units ...................      --         --         --         --         --         --         --         --
    Commercial real estate .................      --         --         --         --         --         --         --         --
    Construction ...........................      --         --         --         --         --         --         --         --
    Land ...................................      --         --         --         --         --         --         --         --
------------------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............    28,852     14,010     51,164     94,026     32,329     21,901     54,407    108,637
Non-mortgage:
    Commercial .............................      --         --          466        466       --         --        1,163      1,163
    Automobile .............................        98         13          4        115        174         85         46        305
    Other consumer .........................        48         47        211        306        356         62        173        591
------------------------------------------------------------------------------------------------------------------------------------
      Total delinquent loans ...............  $ 28,998   $ 14,070   $ 51,845   $ 94,913   $ 32,859   $ 22,048   $ 55,789   $110,696
====================================================================================================================================
Delinquencies as a percentage of total loans      0.26%      0.13%      0.47%      0.86%      0.33%      0.22%      0.55%      1.10%
====================================================================================================================================
<CAPTION>
                                                                2000                                    1999
                                               -------------------------------------------------------------------------------
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $ 12,400   $  8,611   $ 15,246   $ 36,257   $  8,630   $  3,889   $ 12,793   $ 25,312
      One-to-four units - subprime .........     7,300      7,658     14,427     29,385      7,867      3,069      7,935     18,871
      Five or more units ...................      --         --         --         --         --         --         --         --
    Commercial real estate .................      --         --         --         --         --         --         --         --
    Construction ...........................      --         --         --         --         --         --         --         --
    Land ...................................      --         --         --         --         --         --         --         --
------------------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............    19,700     16,269     29,673     65,642     16,497      6,958     20,728     44,183
Non-mortgage:
    Commercial .............................      --         --         --         --         --         --         --         --
    Automobile .............................       393         26        151        570      4,758        674        717      6,149
    Other consumer .........................        98         29        246        373        679         42        114        835
------------------------------------------------------------------------------------------------------------------------------------
      Total delinquent loans ...............  $ 20,191   $ 16,324   $ 30,070   $ 66,585   $ 21,934   $  7,674   $ 21,559   $ 51,167
====================================================================================================================================
Delinquencies as a percentage of total loans      0.20%      0.16%      0.30%      0.66%      0.25%      0.09%      0.24%      0.58%
====================================================================================================================================
<CAPTION>
                                                                1998
                                              -------------------------------------------
<S>                                           <C>        <C>        <C>        <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $  9,841   $  6,014   $ 12,832   $ 28,687
      One-to-four units - subprime .........       244        784        947      1,975
      Five or more units ...................      --         --          155        155
    Commercial real estate .................      --         --         --         --
    Construction ...........................      --         --         --         --
    Land ...................................      --         --         --         --
-----------------------------------------------------------------------------------------
      Total real estate loans ..............    10,085      6,798     13,934     30,817
Non-mortgage:
    Commercial .............................      --         --         --         --
    Automobile .............................     4,650        888      1,048      6,586
    Other consumer .........................       334         45        344        723
-----------------------------------------------------------------------------------------
      Total delinquent loans ...............  $ 15,069   $  7,731   $ 15,326   $ 38,126
=========================================================================================
Delinquencies as a percentage of total loans      0.26%      0.13%      0.26%      0.65%
=========================================================================================
<FN>
(1)  All 90 day or greater  delinquencies are on non-accrual status and reported
     as part of non-performing assets.
</FN>
</TABLE>

                                       52
<PAGE>
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE

     We  maintain a valuation  allowance  for losses on loans and real estate to
provide for losses inherent in those  portfolios.  The adequacy of the allowance
is  evaluated  quarterly  by  management  to maintain  the  allowance  at levels
sufficient to provide for inherent  losses. A key component to our evaluation is
our internal asset review process.

     Our  Internal  Asset  Review  Department  conducts  independent  reviews to
evaluate  the risk and  quality of all our assets.  Our  Internal  Asset  Review
Committee  is  responsible  for the review  and  classification  of assets.  The
Internal Asset Review Committee  members include the Chief Internal Asset Review
Officer,  Chief Executive Officer, Chief Financial Officer, Chief Administrative
Officer, Chief Lending Officer,  General Counsel and Director of Compliance/Risk
Management. The Internal Asset Review Committee meets quarterly to review and to
determine asset  classifications and to recommend any changes to asset valuation
allowances.  With the exception of payoffs or asset sales, the classification of
an asset, once established, can be removed or upgraded only upon approval of the
Internal Asset Review Committee. The Chief Internal Asset Review Officer reports
quarterly to the Audit  Committee of the Board of  Directors  regarding  overall
asset quality, the adequacy of valuation allowances on classified assets and our
adherence  to  policies  and  procedures   regarding  asset  classification  and
valuation.

     We adhere to an internal asset review system and loss allowance methodology
designed  to provide  for timely  recognition  of  problem  assets and  adequate
general valuation allowances to cover asset losses. Our current asset monitoring
process  includes  the use of asset  classifications  to  segregate  the assets,
largely loans and real estate, into various risk categories.  We use the various
asset classifications as a means of measuring risk for determining the valuation
allowance at a point in time.  We  currently  use a six grade system to classify
our assets. The current grades are:

     o    pass;

     o    watch;

     o    special mention;

     o    substandard;

     o    doubtful; and

     o    loss.

     We consider  substandard,  doubtful and loss assets "classified assets" for
regulatory purposes. A brief description of these classifications follows:

     o    The pass  classification  represents a level of credit  quality  which
          contains no well-defined deficiency or weakness.

     o    The watch  classification  is used to identify an asset that currently
          contains no well-defined  deficiency or weakness, but it is determined
          to  be  desirable  to  closely  monitor  the  asset--e.g.,   loans  to
          facilitate  the sale of real estate  acquired in  settlement of loans.
          This  category  may  also be  used  for  assets  upgraded  from  lower
          classifications where continuing monitoring is deemed appropriate.

     o    A special  mention asset does not currently  expose us to a sufficient
          degree of risk to warrant an adverse classification,  but does possess
          a correctable  deficiency or potential weakness deserving management's
          close attention.

     o    Substandard  assets have a well-defined  weakness or weaknesses.  They
          are  characterized  by the distinct  possibility  that we will sustain
          some loss if the deficiencies are not corrected.

     o    An asset classified  doubtful has all the weaknesses inherent in those
          classified   substandard  with  the  added   characteristic  that  the
          weaknesses  make  collection or  liquidation  in full, on the basis of
          currently existing facts,  conditions and values,  highly questionable
          and improbable.  We consider doubtful to be a temporary classification
          until resolution of pending weakness issues enables us to more clearly
          define the potential for loss.

     o    That   portion  of  an  asset   classified   as  loss  is   considered
          uncollectible and of so little value that its continuance as an asset,
          without  establishment  of a  specific  valuation  allowance,  is  not
          warranted.  A loss  classification  does  not mean  that an asset  has
          absolutely  no  recovery  or  salvage  value,  but  rather  it is  not
          reasonable  to defer  writing off or providing for all or a portion of
          an impaired asset even though

                                       53
<PAGE>
          partial  recovery  may be effected in the  future.  We will  generally
          classify as loss the balance of the asset that is greater than the net
          fair value of the asset  unless we can  expect  payment  from  another
          source.  Therefore, the amount of an asset classified as loss reflects
          the  total  of  specific  valuation  allowances  established  for  the
          particular asset.  Specific valuation allowances are not includable in
          determining the Bank's total regulatory capital.

     The  OTS  has  the   authority   to   require   us  to  change   our  asset
classifications.  If the change results in an asset being classified in whole or
in part as loss, a specific allowance must be established  against the amount so
classified  or that  amount  must be  charged  off.  OTS  guidelines  set  forth
quantitative benchmarks as a starting point for the determination of appropriate
levels of general valuation allowances. The OTS directs its examiners to rely on
management's  estimates of adequate general  valuation  allowances if the Bank's
process for determining adequate allowances is deemed to be sound.

     The  allowances  for losses on loans and real estate are  maintained  at an
amount  management deems adequate to cover inherent losses.  We have implemented
and  adhere  to  an  internal  asset  review  system  and  loan  loss  allowance
methodology  designed  to provide  for the  detection  of problem  assets and an
adequate  allowance to cover loan losses.  In determining the allowance for loan
losses related to specific large loans (loans over $5 million),  we evaluate the
allowance  on  an   individual   loan  basis,   including  an  analysis  of  the
creditworthiness,  cash  flows and  financial  status of the  borrower,  and the
condition and the estimated value of the  collateral.  We review all loans under
$5 million by analyzing their performance and composition of their collateral as
a whole because of the relatively  homogeneous  nature of the portfolios.  Given
the above  evaluations,  the amount of the allowance is based upon the summation
of  general  valuation  allowances,  allocated  allowances  and  an  unallocated
allowance.

     We utilize the asset classifications from our internal asset review process
in the following manner to determine the amount of our allowances:

     o    General valuation  allowances:  This element relates to assets with no
          well-defined  deficiency or weakness (i.e.,  assets classified pass or
          watch) and takes into  consideration  loss that is imbedded within the
          portfolio but has not yet been  realized.  Generally,  we believe that
          borrowers  are  impacted  by  events  well in  advance  of a  lender's
          knowledge  that may  ultimately  result in loan  default and  eventual
          loss. Examples of such loss-causing events would be borrower job loss,
          divorce or medical crisis in the case of single family residential and
          consumer  loans,  or loss of a major tenant in the case of  commercial
          real estate loans.  General  valuation  allowances  are  determined by
          applying factors that take into consideration past loss experience and
          asset  duration  for each  major  asset type to the  associated  asset
          balance.

     o    Allocated allowances: This element relates to assets with well-defined
          deficiencies or weaknesses (i.e.,  assets classified  special mention,
          substandard,  doubtful or loss). We calculate on an ongoing basis loss
          by credit classification for each major asset type. Factors based upon
          those loss  statistics are applied against  current  classified  asset
          balances to determine the amount of allocated allowances.  Included in
          these allowances are those amounts  associated with assets where it is
          probable  that the value of the asset has been  impaired  and the loss
          can be reasonably estimated. If we determine our carrying value of the
          asset  exceeds the net fair value and no  alternative  payment  source
          exists,  then a specific  allowance is recorded for the amount of that
          difference.

     o    Unallocated allowance: This element is more subjective and is reviewed
          quarterly to take into  consideration  estimation  errors and economic
          trends that are not  necessarily  captured in determining  the general
          valuation and allocated allowances.

     Our provision  for loan losses was $0.9 million in 2002,  down $1.6 million
from 2001.  Our net loan  charge-offs  exceeded the provision for loan losses by
$1.1 million  resulting in a decrease in the  allowance for loan losses to $35.0
million at December 31, 2002. The decrease in the allowance reflected a decrease
of $1.1 million in general  valuation  allowances  to $26.7  million.  Allocated
allowances  increased by $0.1 million in our  single-family  portfolio  and $0.1
million in our commercial non-mortgage portfolio,  which was partially offset by
a $0.2 million decrease in the commercial real estate mortgage portfolio.  There
was no change in the  unallocated  allowance of $2.8 million.  During 2001,  our
provision  for  loan  losses  exceeded  net  loan  charge-offs  by $1.7  million
resulting in an increase in the  allowance  for loan losses to $36.1  million at
December 31, 2001.  The increase in the allowance  reflected an increase of $0.8
million in general valuation  allowances to $27.8 million.  Allocated allowances
increased by $1.8 million in our single-family portfolio and $0.2 million in our
commercial non-mortgage portfolio,  which was partially offset by a $1.0 million
decrease in the commercial real estate mortgage  portfolio.  There was no change
in the unallocated allowance.

                                       54
<PAGE>
     The  following  table  summarizes  the activity in our  allowance  for loan
losses during the years indicated.

<TABLE>
<CAPTION>

(In Thousands)                     2002        2001        2000        1999        1998
--------------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>         <C>         <C>
Balance at beginning of period   $ 36,120    $ 34,452    $ 38,342    $ 31,517    $ 32,092
Provision ....................        939       2,564       3,251      11,270       3,899
Charge-offs ..................     (2,231)     (1,348)     (1,749)     (5,535)     (7,372)
Recoveries ...................        171         452         419       1,090       2,898
Transfers (1) ................       --          --        (5,811)       --          --
--------------------------------------------------------------------------------------------
Balance at end of period .....   $ 34,999    $ 36,120    $ 34,452    $ 38,342    $ 31,517
============================================================================================
<FN>
(1)  Reduction in 2000 was due to the sale of subsidiary.
</FN>
</TABLE>

     Net loan  charge-offs  were $2.1  million in 2002,  up from $0.9 million in
2001 and $1.3 million in 2000. The increase from a year ago primarily  reflected
a $1.2 million  charge-off in the current year of a commercial  real estate loan
for which a short-pay was accepted in full consideration of the loan.

                                       55
<PAGE>
     The following table presents by category of loan gross  charge-offs,  gross
recoveries and net charge-offs during the years indicated.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                    2002       2001        2000       1999         1998
----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>         <C>        <C>          <C>
GROSS LOAN CHARGE-OFFS
Loans secured by real estate:
      Residential:
        One-to-four units ...........................   $   435    $   530     $   352    $    393     $ 1,035
        One-to-four units - subprime ................       166        344         383         187        --
        Five or more units ..........................      --         --          --          --            68
      Commercial real estate ........................     1,188       --          --          --          --
      Construction ..................................      --         --          --          --          --
      Land ..........................................      --         --          --          --          --
Non-mortgage:
      Commercial ....................................      --         --          --          --          --
      Automobile ....................................       104        197         832       4,795       6,118
      Other consumer ................................       338        277         182         160         151
----------------------------------------------------------------------------------------------------------------
        Total gross loan charge-offs ................     2,231      1,348       1,749       5,535       7,372
----------------------------------------------------------------------------------------------------------------
GROSS LOAN RECOVERIES
Loans secured by real estate:
      Residential:
        One-to-four units ...........................       111        267          19        --           125
        One-to-four units - subprime ................      --          166        --          --          --
        Five or more units ..........................      --         --          --          --          --
      Commercial real estate ........................      --            1         250         250       1,610
      Construction ..................................      --         --          --          --          --
      Land ..........................................      --         --          --          --          --
Non-mortgage:
      Commercial ....................................      --         --          --          --          --
      Automobile ....................................        47          4         136         831       1,159
      Other consumer ................................        13         14          14           9           4
----------------------------------------------------------------------------------------------------------------
        Total gross loan recoveries .................       171        452         419       1,090       2,898
----------------------------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS
Loans secured by real estate:
      Residential:
        One-to-four units ...........................       324        263         333         393         910
        One-to-four units - subprime ................       166        178         383         187        --
        Five or more units ..........................      --         --          --          --            68
      Commercial real estate ........................     1,188         (1)       (250)       (250)     (1,610)
      Construction ..................................      --         --          --          --          --
      Land ..........................................      --         --          --          --          --
Non-mortgage:
      Commercial ....................................      --         --          --          --          --
      Automobile ....................................        57        193         696       3,964       4,959
      Other consumer ................................       325        263         168         151         147
----------------------------------------------------------------------------------------------------------------
        Total net loan charge-offs ..................   $ 2,060    $   896     $ 1,330     $ 4,445     $ 4,474
================================================================================================================
Net loan charge-offs as a percentage of average loans      0.02%      0.01%       0.01%       0.06%       0.08%
================================================================================================================
</TABLE>

                                       56
<PAGE>
     The  following  table  indicates  our  allocation of the allowance for loan
losses to the various categories of loans at the dates indicated.

<TABLE>
<CAPTION>
                                                                        December 31,
                                ---------------------------------------------------------------------------------------------
                                             2002                           2001                           2000
                                -----------------------------------------------------------------------------------------------
                                            Gross    Allowance             Gross    Allowance             Gross    Allowance
                                             Loan    Percentage             Loan    Percentage             Loan    Percentage
                                           Portfolio   to Loan            Portfolio   to Loan            Portfolio   to Loan
(Dollars in Thousands)           Allowance  Balance    Balance  Allowance  Balance    Balance  Allowance  Balance    Balance
-------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>     <C>            <C>     <C>     <C>            <C>     <C>     <C>            <C>
Loans secured by real estate:
   Residential:
     One-to-four units ..........  $18,562 $8,647,197     0.21%   $19,033 $7,699,061     0.25%   $15,254 $7,655,238     0.20%
     One-to-four units - subprime    8,642  1,386,113     0.62      9,633  1,506,719     0.64     10,157  1,743,914     0.58
     Five or more units .........       80     10,640     0.75         84     11,179     0.75        146     19,460     0.75
   Commercial real estate .......    1,364     71,415     1.91      1,848    112,509     1.64      2,935    164,604     1.78
   Construction .................    1,223    103,547     1.18      1,005     84,942     1.18      1,390    118,165     1.18
   Land .........................      636     53,538     1.19        274     22,028     1.24        332     26,880     1.24
Non-mortgage:
   Commercial ...................      586     15,021     3.90        573     22,017     2.60        442     21,721     2.03
   Automobile (1) ...............      100     11,641     0.86        277     24,529     1.13        269     39,614     0.68
   Other consumer ...............    1,006     56,782     1.77        593     50,908     1.16        727     60,653     1.20
Not specifically allocated ......    2,800       --       --        2,800       --       --        2,800       --       --
-------------------------------------------------------------------------------------------------------------------------------
     Total loans held for
        investment ..............  $34,999 $10,355,894    0.34%   $36,120 $9,533,892     0.38%   $34,452 $9,850,249     0.35%
===============================================================================================================================
<CAPTION>
                                             1999                           1998
                                ----------------------------------------------------------------
<S>                                <C>     <C>            <C>     <C>     <C>            <C>
Loans secured by real estate:
   Residential:
     One-to-four units ..........  $12,913 $6,155,399     0.21%   $11,244 $4,047,182     0.28%
     One-to-four units - subprime    9,876  1,639,401     0.60      3,055    588,951     0.52
     Five or more units .........      184     21,055     0.87        401     40,029     1.00
   Commercial real estate .......    2,439    148,327     1.64      2,632    140,790     1.87
   Construction .................    2,075    176,487     1.18      1,508    127,761     1.18
   Land .........................      843     67,631     1.25        568     44,859     1.27
Non-mortgage:
   Commercial ...................      334     26,667     1.25        218     28,293     0.77
   Automobile ...................    6,259    399,789     1.57      8,344    357,988     2.33
   Other consumer ...............      619     49,344     1.25        747     41,894     1.78
Not specifically allocated ......    2,800       --       --        2,800       --       --
------------------------------------------------------------------------------------------------
     Total loans held for
        investment ..............  $38,342 $8,684,100     0.44%   $31,517 $5,417,747     0.58%
================================================================================================
<FN>
(1)  The decline during 2000 primarily reflects the sale of subsidiary.
</FN>
</TABLE>

     Impaired Loans. We consider a loan to be impaired when,  based upon current
information  and  events,  we believe it is  probable  that we will be unable to
collect  all  amounts  due  according  to the  contractual  terms  of  the  loan
agreement.  We carry  impaired  loans at either the  present  value of  expected
future cash flows  discounted  at the loan's  effective  interest rate or at the
loan's observable market price or the net fair value of the collateral  securing
the loan.  Impaired  loans exclude large groups of smaller  balance  homogeneous
loans  that  we  collectively   evaluate  for  impairment.   For  us,  loans  we
collectively   review  for  impairment  include  all  single  family  loans  and
performing  multi-family and non-residential  loans having principal balances of
less than $5 million.

     In determining impairment, we consider large non-homogeneous loans with the
following characteristics: non-accrual loans, debt restructurings and performing
loans which exhibit, among other  characteristics,  high loan-to-value ratios or
delinquent taxes. We base the measurement of collateral dependent impaired loans
on the fair value of the loan's collateral.  We value  non-collateral  dependent
loans  based on a present  value  calculation  of  expected  future  cash flows,
discounted  at the loan's  effective  rate.  We generally  use cash  receipts on
impaired  loans not  performing  according  to  contractual  terms to reduce the
carrying  value of the loan,  unless we believe we will  recover  the  remaining
principal balance of the loan. We include impairment losses in the allowance for
loan  losses  through  a  charge  to  provision  for  loan  losses.  We  include
adjustments  to  impairment  losses  due to  changes  in the  fair  value of the
collateral of impaired loans in provision for loan losses.  Upon  disposition of
an  impaired  loan,  we record loss of  principal  through a  charge-off  to the
allowance  for loan losses.  The recorded  investment in loans for which we have
recognized  impairment  totaled $13 million at December 31,  2001.  During 2002,
that  amount  increased  but by year end had  declined  back to $13 million as a
short-pay was accepted in full

                                       57
<PAGE>
consideration  of a commercial  real estate loan. The total allowance for losses
related  to these  loans was $1 million  for both  December  31,  2002 and 2001.
During 2002,  the total interest  recognized on the impaired  portfolio was $1.3
million,  compared to $1.7 million in 2001.  For further  information  regarding
impaired loans, see Note 5 of the Notes to Consolidated  Financial Statements on
page 81.

     The  following  table  summarizes  the activity in our  allowance  for loan
losses associated with impaired loans during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                     2002       2001       2000      1999       1998
------------------------------------------------------------------------------------
<S>                              <C>        <C>        <C>       <C>        <C>
Balance at beginning of period   $   759    $   800    $   797   $   810    $ 1,301
Provision (reduction) ........     1,154        (41)         3       (13)      (491)
Charge-offs ..................    (1,188)      --         --        --         --
Recoveries ...................      --         --         --        --         --
------------------------------------------------------------------------------------
Balance at end of period .....   $   725    $   759    $   800   $   797    $   810
====================================================================================
</TABLE>

     The  provision  of $1.2  million  during 2002 and  resultant  $1.2  million
charge-off relates to the previously  mentioned  commercial real estate loan for
which a short-pay was accepted in full consideration.

     In addition to losses  charged  against the allowance  for loan losses,  we
have  maintained  a  valuation  allowance  for  losses on real  estate and joint
ventures held for  investment.  The  provision  reductions in all years were, in
general,  due to a  continuing  improvement  in the  real  estate  market  which
favorably  impacted  the  valuation  of  certain  neighborhood  shopping  center
investments  and to a  reduction  in the  investment  in certain  joint  venture
investments.

     The  following  table  summarizes  the activity in our  allowance  for real
estate and joint ventures held for investment during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                     2002        2001        2000       1999        1998
-------------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>        <C>         <C>
Balance at beginning of period   $  2,690    $  2,997    $  2,131   $  7,717    $ 21,244
Provision (reduction) ........       (448)       (307)        866     (3,666)     (5,296)
Charge-offs ..................     (1,334)       --          --       (1,920)     (8,231)
Recoveries ...................       --          --          --         --          --
-------------------------------------------------------------------------------------------
Balance at end of period .....   $    908    $  2,690    $  2,997   $  2,131    $  7,717
===========================================================================================
</TABLE>

     We have recorded  losses on real estate  acquired in settlement of loans by
direct  write-off to net  operations  of real estate  acquired in  settlement of
loans and against an allowance  for losses  specifically  established  for these
assets.  As of September 30, 1999, we ceased  maintaining  an allowance for real
estate  acquired  in  settlement  of loans as we record the  related  individual
assets at the lower of cost or fair value.

     The  following  table  summarizes  the activity of our  allowance  for real
estate acquired in settlement of loans during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                   2002     2001     2000     1999     1998
-----------------------------------------------------------------------------
<S>                              <C>      <C>      <C>      <C>      <C>
Balance at beginning of period   $--      $--      $--      $ 533    $ 839
Provision (reduction) ........     608      517      412      (45)     455
Charge-offs ..................    (612)    (583)    (442)    (488)    (761)
Recoveries ...................       4       66       30     --       --
-----------------------------------------------------------------------------
Balance at end of period .....   $--      $--      $--      $--      $ 533
=============================================================================
</TABLE>

                                       58
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY

     Our sources of funds  include  deposits,  advances  from the FHLB and other
borrowings; proceeds from the sale of loans, mortgage-backed securities and real
estate;  payments of loans and  mortgage-backed  securities and payments for and
sales of loan servicing; and income from other investments. Interest rates, real
estate  sales  activity and general  economic  conditions  significantly  affect
repayments  on loans and  mortgage-backed  securities  and  deposit  inflows and
outflows.

     Our primary sources of funds generated during 2002 were from:

     o    principal   repayments--including   prepayments,   but  excluding  our
          refinances  of  our  existing  loans--on  loans  and   mortgage-backed
          securities of $2.9 billion;

     o    sales  of  mortgage-backed  securities  available  for  sale  of  $1.0
          billion;

     o    an increase in deposits of $619 million;

     o    maturities and sales of U.S. Treasury  securities,  agency obligations
          and other  investment  securities  available for sale of $618 million;
          and

     o    a net increase in FHLB advances and other borrowings of $101 million.

     We used these funds for the following purposes:

     o    to  originate  and  purchase  loans  held  for  investment,  excluding
          refinances of our existing loans, of $3.7 billion;

     o    to  purchase  mortgage-backed  securities  available  for sale of $1.0
          billion;

     o    to purchase U.S.  Treasury  securities,  agency  obligations and other
          investment securities available for sale of $675 million; and

     o    to increase our loans held for sale a net $153 million.

     Our principal source of liquidity is our ability to utilize borrowings,  as
needed.  Our primary source of borrowings is the FHLB. At December 31, 2002, our
FHLB borrowings  totaled $1.6 billion,  representing  13.6% of total assets.  We
currently  are  approved by the FHLB to borrow up to 40% of total  assets to the
extent we provide  qualifying  collateral and hold sufficient  FHLB stock.  That
approved  limit would have permitted us, as of year end, to borrow an additional
$3.2  billion.  To the extent 2003  deposit  growth  falls  short of  satisfying
ongoing commitments to fund maturing and withdrawable  deposits,  repay maturing
borrowings,  fund  existing and future  loans,  make  investments,  and continue
branch improvement  programs,  we will utilize our FHLB borrowing arrangement or
possibly other sources. As of December 31, 2002, we had commitments to borrowers
for  short-term  rate locks of $996 million,  undisbursed  loan funds and unused
lines and letters of credit of $190 million, and other contingent liabilities of
$2 million.  We believe our current  sources of funds,  including  repayments of
existing loans, enable us to meet our obligations while maintaining liquidity at
appropriate levels.

     Another  measure of liquidity in the savings and loan industry is the ratio
of  cash  and  eligible  investments  to the  sum of  withdrawable  savings  and
borrowings due within one year. At December 31, 2002, the Bank's ratio was 5.4%,
compared to 4.3% at both December 31, 2001 and 2000.

     The  holding  company  currently  has  adequate  liquid  assets to meet its
obligations   and  can  obtain   further  funds  by  means  of  dividends   from
subsidiaries,  subject to certain  limitations,  or issuance of further  debt or
equity. At December 31, 2002, the holding company's liquid assets, including due
from Bank--interest bearing balances, totaled $65 million.

     On July 24,  2002,  the Board of  Directors  of Downey  authorized  a share
repurchase  program of up to $50 million of Downey's  common stock. To fund this
program,  the Bank paid a special  $50 million  dividend  during the year to the
holding  company.  The shares are being  repurchased  from  time-to-time in open
market transactions.  The timing,  volume and price of purchases will be made at
the  discretion  of Downey,  and will also be contingent  upon Downey's  overall
financial condition, as well as market conditions in general. During the current
year, 306,300 shares were repurchased at an average price of $39.73 and, at year
end,  $38 million of the original  authorization  remains  available  for future
purchases.

     Stockholders'  equity  totaled $823  million at December 31, 2002,  up from
$734 million at December 31, 2001 and $625 million at December 31, 2000.

                                       59
<PAGE>
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

     Through the normal  course of  operations,  we have  entered  into  certain
contractual obligations and other commitments.  Our obligations generally relate
to funding of our operations  through  deposits and borrowings as well as leases
for premises and equipment,  and our commitments generally relate to our lending
operations.

     We enter into derivative financial instruments as part of our interest rate
risk management process, primarily related to our sale of loans in the secondary
market.  For further  information  regarding  our  derivative  instruments,  see
Asset/Liability  Management  and Market  Risk on page 44 and Note 20 of Notes to
the Consolidated Financial Statements on page 101.

     Commitments  to  originate  fixed  and  variable  rate  mortgage  loans are
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition  established  in the  commitment.  Commitments  generally  have  fixed
expiration dates or other termination  clauses and may require payment of a fee.
Since some of the  commitments  may expire  without being drawn upon,  the total
commitment amounts do not necessarily  represent future cash  requirements.  The
credit risk  involved in issuing  lines and letters of credit  requires the same
creditworthiness  evaluation  as that involved in extending  loan  facilities to
customers.  Downey evaluates each customer's  creditworthiness on a case-by-case
basis.  Undisbursed  loan funds and unused  lines of credit  include home equity
lines of credit and funds not  disbursed,  but  committed  to  construction  and
commercial lending by the Bank.

     We have  obligations  under long term  operating  leases,  principally  for
building space and land.  Lease terms generally cover a five-year  period,  with
options to extend, and are non-cancelable.

     Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.

     Downey receives  collateral to support  commitments for which collateral is
deemed  necessary.  The most significant  categories of collateral  include real
estate properties underlying mortgage loans, liens on personal property and cash
on deposit with Downey.

     At December 31, 2002,  scheduled  maturities of certificates of deposit and
FHLB advances,  secondary  marketing  activities,  loans held for investment and
future operating minimum lease  commitments,  and other contractual  obligations
are as follows:

<TABLE>
<CAPTION>
                                                                 Within        1 - 3       4 - 5      Over        Total
(In Thousands)                                                   1 Year       Years       Years      5 Years     Balance
----------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>          <C>          <C>          <C>          <C>
Certificates of deposit ..................................   $3,534,174   $  627,970   $  505,510   $     --     $4,667,654
FHLB advances ............................................      413,934      609,850      141,300      459,000    1,624,084
Secondary marketing activities:
    Non-qualifying hedge transactions:
      Expected rate lock commitments .....................      614,592         --           --           --        614,592
      Associated forward sale contracts ..................      624,062         --           --           --        624,062
      Associated forward purchase contracts ..............       50,000         --           --           --         50,000
    Qualifying cash flow hedge transactions:
      Loans held for sale, at lower of cost or fair value       652,052         --           --           --        652,052
      Associated forward sale contracts ..................      623,975         --           --           --        623,975
Commitments to originate loans held for investment:
    Adjustable ...........................................      249,121         --           --           --        249,121
    Fixed ................................................          716         --           --           --            716
Undisbursed loan funds and unused lines of credit ........       82,671       12,331         --         94,281      189,283
Operating leases .........................................        4,347        7,158        4,541        2,482       18,528
Standby letters of credit and other contingent liabilities         --           --           --          2,662        2,662
----------------------------------------------------------------------------------------------------------------------------
    Total obligations and commitments ....................   $6,849,644   $1,257,309   $  651,351   $  558,425   $9,316,729
============================================================================================================================
</TABLE>

                                       60
<PAGE>
REGULATORY CAPITAL COMPLIANCE

     Our core and  tangible  capital  ratios were both 6.92% and our  risk-based
capital  ratio was  14.08% at  December  31,  2002.  These  levels are down from
comparable  ratios of 7.10% for both core and  tangible  capital  and 14.53% for
risk-based  capital at  December  31,  2001,  and  continue  to exceed the "well
capitalized"  standards  of 5.00% for core  capital  and 10.00%  for  risk-based
capital, as defined by regulation.

     The following table is a reconciliation of the Bank's  stockholder's equity
to federal regulatory capital as of December 31, 2002.

<TABLE>
<CAPTION>
                                                         Tangible Capital          Core Capital          Risk-Based Capital
                                                       ---------------------   ---------------------    -------------------------
(Dollars in Thousands)                                     Amount    Ratio         Amount     Ratio         Amount     Ratio
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                     <C>                      <C>
Stockholder's equity .................................    $873,851                $873,851                 $873,851
Adjustments:
   Deductions:
    Investment in subsidiary, primarily real estate ..     (41,587)                (41,587)                 (41,587)
    Excess cost over fair value of branch acquisitions      (3,150)                 (3,150)                  (3,150)
    Non-permitted mortgage servicing rights ..........      (5,773)                 (5,773)                  (5,773)
   Additions:
    Unrealized losses on securities available for sale       1,422                   1,422                    1,422
    General loss allowance - investment in DSL
       Service Company ...............................         202                     202                      202
    Allowance for loan losses,
      net of specific allowances (1) .................        --                      --                     34,480
---------------------------------------------------------------------------------------------------------------------------------
Regulatory capital ...................................     824,965   6.92%         824,965   6.92%          859,445   14.08%
Well capitalized requirement .........................     178,739   1.50   (2)    595,797   5.00           610,398   10.00   (3)
---------------------------------------------------------------------------------------------------------------------------------
Excess ...............................................    $646,226   5.42%        $229,168   1.92%         $249,047    4.08%
=================================================================================================================================
<FN>
(1)  Limited to 1.25% of risk-weighted assets.
(2)  Represents  the  minimum  requirement  for  tangible  capital,  as no "well
     capitalized" requirement has been established for this category.
(3)  A third  requirement  is Tier 1 capital to  risk-weighted  assets of 6.00%,
     which the Bank met and exceeded with a ratio of 13.52%.
</FN>
</TABLE>

     Subsequent to December 31, 2002, the OTS notified us that  beginning  March
31, 2003, we will need to make the following  changes to our regulatory  capital
calculations:

     o    Deduct from capital, loans the Bank has made to certain joint ventures
          in which DSL Service Company is a partner. At December 31, 2002, these
          loans totaled $37 million.

     o    Risk weight our subprime  residential loans at 75% instead of 50%. For
          further      information      regarding      this     change,      see
          Business-Regulation-Regulation of the Bank on page 11.

     While these changes will reduce our regulatory  capital ratios,  our ratios
will remain  above the well  capitalized  requirement.  The pro forma  impact of
these changes to our year-end 2002 regulatory capital ratios are:

     o    Tangible  capital  ratio  declines  from  6.92%  to  6.63% - the  well
          capitalized requirement is 1.50%.

     o    Core capital ratio declines from 6.92% to 6.63% - the well capitalized
          requirement is 5.00%.

     o    Risk-based  capital  ratio  declines  from 14.08% to 12.82% - the well
          capitalized requirement is 10.00%.

NEWLY ADOPTED ACCOUNTING PRINCIPLES

     Statement of Financial Accounting Standards No. 144. Statement of Financial
Accounting  Standards  No. 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"),  addresses  financial  accounting and reporting
for the impairment or disposal of long-lived  assets.  SFAS 144 supersedes  SFAS
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the  accounting  and reporting  provisions of APB
Opinion No. 30, "Reporting the Results of  Operations--Reporting  the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a business segment. SFAS
144 also  eliminates the exception to  consolidation  for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are effective

                                       61
<PAGE>
for financial  statements  issued for fiscal years  beginning after December 15,
2001, and interim periods within those fiscal years.  The provisions of SFAS 144
generally are to be applied prospectively.

     Statement of Financial Accounting Standards No. 147. Statement of Financial
Accounting Standards No. 147,  "Acquisitions of Certain Financial  Institutions,
an amendment of FASB  Statements No. 72 and 144 and FASB  Interpretation  No. 9"
("SFAS  147"),   addresses  the  financial  accounting  and  reporting  for  the
acquisition of all or part of a financial institution,  except for a transaction
between  two or more  mutual  enterprises.  SFAS  147  removes  acquisitions  of
financial  institutions,  other than  transactions  between  two or more  mutual
enterprises,  from the scope of Statement of Financial  Accounting Standards No.
72,  "Accounting for Certain  Acquisitions  of Banking or Thrift  Institutions,"
("SFAS 72"), and Financial  Accounting  Standards  Board  Interpretation  No. 9,
"Applying  APB Opinions No. 16 and 17 When a Savings and Loan  Association  or a
Similar Institution Is Acquired in a Business  Combination  Accounted for by the
Purchase  Method,"  and requires  that those  transactions  be accounted  for in
accordance with Statement of Financial  Accounting  Standards No. 141, "Business
Combinations,"  and  Statement  of  Financial   Accounting  Standards  No.  142,
"Goodwill and Other  Intangible  Assets" ("SFAS 142").  Thus, the requirement in
SFAS 72 to recognize, and subsequently amortize, any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable  intangible
assets  acquired  as an  unidentifiable  intangible  asset no longer  applies to
acquisitions  within  the  scope  of  SFAS  147.  Consequently,   Downey  ceased
amortizing the remaining excess cost over fair value of branch  acquisitions and
will  subject  this asset to annual  impairment  testing.  Downey also  restated
previously issued financial statements during the fourth quarter of 2002 back to
January 1, 2002, when SFAS 142 was applied.  As of December 31, 2002, this asset
totaled $3 million.

CURRENT ACCOUNTING ISSUES

     Statement of Financial Accounting Standards No. 143. Statement of Financial
Accounting  Standards No. 143,  "Accounting  for Asset  Retirement  Obligations"
("SFAS 143"),  addresses  financial  accounting  and  reporting for  obligations
associated with the retirement of tangible  long-lived assets and the associated
asset retirement  costs.  SFAS 143 is effective for financial  statements issued
for fiscal years  beginning  after June 15,  2002.  It is  anticipated  that the
financial impact of SFAS 143 will not have a material effect on Downey.

     Statement of Financial Accounting Standards No. 145. Statement of Financial
Accounting  Standards No. 145, "Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS  Statement  No. 13, and Technical  Corrections"  ("SFAS 145"),
updates, clarifies and simplifies existing accounting  pronouncements.  SFAS 145
rescinds SFAS No. 4, "Reporting Gains and Losses from  Extinguishment  of Debt."
SFAS  145  amends  SFAS  No.  13,  "Accounting  for  Leases,"  to  eliminate  an
inconsistency  between the required  accounting for sale-leaseback  transactions
and the required  accounting for certain lease  modifications that have economic
effects that are similar to sale-leaseback transactions.  The provisions of SFAS
145  related  to SFAS No.  4 and SFAS No.  13 are  effective  for  fiscal  years
beginning and  transactions  occurring after May 15, 2002,  respectively.  It is
anticipated  that the  financial  impact  of SFAS  145 will not have a  material
effect on Downey.

     Statement of Financial Accounting Standards No. 146. Statement of Financial
Accounting  Standards No. 146,  "Accounting  for Costs  Associated  with Exit or
Disposal Activities" ("SFAS 146"), requires Downey to recognize costs associated
with exit or disposal  activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan.  SFAS 146 replaces  Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability  Recognition for Certain Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs  Incurred  in a  Restructuring)."  The  provisions  of SFAS  146 are to be
applied  prospectively to exit or disposal  activities  initiated after December
31, 2002.

     Statement of Financial Accounting Standards No. 148. Statement of Financial
Accounting  Standards  No.  148,  "Accounting  for  Stock-Based  Compensation  -
Transition  and  Disclosure"   ("SFAS  148"),   amends  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123"),  to  provide  alternative  methods  of  transition  for  an  entity  that
voluntarily  changes  to the fair value  method of  accounting  for  stock-based
employee  compensation.  SFAS 148 also amends the disclosure  provisions of SFAS
123 to require prominent  disclosure about the effects on reported net income of
Downey's  accounting  policy  decisions  with  respect to  stock-based  employee
compensation.  Finally,  SFAS 148 amends APB Opinion No. 28, "Interim  Financial
Reporting",  to require  disclosure  about  those  effects in interim  financial
information.  Presently,  Downey does not intend to adopt the fair value method.
For further information  regarding our accounting for stock options, see Note 17
of Notes to Consolidated Financial Statements on page 97.

                                       62
<PAGE>
     Financial   Accounting   Standards  Board   Interpretation   46.  Financial
Accounting  Standards Board  Interpretation  46,  "Provides  Guidance to Improve
Financial Reporting for SPEs, Off-Balance Sheet Structures and Similar Entities"
("FIN 46"),  requires a variable interest entity to be consolidated by a company
if that  company is subject to a majority of the risk of loss from the  variable
interest  entity's  activities  or is  entitled  to  receive a  majority  of the
entity's  residual  returns or both. Prior to FIN 46, a company included another
entity in its consolidated financial statements only if it controlled the entity
through  voting  interests.  FIN 46 also  requires  disclosures  about  variable
interest  entities that the company is not required to consolidate  but in which
it has a significant variable interest. The consolidated  requirements of FIN 46
apply  immediately to variable interest entities created after January 31, 2003.
The consolidated  requirements  apply to older entities in the first fiscal year
or interim period after June 15, 2003. Certain disclosure  requirements apply in
all financial  statements issued after January 31, 2003,  regardless of when the
variable  interest  entity was  established.  It is possible that certain of our
real estate joint venture partnerships may require  consolidation as a result of
applying  the  provisions  of FIN  46.  The  financial  impact  will  likely  be
immaterial. For further information regarding Downey's real estate joint venture
partnerships,  see  Financial  Condition--Investments  in Real  Estate and Joint
Ventures  on page 39 and Note 6 on page 83 of Notes  to  Consolidated  Financial
Statements

SALE OF SUBSIDIARY

     On  February  29,  2000,  the Bank  sold its  indirect  automobile  finance
subsidiary,  Downey  Auto  Finance  Corp.,  to  Auto  One  Acceptance  Corp.,  a
subsidiary  of  California  Federal Bank and  recognized a pre-tax gain from the
sale of $9.8 million.  At December 31, 1999, Downey Auto Finance Corp. had loans
totaling  $366 million and total assets of $373  million.  The proceeds from the
sale have provided  additional  capital to further the growth of our residential
lending business.

                                       63
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     For information  regarding  quantitative and qualitative  disclosures about
market risk, see Financial Condition--Asset/Liability Management and Market Risk
on page 44.

                                       64
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page

            Independent Auditors' Report .................................    66
            Consolidated Balance Sheets ..................................    67
            Consolidated Statements of Income ............................    68
            Consolidated Statements of Comprehensive Income ..............    69
            Consolidated Statements of Stockholders' Equity ..............    69
            Consolidated Statements of Cash Flows ........................    70
            Notes to Consolidated Financial Statements ...................    72

                                       65
<PAGE>

KPMG
    355 South Grand Avenue
    Los Angeles, CA 90071












INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Downey Financial Corp.:

We have audited the accompanying consolidated balance sheets of Downey Financial
Corp.  and  subsidiaries  ("Downey")  as of December 31, 2002 and 2001,  and the
related consolidated statements of income,  comprehensive income,  stockholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,   2002.   These   consolidated   financial   statements   are  the
responsibility  of  Downey's  management.  Our  responsibility  is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Downey Financial
Corp.  and  subsidiaries  as of December  31, 2002 and 2001,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  December 31,  2002,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


                                       /s/  KPMG LLP


Los Angeles, California
January 16, 2003

                                       66
<PAGE>

<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                          December 31,
                                                                                -------------------------------
(Dollars in Thousands, Except Per Share Data)                                         2002             2001
---------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>             <C>
ASSETS
Cash .........................................................................   $    123,524    $    106,079
Federal funds ................................................................          2,555          37,001
---------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents ................................................        126,079         143,080
U.S. Treasury securities, agency obligations and other investment securities
    available for sale, at fair value ........................................        457,797         402,355
Municipal securities held to maturity, at amortized cost (estimated fair value
    of $6,202 at December 31, 2002 and $6,373 at December 31, 2001) ..........          6,216           6,388
Loans held for sale, at lower of cost or fair value ..........................        652,052         499,024
Mortgage-backed securities available for sale, at fair value .................          2,253         118,981
Loans receivable held for investment .........................................     10,322,637       9,514,408
Investments in real estate and joint ventures ................................         33,890          38,185
Real estate acquired in settlement of loans ..................................         12,360          15,366
Premises and equipment .......................................................        113,536         111,762
Federal Home Loan Bank stock, at cost ........................................        117,563         113,139
Mortgage servicing rights, net ...............................................         57,729          56,895
Other assets .................................................................         76,039          85,447
---------------------------------------------------------------------------------------------------------------
                                                                                 $ 11,978,151    $ 11,105,030
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .....................................................................   $  9,238,350    $  8,619,566
Federal Home Loan Bank advances and other borrowings .........................      1,624,084       1,522,712
Accounts payable and accrued liabilities .....................................        102,533          67,431
Deferred income taxes ........................................................         70,080          41,425
---------------------------------------------------------------------------------------------------------------
    Total liabilities ........................................................     11,035,047      10,251,134
---------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable capital securities of subsidiary
    trust holding solely junior subordinated debentures of the Company
    ("Capital Securities") ...................................................        120,000         120,000
STOCKHOLDERS' EQUITY
Preferred stock, par value of $0.01 per share; authorized 5,000,000 shares;
    outstanding none .........................................................           --              --
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
    issued 28,235,022 shares at December 31, 2002 and 28,213,048
    shares at December 31, 2001 ..............................................            282             282
Additional paid-in capital ...................................................         93,792          93,400
Accumulated other comprehensive loss .........................................         (1,422)           (239)
Retained earnings ............................................................        742,622         640,453
Treasury stock, at cost, 306,300 shares at December 31, 2002 .................        (12,170)           --
---------------------------------------------------------------------------------------------------------------
    Total stockholders' equity ...............................................        823,104         733,896
---------------------------------------------------------------------------------------------------------------
                                                                                 $ 11,978,151    $ 11,105,030
===============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       67
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
                                                                                 Years Ended December 31,
                                                                     ----------------------------------------------
(Dollars in Thousands, Except Per Share Data)                              2002            2001           2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>             <C>
INTEREST INCOME
Loans receivable .................................................   $    612,762    $    782,784    $    760,538
U.S. Treasury securities and agency obligations ..................          9,682          15,392          13,387
Mortgage-backed securities .......................................          3,637             726           1,060
Other investments ................................................          6,957           9,479           9,375
-------------------------------------------------------------------------------------------------------------------
    Total interest income ........................................        633,038         808,381         784,360
-------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits .........................................................        244,541         424,855         379,303
Borrowings .......................................................         60,936          65,793         130,419
Capital securities ...............................................         12,163          12,163          12,163
-------------------------------------------------------------------------------------------------------------------
    Total interest expense .......................................        317,640         502,811         521,885
-------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ..............................................        315,398         305,570         262,475
PROVISION FOR LOAN LOSSES ........................................            939           2,564           3,251
-------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses ..........        314,459         303,006         259,224
-------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET
Loan and deposit related fees ....................................         47,220          50,486          30,089
Real estate and joint ventures held for investment, net ..........         10,250           3,885           8,798
Secondary marketing activities:
    Loan servicing loss, net .....................................        (39,629)        (11,373)         (3,628)
    Net gains on sales of loans and mortgage-backed securities ...         45,860          22,432           3,297
    Net gains on sales of mortgage servicing rights ..............            331             934            --
Net gains (losses) on sales of investment securities .............            219             329            (106)
Gain on sale of subsidiary .......................................           --              --             9,762
Other ............................................................          2,431           1,843           2,342
-------------------------------------------------------------------------------------------------------------------
    Total other income, net ......................................         66,682          68,536          50,554
-------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE
Salaries and related costs .......................................        119,514          99,935          82,522
Premises and equipment costs .....................................         30,694          26,016          23,220
Advertising expense ..............................................          4,418           4,410           4,786
SAIF insurance premiums and regulatory assessments ...............          3,078           3,051           2,626
Professional fees ................................................          1,435           5,452           3,319
Other general and administrative expense .........................         27,505          23,632          19,716
-------------------------------------------------------------------------------------------------------------------
    Total general and administrative expense .....................        186,644         162,496         136,189
-------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans .....             11             239             818
Amortization of excess cost over fair value of branch acquisitions           --               457             462
-------------------------------------------------------------------------------------------------------------------
    Total operating expense ......................................        186,655         163,192         137,469
-------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .......................................        194,486         208,350         172,309
Income taxes .....................................................         82,193          88,169          73,058
-------------------------------------------------------------------------------------------------------------------
    NET INCOME ...................................................   $    112,293    $    120,181    $     99,251
===================================================================================================================
PER SHARE INFORMATION
BASIC ............................................................   $       3.99    $       4.26    $       3.52
===================================================================================================================
DILUTED ..........................................................   $       3.99    $       4.25    $       3.51
===================================================================================================================
CASH DIVIDENDS DECLARED AND PAID .................................   $       0.36    $       0.36    $       0.36
===================================================================================================================
Weighted average diluted shares outstanding ......................     28,173,659      28,271,103      28,225,551
===================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       68
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
                                                                                   Years Ended December 31,
                                                                             --------------------------------------
(In Thousands)                                                                  2002         2001         2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>          <C>
NET INCOME ................................................................   $ 112,293    $ 120,181    $  99,251
-------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES (BENEFITS)
Unrealized gains (losses) on securities available for sale:
    U.S. Treasury securities, agency obligations and other investment
       securities available for sale, at fair value .......................          61          705        2,032
    Mortgage-backed securities available for sale, at fair value ..........         935         (714)         173
    Less reclassification of realized (gains) losses included in net income        (284)        (190)          50
Unrealized losses on cash flow hedges:
    Net derivative instruments ............................................     (11,434)      (5,981)        --
    Less reclassification of realized losses included in net income .......       9,539        5,254         --
-------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of income taxes (benefits) ...      (1,183)        (926)       2,255
-------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ......................................................   $ 111,110    $ 119,255    $ 101,506
===================================================================================================================
</TABLE>

<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>

                                                                             Accumulated
                                                               Additional       Other
                                                      Common     Paid-in    Comprehensive   Retained    Treasury
(Dollars in Thousands, Except Per Share Data)          Stock     Capital    Income (Loss)   Earnings      Stock       Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>         <C>         <C>          <C>          <C>          <C>
Balances at December 31, 1999 ....................   $     281   $  92,385   $  (1,568)   $ 441,320    $    --      $ 532,418
Cash dividends, $0.36 per share ..................        --          --          --        (10,143)        --        (10,143)
Exercise of stock options ........................           1         854        --           --           --            855
Unrealized gains on securities available for sale         --          --         2,255         --           --          2,255
Net income .......................................        --          --          --         99,251         --         99,251
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 ....................         282      93,239         687      530,428         --        624,636
Cash dividends, $0.36 per share ..................        --          --          --        (10,156)        --        (10,156)
Exercise of stock options ........................        --           161        --           --           --            161
Unrealized losses on securities available for sale        --          --          (199)        --           --           (199)
Unrealized losses on cash flow hedges ............        --          --          (727)        --           --           (727)
Net income .......................................        --          --          --        120,181         --        120,181
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 ....................         282      93,400        (239)     640,453         --        733,896
Cash dividends, $0.36 per share ..................        --          --          --        (10,124)        --        (10,124)
Exercise of stock options ........................        --           392        --           --           --            392
Unrealized gains on securities available for sale         --          --           712         --           --            712
Unrealized losses on cash flow hedges ............        --          --        (1,895)        --           --         (1,895)
Purchase of treasury stock .......................        --          --          --           --        (12,170)     (12,170)
Net income .......................................        --          --          --        112,293         --        112,293
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 ....................   $     282   $  93,792   $  (1,422)   $ 742,622    $ (12,170)   $ 823,104
===============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       69
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                  --------------------------------------------
(In Thousands)                                                                          2002          2001           2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................................................   $   112,293   $    120,181   $     99,251
Adjustments to reconcile net income to net cash used for operating activities:
     Depreciation and amortization ............................................        61,840         49,009         32,957
     Provision for losses on loans, real estate acquired in settlement of
       loans, investments in real estate and joint ventures, mortgage
        servicing rights and other assets .....................................        37,712         13,366         10,605
     Net gains on sales of loans and mortgage-backed securities, mortgage
       servicing rights, investment securities, real estate and other assets ..       (55,046)       (26,019)       (10,111)
     Gain on sale of subsidiary ...............................................          --             --           (9,762)
     Interest capitalized on loans (negative amortization) ....................       (25,615)       (31,576)       (72,641)
     Federal Home Loan Bank stock dividends ...................................        (4,424)        (6,783)        (7,522)
Loans originated for sale .....................................................    (6,172,572)    (4,823,938)    (1,729,220)
Proceeds from sales of loans held for sale, including those sold
     as mortgage-backed securities ............................................     6,036,671      4,539,068      1,547,187
(Increase) decrease in other, net .............................................        (4,687)        18,509        (33,238)
------------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ........................................       (13,828)      (148,183)      (172,494)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
     Subsidiary, net ..........................................................          --             --          379,234
     U.S. Treasury securities, agency obligations and other
       investment securities available for sale ...............................        92,137         29,139         29,645
     Mortgage-backed securities available for sale ............................     1,080,491           --            3,253
     Loans held for investment ................................................          --             --           99,751
     Wholly owned real estate and real estate acquired in settlement of loans .        41,811         11,141         38,707
     Federal Home Loan Bank stock .............................................          --             --           17,516
Proceeds from maturities of U.S. Treasury securities, agency obligations
     and other investment securities available for sale .......................       525,440        462,545         22,000
Purchase of:
     U.S. Treasury securities, agency obligations and other investment
       securities available for sale ..........................................      (674,740)      (584,244)      (181,905)
     Mortgage-backed securities available for sale ............................    (1,014,098)      (115,597)          --
     Loans receivable held for investment .....................................      (466,702)       (94,980)       (18,828)
     Premises and equipment ...................................................       (20,369)       (25,548)        (8,984)
     Federal Home Loan Bank stock .............................................          --             --          (13,958)
Originations of loans receivable held for investment (net of refinances of
     $1,039,283 for the year ended December 31, 2002, $794,823 for the year
     ended December 31, 2001 and $165,148 for the year ended December 31, 2000)    (3,235,805)    (2,505,098)    (3,317,104)
Principal payments on loans receivable held for investment and
     mortgage-backed securities available for sale ............................     2,923,882      2,926,863      1,823,685
Net change in undisbursed loan funds ..........................................        60,342         (9,930)       (59,588)
Investments in real estate held for investment ................................       (18,134)        (5,860)        (1,356)
Other, net ....................................................................         4,318          4,007            650
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ..........................      (701,427)        92,438     (1,187,282)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       70
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
                                                                                            Years Ended December 31,
                                                                                ---------------------------------------------
(In Thousands)                                                                         2002           2001          2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ......................................................   $   618,784    $   536,877    $ 1,519,928
Proceeds from Federal Home Loan Bank advances and other borrowings ............     7,220,550      3,914,900      6,059,445
Repayments of Federal Home Loan Bank advances and other borrowings ............    (7,119,178)    (4,370,760)    (6,203,653)
Purchase of treasury stock ....................................................       (12,170)          --             --
Proceeds from exercise of stock options .......................................           392            161            855
Cash dividends ................................................................       (10,124)       (10,156)       (10,143)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .....................................       698,254         71,022      1,366,432
----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ..........................       (17,001)        15,277          6,656
Cash and cash equivalents at beginning of period ..............................       143,080        127,803        121,147
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................   $   126,079    $   143,080    $   127,803
============================================================================================================================
Supplemental disclosure of cash flow information:
    Cash paid during the period for:
     Interest .................................................................   $   318,665    $   512,657    $   511,943
     Income taxes .............................................................        73,459         77,995         73,744
Supplemental disclosure of non-cash investing:
    Loans transferred to held for investment from held for sale ...............         2,928          7,454         42,054
    Loans transferred from held for investment to held for sale ...............          --             --           97,047
    Loans transferred from held for investment to wholly owned real estate ....          --           15,688           --
    Loans exchanged for mortgage-backed securities ............................     5,104,433      3,816,171        970,319
    Real estate acquired in settlement of loans ...............................        25,208         25,743         18,389
    Loans to facilitate the sale of real estate acquired in settlement of loans        15,163         10,063          6,896
============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       71
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2002, 2001 and 2000

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The  consolidated  financial  statements  of  Downey  Financial  Corp.  and
     subsidiaries  ("Downey") include all accounts of Downey Financial Corp. and
     the consolidated accounts of all subsidiaries, including Downey Savings and
     Loan Association,  F.A. (the "Bank"). All significant intercompany balances
     and transactions have been eliminated.

     BUSINESS

     Downey  provides a full  range of  financial  services  to  individual  and
     corporate customers.  Downey is subject to competition from other financial
     institutions.  Downey is subject to the regulations of certain governmental
     agencies  and  undergoes   periodic   examinations   by  those   regulatory
     authorities.

     BASIS OF FINANCIAL STATEMENT PRESENTATION

     The accompanying  consolidated  financial  statements have been prepared in
     conformity with generally accepted  accounting  principles  accepted in the
     United  States  of  America.   In  preparing  the  consolidated   financial
     statements,  management is required to make estimates and assumptions  that
     affect the reported  amounts of assets and  liabilities  as of the dates of
     the balance sheets and the results of operations for the reporting periods.
     Actual results could differ significantly from those estimates.

     Material estimates that are particularly  susceptible to significant change
     in the near term relate to the  determination  of the allowances for losses
     on loans,  real  estate and  mortgage  servicing  rights  ("MSRs")  and the
     valuation of expected rate lock commitments.  Management  believes that the
     allowances  established  for  losses on  loans,  real  estate  and MSRs are
     adequate  and that the  valuation  of expected  rate lock  commitments  are
     reasonable. While management uses available information to recognize losses
     on loans, real estate and MSRs and to value expected rate lock commitments,
     future changes to the  allowances or valuations  may be necessary  based on
     changes in economic conditions.  In addition,  various regulatory agencies,
     as an  integral  part of their  examination  process,  periodically  review
     Downey's  allowances  for  losses  on  loans,  real  estate  and  MSRs  and
     valuations  of expected  rate lock  commitments.  Such agencies may require
     Downey to recognize  changes to the allowances or valuations based on their
     judgments  about  information  available  to  them  at the  time  of  their
     examination.

     Downey  is   required   to  carry  its  loans  held  for  sale   portfolio,
     mortgage-backed  and investment  securities  available for sale portfolios,
     real  estate  acquired  in  settlement  of  loans,  real  estate  held  for
     investment or under development,  derivatives and MSRs at the lower of cost
     or fair value or in certain cases, at fair value.  Fair value estimates are
     made at a specific point in time based upon relevant market information and
     other information  about the asset or liability.  Such estimates related to
     loans held for sale is estimated  based upon market  prices  obtained  from
     readily available market quote systems.  Fair value for the mortgage-backed
     and investment  securities portfolios and derivatives include published bid
     prices or bid  quotations  received  from  securities  dealers.  Fair value
     estimates  for real estate  acquired in settlement of loans and real estate
     held  for  investment  or  under   development  is  determined  by  current
     appraisals  and,  where no active market exists for a particular  property,
     discounting a forecast of expected cash flows at a rate  commensurate  with
     the risk  involved.  Fair value for MSRs is  determined  by  computing  the
     present value of the expected net servicing income from the portfolio.

     NEWLY ADOPTED ACCOUNTING PRINCIPLES

     Statement of Financial Accounting Standards No. 144. Statement of Financial
     Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
     Long-Lived  Assets"  ("SFAS  144"),   addresses  financial  accounting  and
     reporting for the  impairment or disposal of  long-lived  assets.  SFAS 144
     supersedes  SFAS No. 121,  "Accounting  for the  Impairment  of  Long-Lived
     Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
     reporting provisions of APB Opinion No. 30, "Reporting the Results of

                                       72
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Operations--Reporting  the  Effects of Disposal of a Segment of a Business,
     and   Extraordinary,   Unusual  and   Infrequently   Occurring  Events  and
     Transactions,"  for the  disposal  of a  business  segment.  SFAS  144 also
     eliminates  the  exception  to  consolidation  for a  subsidiary  for which
     control is likely to be temporary. The provisions of SFAS 144 are effective
     for financial  statements  issued for fiscal years beginning after December
     15, 2001, and interim periods within those fiscal years.  The provisions of
     SFAS 144 generally are to be applied prospectively.

     Statement of Financial Accounting Standards No. 147. Statement of Financial
     Accounting   Standards  No.  147,   "Acquisitions   of  Certain   Financial
     Institutions,  an  amendment  of FASB  Statements  No.  72 and 144 and FASB
     Interpretation No. 9" ("SFAS 147"),  addresses the financial accounting and
     reporting for the  acquisition  of all or part of a financial  institution,
     except for a transaction between two or more mutual  enterprises.  SFAS 147
     removes  acquisitions of financial  institutions,  other than  transactions
     between  two or more mutual  enterprises,  from the scope of  Statement  of
     Financial Accounting Standards No. 72, "Accounting for Certain Acquisitions
     of Banking or Thrift  Institutions,"  ("SFAS 72"), and Financial Accounting
     Standards Board  Interpretation No. 9, "Applying APB Opinions No. 16 and 17
     When a Savings and Loan Association or a Similar Institution Is Acquired in
     a Business Combination  Accounted for by the Purchase Method," and requires
     that those  transactions  be accounted for in accordance  with Statement of
     Financial  Accounting  Standards  No.  141,  "Business  Combinations,"  and
     Statement of Financial  Accounting  Standards No. 142,  "Goodwill and Other
     Intangible  Assets"  ("SFAS  142").  Thus,  the  requirement  in SFAS 72 to
     recognize,  and  subsequently  amortize,  any  excess of the fair  value of
     liabilities  assumed  over the  fair  value of  tangible  and  identifiable
     intangible assets acquired as an unidentifiable  intangible asset no longer
     applies to acquisitions within the scope of SFAS 147. Consequently,  Downey
     ceased  amortizing  the  remaining  excess  cost over fair  value of branch
     acquisitions  and will  subject  this asset to annual  impairment  testing.
     Downey also restated  previously  issued  financial  statements  during the
     fourth quarter of 2002 back to January 1, 2002,  when SFAS 142 was applied.
     As of December 31, 2002, this asset totaled $3 million.

     CASH AND CASH EQUIVALENTS

     For purposes of the  statements  of cash flows,  cash and cash  equivalents
     include cash on hand, amounts due from banks,  certificates of deposit with
     maturities three months or less and federal funds sold. Generally,  federal
     funds are purchased and sold for one-day periods.

     MORTGAGE-BACKED SECURITIES PURCHASED UNDER RESALE AGREEMENTS, U.S. TREASURY
     SECURITIES AND AGENCY OBLIGATIONS,  OTHER INVESTMENT SECURITIES,  MUNICIPAL
     SECURITIES AND MORTGAGE-BACKED SECURITIES

     Downey has established  written guidelines and objectives for its investing
     activities. At the time of purchase of a mortgage-backed security purchased
     under resale agreement, U.S. Treasury security and agency obligation, other
     investment  security,  municipal  security or a  mortgage-backed  security,
     management  of Downey  designates  the security as either held to maturity,
     available  for  sale or held  for  trading  based  on  Downey's  investment
     objectives,   operational  needs  and  intent.  Downey  then  monitors  its
     investment  activities to ensure that those  activities are consistent with
     the established guidelines and objectives.

     Held to Maturity. Securities held to maturity are carried at cost, adjusted
     for   amortization  of  premiums  and  accretion  of  discounts  which  are
     recognized in interest  income using the interest  method.  Mortgage-backed
     securities  represent  participating  interests in pools of long-term first
     mortgage loans  originated  and serviced by the issuers of the  securities.
     Mortgage-backed securities held to maturity are carried at unpaid principal
     balances,   adjusted  for  unamortized  premiums  and  unearned  discounts.
     Premiums and discounts on  mortgage-backed  securities are amortized  using
     the  interest  method  over  the  remaining  period  to the  call  date  or
     contractual  maturity,  adjusted  for  anticipated  prepayments.  It is the
     positive  intent of  Downey,  and  Downey  has the  ability,  to hold these
     securities   until   maturity  as  part  of  its  portfolio  of  long-term,
     interest-earning   assets.  If  the  cost  basis  of  these  securities  is
     determined  to be  other  than  temporarily  impaired,  the  amount  of the
     impairment is charged to operations.

                                       73
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Available  for Sale.  Securities  available  for sale are  carried  at fair
     value.  Premiums and discounts are amortized using the interest method over
     the remaining  period to the call date or contractual  maturity and, in the
     case of mortgage-backed  securities,  adjusted for anticipated prepayments.
     Unrealized  holding gains and losses, or valuation  allowances  established
     for net  unrealized  losses,  are excluded  from earnings and reported as a
     separate   component  of   stockholders'   equity  as   accumulated   other
     comprehensive  income,  net of income taxes,  unless the security is deemed
     other than temporarily  impaired. If the security is determined to be other
     than  temporarily  impaired,  the  amount of the  impairment  is charged to
     operations.

     Realized  gains and losses on the sale of  securities  available  for sale,
     determined using the specific identification method and recorded on a trade
     date basis, are reflected in earnings.

     Held for  Trading.  Securities  held for trading are carried at fair value.
     Realized and unrealized gains and losses are reflected in earnings.

     DERIVATIVES AND HEDGES

     Derivative financial instruments are recorded at fair value and reported as
     either assets or liabilities on the balance sheet. The accounting for gains
     and losses  associated  with changes in the fair value of  derivatives  are
     reported in current  earnings or other  comprehensive  income,  net of tax,
     depending  on whether  they  qualify for hedge  accounting  and whether the
     hedge is highly effective in achieving offsetting changes in the fair value
     or  cash  flows  of  the  asset  or  liability  being  hedged.   Derivative
     instruments  designated in a hedge relationship to mitigate exposure to the
     variability  in fair  values or expected  future cash flows are  considered
     fair value  hedges or cash flow hedges,  respectively.  The method used for
     assessing  the  effectiveness  of a  hedging  derivative,  as  well  as the
     measurement  approach for determining the ineffective aspects of the hedge,
     is established at the inception of the hedge.

     LOANS HELD FOR SALE

     Downey  identifies  those  loans  which  foreseeably  may be sold  prior to
     maturity.  These  loans  have  been  classified  as  held  for  sale in the
     Consolidated Balance Sheets and are recorded at the lower of amortized cost
     or fair value. Effective with the adoption of SFAS 133, the carrying amount
     includes  a basis  adjustment  to the loan at  funding  resulting  from the
     change in the fair value of the interest rate lock derivative from the date
     of commitment to the date of funding. In response to unforeseen events such
     as  changes  in  regulatory  capital  requirements,  liquidity  shortfalls,
     changes in the  availability  of sources of funds and excess loan demand by
     borrowers  that could not be controlled  immediately by loan price changes,
     Downey  may  sell  loans  which  had  been  held  for  investment.  In such
     occurrences,  the loans are  transferred at amortized cost and the lower of
     cost or fair value method is then applied.

     GAINS OR LOSSES ON SALES OF LOANS AND MORTGAGE SERVICING ASSETS

     Gains or losses on sales of loans  are  recognized  at the time of sale and
     are  determined by the  difference  between the net sales  proceeds and the
     allocated basis of the loans sold. Downey capitalizes MSRs acquired through
     purchase or when  mortgage  loans are sold or  securitized  with  servicing
     rights  retained.  The total cost of the mortgage loans designated for sale
     is allocated to the MSRs and the mortgage  loans  without the MSRs based on
     their relative fair values. The MSRs are included as a component of gain on
     sale of  loans.  The  MSRs  are  amortized  in  proportion  to and over the
     estimated period of net servicing income. Such amortization is reflected as
     a component of loan servicing income (loss).

     The MSRs are  periodically  reviewed  for  impairment  based on their  fair
     value.  The fair value of the MSRs,  for the  purposes  of  impairment,  is
     measured using a discounted  cash flow analysis  based on available  market
     quotes,  market-adjusted  discount rates and anticipated prepayment speeds.
     Market  sources are used to determine  prepayment  speeds,  the net cost of
     servicing  per  loan,  and  inflation,   default  and  interest  rates  for
     mortgages.

     The Company  capitalizes  and measures MSR  impairment  on a  disaggregated
     basis  based  on the  following  predominant  risk  characteristics  of the
     underlying  mortgage  loans:  fixed-rate  mortgage  loans by loan  term and
     coupon rate (less than 7%, 150 basis point  increments  between 7% and 10%,
     and  greater  than  10%),  and loan  term for  adjustable  rate  mortgages.
     Impairment losses are recognized through a valuation

                                       74
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     allowance for each impaired stratum, with any associated provision recorded
     as a component of loan servicing income (loss).

     LOANS RECEIVABLE HELD FOR INVESTMENT

     Loans  receivable  are  recorded at cost,  net of discounts  and  premiums,
     undisbursed  loan  proceeds,  net deferred fees and costs and the allowance
     for loan losses.

     Interest  income on loans is  accrued  based on the  outstanding  principal
     amount of loans using the interest method.  Discounts and premiums on loans
     are amortized to income using the interest method over the remaining period
     to  contractual  maturity.  The  amortization  of discounts  into income is
     discontinued on loans that are  contractually  ninety days past due or when
     collection of interest appears doubtful.

     Loan origination fees and related incremental direct loan origination costs
     are  deferred and  amortized  to income using the interest  method over the
     contractual  life of the  loans,  adjusted  for  actual  prepayments.  Fees
     received for a commitment to originate or purchase a loan or group of loans
     are deferred and, if the commitment is exercised,  recognized over the life
     of the  loan as an  adjustment  of  yield  or,  if the  commitment  expires
     unexercised,  recognized as income upon expiration of the  commitment.  The
     amortization  of deferred fees and costs is  discontinued on loans that are
     contractually  ninety days past due or when collection of interest  appears
     doubtful.

     Accrued interest on loans that are  contractually  ninety days or more past
     due or when collection of interest appears  doubtful is generally  reversed
     and charged against interest income. Income is subsequently recognized only
     to the extent cash  payments  are  received  and the  principal  balance is
     expected to be recovered. Such loans are restored to an accrual status only
     if  the  loan  is  brought  contractually  current  and  the  borrower  has
     demonstrated the ability to make future payments of principal and interest.

     ALLOWANCE FOR LOAN LOSSES

     The allowance for loan losses is maintained at an amount  management  deems
     adequate to cover inherent losses. Downey has implemented and adheres to an
     internal asset review system and loan loss allowance  methodology  designed
     to provide for the detection of problem assets and an adequate allowance to
     cover loan losses.  In determining the allowance for loan losses related to
     specific  large loans (loans over $5  million),  management  evaluates  its
     allowance  on an  individual  loan  basis,  including  an  analysis  of the
     creditworthiness,  cash flows and financial status of the borrower, and the
     condition and the estimated  value of the  collateral.  Downey  reviews all
     loans under $5 million by analyzing  their  performance  and composition of
     their collateral as a whole because of the relatively homogeneous nature of
     the portfolios. Given the above evaluations, the amount of the allowance is
     based  upon  the  summation  of  general  valuation  allowances,  allocated
     allowances  and an  unallocated  allowance.  General  valuation  allowances
     relate  to  loans  with no  well-defined  deficiency  or  weakness  and are
     determined  by  applying  against  such loans  factors  for each major loan
     category that consider past loss  experience and loan  duration.  Allocated
     allowances relate to loans with well-defined deficiencies or weaknesses and
     are generally determined by loss factors that consider past loss experience
     for such loans or are  determined by the excess of the recorded  investment
     in the loan over the fair value of the collateral,  where appropriate.  The
     unallocated  allowance is more subjective and is reviewed quarterly to take
     into  consideration  estimation errors and other factors such as prevailing
     and forecasted economic conditions.

     Downey considers a loan to be impaired when, based upon current information
     and  events,  it  believes  it is  probable  that  Downey will be unable to
     collect all  amounts due  according  to the  contractual  terms of the loan
     agreement.    In   determining    impairment,    Downey   considers   large
     non-homogeneous  loans  with  the  following  characteristics:  non-accrual
     loans, debt restructurings and performing loans which exhibit,  among other
     characteristics,  high  loan-to-value  ratios or delinquent  taxes.  Downey
     bases the  measurement of collateral  dependent  impaired loans on the fair
     value of the loan's collateral.  Non-collateral  dependent loans are valued
     based on a  present  value  calculation  of  expected  future  cash  flows,
     discounted at the loan's  effective  rate.  Cash receipts on impaired loans
     not performing  according to contractual terms are generally used to reduce
     the carrying value of the loan,  unless Downey believes it will recover the
     remaining principal balance of the loan.  Impairment losses are included in
     the  allowance  for loan  losses  through  a charge to  provision  for loan
     losses. Adjustments to impairment losses due to changes in the fair

                                       75
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     value of  collateral  of impaired  loans are included in provision for loan
     losses. Upon disposition of an impaired loan, loss of principal, if any, is
     recorded through a charge-off to the allowance for loan losses.

     In the  opinion  of  management,  and in  accordance  with  the  loan  loss
     allowance  methodology,  the present  allowance is  considered  adequate to
     absorb estimable and probable loan losses.  Additions to the allowances are
     reflected in current operations. Charge-offs to the allowance are made when
     the loan is  considered  uncollectible  or is  transferred  to real  estate
     owned. Recoveries are credited to the allowance.

     For regulatory  capital  purposes,  the Bank's  general  allowance for loan
     losses is included to a limit of 1.25% of regulatory risk-weighted assets.

     LOAN SERVICING

     Downey  services  mortgage loans for  investors.  Fees earned for servicing
     loans owned by investors  are reported as income when the related  mortgage
     loan payments are collected. Loan servicing costs are charged to expense as
     incurred.

     INVESTMENT IN REAL ESTATE AND JOINT VENTURES

     Real estate held for  investment or under  development is held at the lower
     of cost (less  accumulated  depreciation) or fair value.  Costs,  including
     interest,  of  holding  real  estate  in  the  process  of  development  or
     improvement are  capitalized,  whereas costs relating to holding  completed
     property are expensed.  An allowance for losses is  established by a charge
     to operations if the carrying  value of a property  exceeds its fair value,
     including the consideration of disposition costs.

     Downey  utilizes  the  equity  method  of  accounting  for  investments  in
     non-controlled joint ventures. All intercompany profits are eliminated.

     Income from the sale of real estate is recognized principally when title to
     the property has passed to the buyer, minimum down payment requirements are
     met and the  terms of any  notes  received  by  Downey  satisfy  continuing
     investment requirements.  At the time of sale, costs are relieved from real
     estate projects on a relative sales value basis and charged to operations.

     REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS

     Real estate acquired through foreclosure is initially recorded at the lower
     of cost or fair value, net of an allowance for estimated  selling costs, on
     the date of foreclosure  and a loan  charge-off is recorded,  if necessary.
     After that the individual  assets are recorded at the lower of cost or fair
     value.  All legal fees and direct costs,  including  foreclosure  and other
     related costs, are expensed as incurred.

     PREMISES AND EQUIPMENT

     Buildings, leasehold improvements and furniture, fixtures and equipment are
     carried at cost, less accumulated depreciation and amortization.  Buildings
     and   furniture,   fixtures  and  equipment  are   depreciated   using  the
     straight-line  method over the  estimated  useful lives of the assets.  The
     cost of leasehold  improvements is being amortized using the  straight-line
     method  over the shorter of the  estimated  useful life of the asset or the
     terms of the related leases.

     IMPAIRMENT OF LONG-LIVED ASSETS

     Downey reviews long-lived assets and certain  identifiable  intangibles for
     impairment  whenever events or changes in  circumstances  indicate that the
     carrying  amount  of an asset  may not be  recoverable.  Recoverability  of
     assets to be held and used is  measured  by a  comparison  of the  carrying
     amount of an asset to future net cash flows expected to be generated by the
     asset.  If such assets are considered to be impaired,  the impairment to be
     recognized  is measured by the amount by which the  carrying  amount of the
     assets  exceed the fair value of the  assets.  Assets to be disposed of are
     reported  at the lower of the  carrying  amount or fair value less costs to
     sell.

                                       76
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Downey  enters into sales of  securities  under  agreements  to  repurchase
     ("reverse  repurchase  agreements").   Reverse  repurchase  agreements  are
     treated as financing  arrangements  and,  accordingly,  the  obligations to
     repurchase  the  securities  sold are reflected as  liabilities in Downey's
     consolidated financial statements.  The securities  collateralizing reverse
     repurchase  agreements  are delivered to several major  national  brokerage
     firms who arranged the  transactions.  These  securities  are  reflected as
     assets in Downey's consolidated  financial statements.  The brokerage firms
     may loan such  securities  to other  parties in the normal  course of their
     operations  and agree to return the  identical  securities to Downey at the
     maturity of the agreements.

     INCOME TAXES

     Downey  applies the asset and  liability  method of  accounting  for income
     taxes. The asset and liability method recognizes  deferred income taxes for
     the  tax  consequences  of  "temporary  differences"  by  applying  enacted
     statutory tax rates  applicable to future years to differences  between the
     financial  statement  carrying amounts and the tax bases of existing assets
     and  liabilities.  The effect on deferred taxes of a change in tax rates is
     recognized in income in the period that includes the enactment date.

     Deferred tax assets are to be  recognized  for temporary  differences  that
     will result in deductible amounts in future years and for tax carryforwards
     if, in the  opinion  of  management,  it is more  likely  than not that the
     deferred tax assets will be realized.

     TREASURY STOCK

     Downey applies the cost method of accounting for treasury  stock.  The cost
     method requires Downey to record the  reacquisition  cost of treasury stock
     as a deduction from the total paid-in capital and retained  earnings on the
     balance  sheet.  The treasury  stock account is debited for the cost of the
     shares   acquired   and  is  credited   upon   reissuance   at  cost  on  a
     first-in-first-out basis. If the treasury shares are reissued at a price in
     excess of the  acquisition  cost, the excess is credited to paid-in capital
     from  treasury  stock.  If the  treasury  shares are  reissued at less than
     acquisition  cost,  the  deficiency  is treated first as a reduction of any
     paid-in  capital  related to previous  reissuances or  retirements.  If the
     balance in paid-in  capital from treasury stock is  insufficient  to absorb
     the  deficiency,  the  remainder  is recorded  as a  reduction  of retained
     earnings.

     STOCK OPTION PLAN

     Downey  records  compensation  expense  on the  date of  grant  only if the
     current  market price of the  underlying  stock exceeded the exercise price
     rather than  recognizing  as expense over the vesting period the fair value
     of all stock-based  awards on the date of grant.  However,  Downey provides
     pro forma net income and pro forma net  income  per share  disclosures  for
     employee  stock option  grants made since 1995 as if the  fair-value of all
     stock-based  awards as of the grant date are recognized as expense over the
     vesting period.

     PER SHARE INFORMATION

     Two earnings per share ("EPS")  measures are presented.  Basic EPS excludes
     dilution   and  is  computed  by  dividing   income   available  to  common
     stockholders  by the weighted  average number of common shares  outstanding
     for the period,  excluding common shares in treasury.  Diluted EPS reflects
     the potential dilution that could occur if securities or other contracts to
     issue  common  stock were  exercised  or  converted  into  common  stock or
     resulted from issuance of common stock that then shared in earnings.

     CURRENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards No. 143. Statement of Financial
     Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
     ("SFAS 143"),  addresses financial accounting and reporting for obligations
     associated  with the  retirement  of  tangible  long-lived  assets  and the
     associated

                                       77
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     asset  retirement  costs.  SFAS 143 is effective for  financial  statements
     issued for fiscal years  beginning  after June 15, 2002. It is  anticipated
     that the  financial  impact of SFAS 143 will not have a material  effect on
     Downey.

     Statement of Financial Accounting Standards No. 145. Statement of Financial
     Accounting Standards No. 145, "Rescission of SFAS Statements No. 4, 44, and
     64, Amendment of SFAS Statement No. 13, and Technical  Corrections"  ("SFAS
     145"),    updates,    clarifies   and   simplifies    existing   accounting
     pronouncements.  SFAS 145 rescinds SFAS No. 4, "Reporting  Gains and Losses
     from  Extinguishment of Debt." SFAS 145 amends SFAS No. 13, "Accounting for
     Leases," to eliminate an inconsistency  between the required accounting for
     sale-leaseback  transactions and the required  accounting for certain lease
     modifications that have economic effects that are similar to sale-leaseback
     transactions. The provisions of SFAS 145 related to SFAS No. 4 and SFAS No.
     13 are effective  for fiscal years  beginning  and  transactions  occurring
     after May 15, 2002,  respectively.  It is  anticipated  that the  financial
     impact of SFAS 145 will not have a material effect on Downey.

     Statement of Financial Accounting Standards No. 146. Statement of Financial
     Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
     Disposal  Activities"  ("SFAS  146"),  requires  Downey to recognize  costs
     associated  with exit or disposal  activities when they are incurred rather
     than at the date of a  commitment  to an exit or  disposal  plan.  SFAS 146
     replaces  Emerging  Issues Task Force ("EITF")  Issue No. 94-3,  "Liability
     Recognition for Certain  Employee  Termination  Benefits and Other Costs to
     Exit an Activity  (including  Certain Costs Incurred in a  Restructuring)."
     The  provisions  of SFAS  146 are to be  applied  prospectively  to exit or
     disposal activities initiated after December 31, 2002.

     Statement of Financial Accounting Standards No. 148. Statement of Financial
     Accounting  Standards No. 148,  "Accounting for Stock-Based  Compensation -
     Transition  and  Disclosure"  ("SFAS 148"),  amends  Statement of Financial
     Accounting  Standards No. 123,  "Accounting for  Stock-Based  Compensation"
     ("SFAS 123"),  to provide  alternative  methods of transition for an entity
     that  voluntarily  changes  to the fair  value  method  of  accounting  for
     stock-based  employee  compensation.  SFAS 148 also  amends the  disclosure
     provisions of SFAS 123 to require prominent disclosure about the effects on
     reported net income of Downey's accounting policy decisions with respect to
     stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No.
     28,  "Interim  Financial  Reporting",  to require  disclosure  about  those
     effects in interim financial information. Presently, Downey does not intend
     to adopt the fair value  method.  For  further  information  regarding  our
     accounting for stock options, see Note 17 on page 97.

     Financial   Accounting   Standards  Board   Interpretation   46.  Financial
     Accounting Standards Board Interpretation 46, "Provides Guidance to Improve
     Financial  Reporting for SPEs,  Off-Balance  Sheet  Structures  and Similar
     Entities"   ("FIN  46"),   requires  a  variable   interest  entity  to  be
     consolidated  by a company if that  company is subject to a majority of the
     risk of loss from the variable interest entity's  activities or is entitled
     to receive a majority of the entity's  residual  returns or both.  Prior to
     FIN 46, a company  included  another entity in its  consolidated  financial
     statements only if it controlled the entity through voting  interests.  FIN
     46 also requires  disclosures  about  variable  interest  entities that the
     company is not required to  consolidate  but in which it has a  significant
     variable   interest.   The  consolidated   requirements  of  FIN  46  apply
     immediately to variable  interest  entities created after January 31, 2003.
     The consolidated  requirements  apply to older entities in the first fiscal
     year or interim period after June 15, 2003. Certain disclosure requirements
     apply in all financial statements issued after January 31, 2003, regardless
     of when the variable  interest entity was established.  It is possible that
     certain  of  our  real  estate  joint  venture   partnerships  may  require
     consolidation  as a  result  of  applying  the  provisions  of FIN 46.  The
     financial  impact  will  likely  be  immaterial.  For  further  information
     regarding  Downey's real estate joint venture  partnerships,  see Note 6 on
     page 83.

                                       78
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(2)  U.S.  TREASURY   SECURITIES,   AGENCY   OBLIGATIONS  AND  OTHER  INVESTMENT
     SECURITIES AVAILABLE FOR SALE

     The amortized  cost and estimated fair value of U.S.  Treasury  securities,
     agency obligations and other investment  securities  available for sale are
     summarized as follows:

<TABLE>
<CAPTION>
                                                          Gross       Gross    Estimated
                                           Amortized   Unrealized   Unrealized   Fair
     (In Thousands)                           Cost        Gains       Losses     Value
     -------------------------------------------------------------------------------------
     <S>                                   <C>          <C>          <C>        <C>
     U.S. Treasury and agency securities   $455,761     $  2,036     $   --     $457,797
     Corporate securities ..............       --           --           --         --
     -------------------------------------------------------------------------------------
     December 31, 2002 .................   $455,761     $  2,036     $   --     $457,797
     =====================================================================================
     U.S. Treasury and agency securities   $355,947     $  1,214     $    251   $356,910
     Corporate securities ..............     44,259        1,203           17     45,445
     -------------------------------------------------------------------------------------
     December 31, 2001 .................   $400,206     $  2,417     $    268   $402,355
     =====================================================================================
</TABLE>

     At December 31, 2002,  all of these  investment  securities  contained call
     provisions ranging from January 22, 2003 until maturity.

     The amortized  cost and estimated fair value of U.S.  Treasury  securities,
     agency  obligations and other investment  securities  available for sale at
     December 31, 2002, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                            Amortized     Fair
     (In Thousands)                            Cost       Value
     -------------------------------------------------------------
     <S>                                     <C>        <C>
     Due in one year or less .............   $   --     $   --
     Due after one year through five years    454,759    456,790
     Due after five years ................      1,002      1,007
     -------------------------------------------------------------
        Total ............................   $455,761   $457,797
     =============================================================
</TABLE>

     Proceeds,  gross  realized  gains and losses on the sales of U.S.  Treasury
     securities,  agency obligations and other investment  securities  available
     for sale are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)           2002       2001      2000
     -----------------------------------------------------
     <S>                     <C>       <C>       <C>
     Proceeds ............   $65,993   $29,139   $29,645
     =====================================================
     Gross realized gains    $   675   $   329   $     4
     =====================================================
     Gross realized losses   $   456   $  --     $   110
     =====================================================
</TABLE>

     Net  unrealized  gains on  investment  securities  available  for sale were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $2.0 million,  or $1.2 million net of income taxes,
     at December 31, 2002,  compared to net unrealized gains of $2.1 million, or
     $1.2 million net of income taxes, at December 31, 2001.

                                       79
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(3)  LOANS AND MORTGAGE-BACKED  SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND
     OTHER INVESTMENT SECURITIES HELD TO MATURITY

     LOANS AND MORTGAGE-BACKED SECURITIES PURCHASED UNDER RESALE AGREEMENTS

     There were no outstanding  loans or  mortgage-backed  securities  purchased
     under resale  agreements at December 31, 2002 or 2001. The average interest
     rate  and  balance  of  such   transactions   was  1.80%  and  $4  million,
     respectively,  during 2002 and 4.35% and $34 million, respectively,  during
     2001. The maximum amount  outstanding at any month-end  during 2002 was $10
     million and $60 million during 2001.

     MUNICIPAL SECURITIES HELD TO MATURITY

     The amortized cost and estimated fair value of municipal securities held to
     maturity are summarized as follows:

<TABLE>
<CAPTION>
                                               Gross        Gross       Estimated
                              Amortized     Unrealized    Unrealized       Fair
     (In Thousands)              Cost          Gains        Losses         Value
     -----------------------------------------------------------------------------
     <S>                       <C>          <C>           <C>           <C>
     December 31, 2002 .....   $6,216       $    --       $   14        $6,202
     =============================================================================
     December 31, 2001 .....   $6,388       $    --       $   15        $6,373
     =============================================================================
</TABLE>

     All of  the  investment  at  December  31,  2002  and  2001  represents  an
     industrial  revenue  bond on which the  interest  income is not  subject to
     federal income taxes and matures in 2015.

(4)  MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

     The  amortized  cost  and  estimated  fair  value  of  the  mortgage-backed
     securities available for sale are summarized as follows:

<TABLE>
<CAPTION>
                                                   Gross        Gross       Estimated
                                  Amortized     Unrealized    Unrealized       Fair
     (In Thousands)                  Cost          Gains        Losses         Value
     ---------------------------------------------------------------------------------
     <S>                          <C>           <C>           <C>           <C>
     December 31, 2002:
        Non-agency certificates   $  2,210      $     43      $   --        $  2,253
     ---------------------------------------------------------------------------------
           Total ..............   $  2,210      $     43      $   --        $  2,253
     =================================================================================
     December 31, 2001:
        Agency certificates ...   $ 17,805      $   --        $    387      $ 17,418
        Non-agency certificates    102,480            15           932       101,563
     ---------------------------------------------------------------------------------
           Total ..............   $120,285      $     15      $  1,319      $118,981
     =================================================================================
</TABLE>

     Net unrealized gains on mortgage-backed  securities available for sale were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the  amount of  $43,000,  or  $25,000  net of  income  taxes,  at
     December  31,  2002.  At December  31,  2001,  net  unrealized  losses were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $1.3 million, or $0.8 million net of income taxes.

                                       80
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Proceeds,  gross realized gains and losses on the sales of  mortgage-backed
     securities available for sale are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)              2002         2001         2000
     --------------------------------------------------------------
     <S>                     <C>          <C>          <C>
     Proceeds ............   $6,187,799   $3,798,775   $  963,712
     ==============================================================
     Gross realized gains    $   39,951   $   24,507   $    4,788
     ==============================================================
     Gross realized losses   $    6,974   $    5,030   $    5,690
     ==============================================================
</TABLE>

(5)  LOANS RECEIVABLE

     Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                   December 31,
                                                         -------------------------------
     (In Thousands)                                            2002            2001
     -----------------------------------------------------------------------------------
     <S>                                                 <C>              <C>
     Held for investment:
        Loans secured by real estate:
           Residential:
             One-to-four units ........................   $  8,647,197    $  7,699,061
             One-to-four units - subprime .............      1,386,113       1,506,719
             Five or more units .......................         10,640          11,179
           Commercial real estate .....................         71,415         112,509
           Construction ...............................        103,547          84,942
           Land .......................................         53,538          22,028
        Non-mortgage:
           Commercial .................................         15,021          22,017
           Automobile .................................         11,641          24,529
           Other consumer .............................         56,782          50,908
     -----------------------------------------------------------------------------------
             Total loans receivable held for investment     10,355,894       9,533,892
        Increase (decrease) for:
           Undisbursed loan funds .....................        (95,002)        (61,280)
           Net deferred costs and premiums ............         96,744          77,916
           Allowance for losses .......................        (34,999)        (36,120)
     -----------------------------------------------------------------------------------
             Total loans held for investment, net .....   $ 10,322,637    $  9,514,408
     ===================================================================================
     Held for sale:
        Loans secured by real estate:
           Residential one-to-four units ..............   $    649,964    $    509,350
           Capitalized basis adjustment (1) ...........          2,088         (10,326)
     -----------------------------------------------------------------------------------
             Total loans held for sale, net ...........   $    652,052    $    499,024
     ===================================================================================
<FN>
     (1)  Reflected  the  change in fair value of the rate lock  derivative  from the
          date commitment to the date of funding.
</FN>
</TABLE>


     At December 31, 2002, over 95% of the real estate  securing  Downey's loans
     was located in California.

     The combined  weighted  average interest yield on loans receivable held for
     investment  and sale was  5.83% and 7.16% at  December  31,  2002 and 2001,
     respectively,  and averaged  5.93%,  7.80% and 7.99% during 2002,  2001 and
     2000, respectively.

     Most of our adjustable rate mortgages  adjust the interest rate monthly and
     the payment amount annually.  These monthly adjustable rate mortgages allow
     for negative amortization, which is the addition to loan

                                       81
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     principal  of accrued  interest  that  exceeds the  required  monthly  loan
     payments.   At  December  31,  2002,   loans  with  negative   amortization
     represented 75% of Downey's  adjustable rate  one-to-four  unit residential
     portfolio,  of which  $112  million  represented  the  amount  of  negative
     amortization  included in the loan  balance.  This compares to 76% and $180
     million, respectively, at December 31, 2001.

     A summary of activity in the allowance for loan losses for loans receivable
     held for investment during 2002, 2001 and 2000 follows:

<TABLE>
<CAPTION>
                                                                                         Not
                                       Real                                 Other    Specifically
     (In Thousands)                   Estate    Commercial   Automobile   Consumer    Allocated     Total
     --------------------------------------------------------------------------------------------------------
     <S>                            <C>         <C>          <C>         <C>         <C>          <C>
     Balance at December 31, 1999   $ 28,330    $    334     $  6,259    $    619    $  2,800     $ 38,342
     Provision for loan losses ..      2,350         108          517         276        --          3,251
     Charge-offs ................       (735)       --           (832)       (182)       --         (1,749)
     Recoveries .................        269        --            136          14        --            419
     Transfers (1) ..............       --          --         (5,811)       --          --         (5,811)
     --------------------------------------------------------------------------------------------------------
     Balance at December 31, 2000     30,214         442          269         727       2,800       34,452
     Provision for loan losses ..      2,103         131          201         129        --          2,564
     Charge-offs ................       (874)       --           (197)       (277)       --         (1,348)
     Recoveries .................        434        --              4          14        --            452
     --------------------------------------------------------------------------------------------------------
     Balance at December 31, 2001     31,877         573          277         593       2,800       36,120
     Provision for loan losses ..        308          13         (120)        738        --            939
     Charge-offs ................     (1,789)       --           (104)       (338)       --         (2,231)
     Recoveries .................        111        --             47          13        --            171
     --------------------------------------------------------------------------------------------------------
     Balance at December 31, 2002   $ 30,507    $    586     $    100    $  1,006    $  2,800     $ 34,999
     ========================================================================================================
<FN>
     (1)  Reduction in 2000 was due to the sale of subsidiary.
</FN>
</TABLE>

     Net  charge-offs  represented  0.02%,  0.01% and 0.01% of average loans for
     2002, 2001 and 2000, respectively.

     All  impaired  loans at December  31,  2002,  2001 and 2000 were secured by
     commercial real estate.  The following  table presents  impaired loans with
     specific  allowances  and the amount of such  allowances and impaired loans
     without specific allowances.

<TABLE>
<CAPTION>
                                                             Specific        Net
     (In Thousands)                        Carrying Value    Allowance     Balance
     ------------------------------------------------------------------------------
     <S>                                      <C>         <C>             <C>
     December 31, 2002:
        Loans with specific allowances ..     $  --       $    --         $  --
        Loans without specific allowances      12,714          --          12,714
     ------------------------------------------------------------------------------
        Total impaired loans ............     $12,714     $    --         $12,714
     ==============================================================================
     December 31, 2001:
        Loans with specific allowances ..     $  --       $    --         $  --
        Loans without specific allowances      13,201          --          13,201
     ------------------------------------------------------------------------------
        Total impaired loans ............     $13,201     $    --         $13,201
     ==============================================================================
     December 31, 2000:
        Loans with specific allowances ..     $  --       $    --         $  --
        Loans without specific allowances      13,841          --          13,841
     ------------------------------------------------------------------------------
        Total impaired loans ............     $13,841     $    --         $13,841
     ==============================================================================
</TABLE>

                                       82
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The average  recorded  investment in impaired  loans totaled $15 million in
     2002 and $14 million in 2001. During 2002, total interest recognized on the
     impaired loan portfolio was $1.3 million,  compared to $1.7 million in 2001
     and $2.9 million in 2000.

     The aggregate amount of non-accrual loans receivable that are contractually
     past due 90 days or more as to principal or  interest,  in the  foreclosure
     process,  restructured,  or upon which interest collection is doubtful were
     $67 million and $77 million at December 31, 2002 and 2001, respectively. At
     December 31, 2002 we had no troubled debt restructurings on accrual status,
     compared to less than $1 million at December  31,  2001,  representing  one
     residential one-to-four unit loan.

     Interest due on non-accrual  loans, but excluded from interest income,  was
     approximately $0.9 million for 2002, $3.2 million for 2001 and $1.8 million
     for 2000.

     Downey has had,  and  expects in the  future to have,  transactions  in the
     ordinary  course of business with executive  officers,  directors and their
     associates on substantially  the same terms,  including  interest rates and
     collateral,  as those  prevailing at the time for  comparable  transactions
     with  other  non-related  parties.  In the  opinion  of  management,  those
     transactions  neither  involve more than the normal risk of  collectibility
     nor present any  unfavorable  features.  At December 31, 2002, the Bank had
     extended  loans to two of its directors and their  associates  totaling $20
     million. At December 31, 2001, the Bank had extended loans to two directors
     and their associates totaling $21 million. All such loans are performing in
     accordance with their loan terms.  Presented below is a summary of activity
     with respect to such loans for the years ending December 31, 2002 and 2001:

<TABLE>
<CAPTION>
     (In Thousands)                      2002       2001
     --------------------------------------------------------
     <S>                              <C>         <C>
     Balance at beginning of period   $ 21,479    $ 23,067
     Additions ....................        445         508
     Repayments ...................     (1,760)     (2,096)
     --------------------------------------------------------
     Balance at end of period .....   $ 20,164    $ 21,479
     ========================================================
</TABLE>

(6)  INVESTMENTS IN REAL ESTATE AND JOINT VENTURES

     Investments in real estate and joint ventures are summarized as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                     ------------------------
     (In Thousands)                                                     2002        2001
     ----------------------------------------------------------------------------------------
     <S>                                                              <C>         <C>
     Gross investments in real estate (1) .........................   $ 23,643    $ 44,429
     Accumulated depreciation .....................................     (5,673)     (7,495)
     Allowance for losses .........................................       (908)     (2,690)
     ----------------------------------------------------------------------------------------
        Investments in real estate ................................     17,062      34,244
     ----------------------------------------------------------------------------------------
     Investments in and interest bearing advances to joint ventures     16,703       3,806
     Note receivable from sale of land ............................        125         135
     ----------------------------------------------------------------------------------------
        Investments in joint ventures .............................     16,828       3,941
     ----------------------------------------------------------------------------------------
        Total investments in real estate and joint ventures .......   $ 33,890    $ 38,185
     ========================================================================================
<FN>
     (1)  Included $0.9 million invested in low income housing.
</FN>
</TABLE>

                                       83
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The table set forth below describes the type,  location and amount invested
     in real estate and joint ventures,  net of specific valuation allowances of
     $1 million and general  valuation  allowances  of less than $1 million,  at
     December 31, 2002:

<TABLE>
<CAPTION>
     (In Thousands)                                           California    Arizona     Total
     -------------------------------------------------------------------------------------------
     <S>                                                       <C>         <C>        <C>
     Shopping centers ......................................   $ 13,342    $  2,883   $ 16,225
     Residential (1) .......................................     17,554        --       17,554
     Land ..................................................        188        --          188
     Note receivable from sale of land .....................        125        --          125
     -------------------------------------------------------------------------------------------
        Total real estate before general valuation allowance   $ 31,209    $  2,883     34,092
     General valuation allowance ...........................                              (202)
     -------------------------------------------------------------------------------------------
     Net investment in real estate and joint ventures ......                          $ 33,890
     ===========================================================================================
<FN>
     (1)  Included $0.9 million invested in low income housing.
</FN>
</TABLE>

     A summary of real estate and joint venture operations  included in Downey's
     results of operations follows:

<TABLE>
<CAPTION>
     (In Thousands)                                              2002        2001        2000
     ---------------------------------------------------------------------------------------------
     <S>                                                       <C>         <C>         <C>
     Wholly owned operations:
        Rental operations:
           Rental income ...................................   $  3,624    $  3,235    $  3,617
           Costs and expenses ..............................     (1,522)       (990)     (1,045)
     ---------------------------------------------------------------------------------------------
             Net rental operations .........................      2,102       2,245       2,572
        Net gains on sales of real estate ..................      1,200         129       2,981
        Reduction of losses on real estate .................        448         307         639
     ---------------------------------------------------------------------------------------------
           Total wholly owned operations ...................      3,750       2,681       6,192
     ---------------------------------------------------------------------------------------------
     Joint venture operations:
        Equity in net income from joint ventures ...........      5,476         736       3,224
        Provision for losses provided by DSL Service Company       --          --        (1,505)
     ---------------------------------------------------------------------------------------------
           Net joint venture operations ....................      5,476         736       1,719
     Interest from joint venture advances ..................      1,024         468         887
     ---------------------------------------------------------------------------------------------
        Total joint venture operations .....................      6,500       1,204       2,606
     ---------------------------------------------------------------------------------------------
           Total ...........................................   $ 10,250    $  3,885    $  8,798
     =============================================================================================
</TABLE>

                                       84
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Activity  in the  allowance  for losses on  investments  in real estate and
     joint ventures for 2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                     Real Estate     Shopping
                                                      Held for        Centers     Investments
                                                      or Under       Held for      In Joint
     (In Thousands)                                  Development    Investment     Ventures        Total
     -----------------------------------------------------------------------------------------------------
     <S>                                             <C>            <C>            <C>           <C>
     Balance at December 31, 1999 ................   $ 1,062        $ 1,069        $  --         $ 2,131
     Provision for (reduction of) estimated losses      --             (639)         1,505           866
     Charge-offs .................................      --             --             --            --
     Recoveries ..................................      --             --             --            --
     -----------------------------------------------------------------------------------------------------
     Balance at December 31, 2000 ................     1,062            430          1,505         2,997
     Reduction of estimated losses ...............       (29)          (278)          --            (307)
     Charge-offs .................................      --             --             --            --
     Recoveries ..................................      --             --             --            --
     Transfers (1) ...............................      --            1,505         (1,505)         --
     -----------------------------------------------------------------------------------------------------
     Balance at December 31, 2001 ................     1,033          1,657           --           2,690
     Reduction of estimated losses ...............       (90)          (358)          --            (448)
     Charge-offs .................................      (840)          (494)          --          (1,334)
     Recoveries ..................................      --             --             --            --
     Transfers ...................................      --             --             --            --
     -----------------------------------------------------------------------------------------------------
     Balance at December 31, 2002 ................   $   103        $   805        $  --         $   908
     =====================================================================================================
<FN>
     (1)  Transfer due to a settlement of  litigation  with former joint venture
          partners wherein we became the sole owner of two shopping centers.
</FN>
</TABLE>

                                       85
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Condensed  financial  information of joint ventures  reported on the equity
     method is as follows:

<TABLE>
     CONDENSED COMBINED BALANCE SHEETS - JOINT VENTURES
<CAPTION>
                                                                     December 31,
                                                                  --------------------
     (In Thousands)                                                 2002      2001
     ---------------------------------------------------------------------------------
     <S>                                                           <C>       <C>
     ASSETS
     Cash ......................................................   $ 4,071   $   725
     Projects under development ................................    44,170    10,817
     Completed projects ........................................      --       4,989
     Other assets ..............................................       574       592
     ---------------------------------------------------------------------------------
                                                                   $48,815   $17,123
     =================================================================================
     LIABILITIES AND EQUITY
     Liabilities:
        Notes payable to the Bank ..............................   $20,742   $ 6,642
        Notes payable to others ................................      --       3,407
        Other ..................................................     9,981     1,418
     Equity:
        DSL Service Company (1) ................................    16,828     3,941
        Allowance for losses recorded by DSL Service Company (2)      --        --
        Other partners (2) .....................................     1,264     1,715
     ---------------------------------------------------------------------------------
          Net equity ...........................................    18,092     5,656
     ---------------------------------------------------------------------------------
                                                                   $48,815   $17,123
     =================================================================================
<FN>
     (1)  Included in these amounts are interest-bearing  joint venture advances
          with priority  interest  payments  from joint  ventures to DSL Service
          Company.
     (2)  The aggregate other  partners'  equity of $1 million and $2 million at
          December  31, 2002 and 2001,  respectively,  represents  their  equity
          interest in the accumulated  retained earnings of the respective joint
          ventures.  Those  results  include  the net  profit  on sales  and the
          operating  results of the real estate assets,  net of depreciation and
          funding  costs.  Except  for any  secured  financing  which  has  been
          obtained,  DSL Service  Company has provided all other  financing.  As
          part of Downey's internal asset review process,  the fair value of the
          joint  venture  real estate  assets is  compared to the secured  notes
          payable to the Bank and others and DSL Service  Company's  investment.
          To the extent the fair  value of the real  estate  assets is less than
          the  aggregate  of those  amounts,  a  provision  is made to  create a
          valuation  allowance.  No valuation  allowances  were required at both
          December 31, 2002 and 2001.
</FN>
</TABLE>

                                       86
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

<TABLE>
     CONDENSED COMBINED STATEMENTS OF OPERATIONS - JOINT VENTURES
<CAPTION>
     (In Thousands)                                           2002        2001        2000
     ------------------------------------------------------------------------------------------
     <S>                                                    <C>         <C>         <C>
     Real estate sales:
         Sales ..........................................   $ 38,520    $  1,009    $ 32,237
         Cost of sales ..................................    (26,758)       (333)    (26,021)
     ------------------------------------------------------------------------------------------
          Net gains on sales ............................     11,762         676       6,216
     ------------------------------------------------------------------------------------------
     Rental operations:
         Rental income ..................................        182       2,741       3,849
         Operating expenses .............................       (239)       (363)       (901)
         Interest, depreciation and other expenses ......     (2,056)     (2,165)     (3,131)
     ------------------------------------------------------------------------------------------
          Net income (loss) on rental operations ........     (2,113)        213        (183)
     ------------------------------------------------------------------------------------------
     Net income .........................................      9,649         889       6,033
     Less other partners' share of net income ...........      4,173         153       2,809
     ------------------------------------------------------------------------------------------
     DSL Service Company's share of net income ..........      5,476         736       3,224
     Provision for losses provided by DSL Service Company       --          --        (1,505)
     ------------------------------------------------------------------------------------------
     DSL Service Company's share of net income ..........   $  5,476    $    736    $  1,719
     ==========================================================================================
</TABLE>

(7)  REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS

     The type and  amount of real  estate  acquired  in  settlement  of loans is
     summarized as follows:

<TABLE>
<CAPTION>
                                                               December 31,
                                                           --------------------
     (In Thousands)                                           2002      2001
     --------------------------------------------------------------------------
     <S>                                                    <C>       <C>
     Residential one-to-four units ......................   $ 9,681   $ 8,450
     Residential one-to-four units - subprime ...........     2,679     6,916
     --------------------------------------------------------------------------
        Total real estate acquired in settlement of loans   $12,360   $15,366
     ==========================================================================
</TABLE>

     A summary of net  operation of real estate  acquired in settlement of loans
     included in Downey's results of operations follows:

<TABLE>
<CAPTION>
     (In Thousands)                                                       2002       2001       2000
     ---------------------------------------------------------------------------------------------------
     <S>                                                                <C>        <C>        <C>
     Net gains on sales .............................................   $(2,231)   $(1,811)   $  (669)
     Net operating expense ..........................................     1,634      1,533      1,075
     Provision for estimated losses .................................       608        517        412
     ---------------------------------------------------------------------------------------------------
        Net operations of real estate acquired in settlement of loans   $    11    $   239    $   818
     ===================================================================================================
</TABLE>

                                       87
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(8)  PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                      December 31,
                                                --------------------------
     (In Thousands)                                2002         2001
     ---------------------------------------------------------------------
     <S>                                         <C>          <C>
     Land ....................................   $  25,808    $  25,282
     Building and improvements ...............      99,236       95,521
     Furniture, fixtures and equipment .......      88,602       78,444
     Construction in progress ................       1,119          662
     Other ...................................          62           62
     ---------------------------------------------------------------------
        Total premises and equipment .........     214,827      199,971
     Accumulated depreciation and amortization    (101,291)     (88,209)
     ---------------------------------------------------------------------
        Total premises and equipment, net ....   $ 113,536    $ 111,762
     =====================================================================
</TABLE>

     Downey has obligations  under long term operating  leases,  principally for
     building space and land.  Lease terms generally  cover a five-year  period,
     with  options to extend.  Rental  expense  was $3.8  million in 2002,  $2.8
     million in 2001 and $2.3 million in 2000.  The following  table  summarizes
     future minimum rental commitments under noncancelable leases.

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------
     <S>                                 <C>
     2003 ............................   $ 4,347
     2004 ............................     3,766
     2005 ............................     3,392
     2006 ............................     2,786
     2007 ............................     1,755
     Thereafter (1) ..................     2,482
     ---------------------------------------------
        Total future lease commitments   $18,528
     =============================================
<FN>
     (1)  There are no lease commitments beyond the year 2011, though options to
          renew at that time are available.
</FN>
</TABLE>

(9)  FEDERAL HOME LOAN BANK STOCK

     The Bank's  required  investment in FHLB stock,  based on December 31, 2002
     financial data, was $108 million.  The investment in FHLB stock amounted to
     $118 million and $113 million at December 31, 2002 and 2001, respectively.

                                       88
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(10) MORTGAGE SERVICING RIGHTS

     The following table  summarizes the activity in mortgage  servicing  rights
     and its  related  allowance  for the  years  indicated  and  other  related
     financial data:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                    2002            2001           2000
     ---------------------------------------------------------------------------------------------------
     <S>                                                  <C>             <C>             <C>
     Gross balance at beginning of period .............   $    65,630     $    46,214     $    34,266
     Additions ........................................        53,236          44,391          18,510
     Amortization .....................................       (14,435)         (9,813)         (5,968)
     Sales of mortgage servicing rights ...............        (1,354)         (7,826)           --
     Impairment write-down ............................       (12,493)         (7,336)           (594)
     ---------------------------------------------------------------------------------------------------
        Gross balance at end of period ................        90,584          65,630          46,214
     ---------------------------------------------------------------------------------------------------
     Allowance balance at beginning of period .........         8,735           5,483               3
     Provision for impairment .........................        36,613          10,588           6,074
     Impairment write-down ............................       (12,493)         (7,336)           (594)
     ---------------------------------------------------------------------------------------------------
        Allowance balance at end of period ............        32,855           8,735           5,483
     ---------------------------------------------------------------------------------------------------
        Total mortgage servicing rights, net ..........   $    57,729     $    56,895     $    40,731
     ===================================================================================================
     Estimated fair value (1) .........................   $    57,736     $    58,047     $    41,826
     Weighted average expected life (in months) .......            43              82              82
     Custodial account earnings rate ..................          1.61%           4.36%           6.35%
     Weighted average discount rate ...................          8.35            9.16            9.78
     ===================================================================================================
     AT PERIOD END
     Mortgage loans serviced for others:
        Total .........................................   $ 8,316,236     $ 5,805,811     $ 3,964,462
        With capitalized mortgage servicing rights (1):
           Amount .....................................     8,036,393       5,379,513       3,779,562
           Weighted average interest rate .............          6.51%           6.97%           7.56%
     ===================================================================================================
     Custodial escrow balances ........................   $    15,243     $    10,596     $     8,207
     ===================================================================================================
<FN>
     (1)  The  estimated  fair value may exceed  book  value for  certain  asset
          strata and excluded loans sold or securitized  prior to 1996 and loans
          temporarily   sub-serviced   without  capitalized  mortgage  servicing
          rights.
</FN>
</TABLE>

     Key assumptions, which vary due to changes in market interest rates and are
     used to determine  the fair value of mortgage  servicing  rights,  include:
     expected prepayment speeds, which impact the average life of the portfolio;
     the  earnings  rate on  custodial  accounts,  which  impact  the  value  of
     custodial  accounts;  and the  discount  rate used in valuing  future  cash
     flows.  The following  table  summarizes the estimated  changes in the fair
     value of  mortgage  servicing  rights  for  changes  in  those  assumptions
     individually  and in  combination  associated  with an immediate  100 basis
     point increase or decrease in market rates. Also summarized is the earnings
     impact  associated  with  provisions  for or  reductions  of the  valuation
     allowance  for  mortgage  servicing  rights.  Impairment  is  measured on a
     disaggregated basis based upon the predominant risk  characteristics of the
     underlying mortgage loans such as term and coupon. Certain stratum may have
     impairment, while other stratum may not. Therefore, changes in overall fair
     value  may  not  equal  provisions  for  or  reductions  of  the  valuation
     allowance.

                                       89
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The sensitivity  analysis in the table below is hypothetical  and should be
     used with caution. As the figures indicate,  changes in fair value based on
     a 100 basis  point  variation  in  assumptions  generally  cannot be easily
     extrapolated  because the  relationship of the change in the assumptions to
     the change in fair value may not be linear. Also, in this table, the effect
     that a change  in a  particular  assumption  may have on the fair  value is
     calculated without changing any other assumptions.  In reality,  changes in
     one  factor  may  result in changes  in  another,  which  might  magnify or
     counteract the sensitivities.

<TABLE>
<CAPTION>
                                                               Expected       Value of
                                                              Prepayment      Custodial    Discount
     (Dollars in Thousands)                                     Speeds        Accounts       Rate      Combination
     -------------------------------------------------------------------------------------------------------------
     <S>                                                       <C>           <C>          <C>          <C>
     Increase rates 100 basis points:
       Increase (decrease) in fair value (1) ...............   $ 38,696      $  2,590     $ (4,770)    $ 38,025
       Reduction of (increase in) valuation allowance ......     31,504         2,584       (4,770)      31,667

     Decrease rates 100 basis points:
       Increase (decrease) in fair value (2) ...............    (20,693)       (3,232)       4,468      (23,191)
       Reduction of (increase in) valuation allowance ......    (20,693)       (3,232)       4,346      (23,191)
     =============================================================================================================
<FN>
     (1)  The weighted-average expected life is 85 months.
     (2)  The weighted-average expected life is 26 months.
</FN>
</TABLE>

     The  components  of loan  servicing  loss  included in Downey's  results of
     operations are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                       2002        2001        2000
     ----------------------------------------------------------------------
     <S>                                <C>         <C>         <C>
     Income from servicing operations   $ 11,419    $  9,028    $  8,414
     Amortization of MSRs ...........    (14,435)     (9,813)     (5,968)
     Provision for impairment .......    (36,613)    (10,588)     (6,074)
     ----------------------------------------------------------------------
       Total loan servicing loss, net   $(39,629)   $(11,373)   $ (3,628)
     ======================================================================
</TABLE>

(11) OTHER ASSETS

     Other assets are summarized as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                                          --------------------
     (In Thousands)                                          2002      2001
     -------------------------------------------------------------------------
     <S>                                                   <C>       <C>
     Accounts receivable ...............................   $ 3,819   $ 4,908
     Accrued interest receivable:
        Loans ..........................................    42,273    48,658
        Mortgage-backed securities .....................         9       601
        Investment securities ..........................     4,612     8,174
     Prepaid expenses ..................................    12,572    10,479
     Expected rate lock commitments ....................     5,386      --
     Designated forward sale contracts .................      --       4,332
     Excess of purchase price over fair value of
        assets acquired and liabilities assumed, net (1)     3,150     3,150
     Repossessed automobiles, net ......................         6        19
     Other .............................................     4,212     5,126
     -------------------------------------------------------------------------
        Total other assets .............................   $76,039   $85,447
     =========================================================================
<FN>
     (1)  During the fourth  quarter of 2002,  Downey  adopted  SFAS 147,  which
          required Downey to cease the amortization of goodwill as of January 1,
          2002 and to  subject  this  asset to  annual  impairment  testing.  No
          impairment existed at December 31, 2002.
</FN>
</TABLE>

                                       90
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Upon the adoption of SFAS 147 on January 1, 2002,  Downey ceased amortizing
     its goodwill,  which decreased noninterest expense and increased net income
     in 2002 as compared to 2001 and 2000. The following  table shows the impact
     to net income on both an absolute  and per share basis for 2002 and the pro
     forma effects of applying SFAS 142 to years 2001 and 2000.

<TABLE>
<CAPTION>
     (In Thousands, Except Per Share Data)                                       2002         2001         2000
     --------------------------------------------------------------------------------------------------------------
     <S>                                                                   <C>           <C>           <C>
     Amortization of excess cost over fair value of net assets acquired:
        Pretax .........................................................   $      --     $       457   $      462
        After-tax ......................................................          --             264          266
     Net income:
        As reported ....................................................       112,293       120,181       99,251
        Add back after-tax goodwill amortization .......................          --             264          266
     --------------------------------------------------------------------------------------------------------------
     Pro forma .........................................................   $   112,293   $   120,455   $   99,517
     ==============================================================================================================
     Earnings per share - Basic:
        As reported ....................................................   $      3.99   $      4.26   $     3.52
        Add back after-tax goodwill amortization .......................          --            0.01         0.01
     --------------------------------------------------------------------------------------------------------------
     Pro forma .........................................................   $      3.99$         4.27   $     3.53
     ==============================================================================================================
     Earnings per share - Diluted:
        As reported ....................................................   $      3.99   $      4.25   $     3.51
        Add back after-tax goodwill amortization .......................          --            0.01         0.01
     --------------------------------------------------------------------------------------------------------------
     Pro forma .........................................................   $      3.99   $      4.26   $     3.52
     ==============================================================================================================
</TABLE>

                                       91
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(12) DEPOSITS

     Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                         -----------------------------------------------
                                                    2002                    2001
                                         -----------------------------------------------
                                           Weighted               Weighted
                                            Average                Average
     (Dollars in Thousands)                  Rate       Amount      Rate       Amount
     -----------------------------------------------------------------------------------
     <S>                                     <C>     <C>            <C>     <C>
     Transaction accounts:
        Non-interest-bearing checking .      --  %   $  388,376     --  %   $  263,165
        Interest-bearing checking (1) .      0.25       422,417     0.35       423,776
        Money market ..................      1.37       120,105     2.01       108,747
        Regular passbook ..............      1.70     3,639,798     2.46     2,131,048
     -----------------------------------------------------------------------------------
           Total transaction accounts .      1.41     4,570,696     1.92     2,926,736
     Certificates of deposit:
        Less than 2.00% ...............      1.57       919,864     1.94        99,654
        2.00-2.49 .....................      2.28       401,657     2.30       556,075
        2.50-2.99 .....................      2.79       528,557     2.74       315,125
        3.00-3.49 .....................      3.38     1,188,078     3.20       458,511
        3.50-3.99 .....................      3.89       700,250     3.84       532,634
        4.00-4.49 .....................      4.25       374,424     4.22       892,517
        4.50-4.99 .....................      4.80       473,399     4.76       555,885
        5.00 and greater ..............      5.63        81,425     5.94     2,282,429
     -----------------------------------------------------------------------------------
          Total certificates of deposit      3.19     4,667,654     4.54     5,692,830
     -----------------------------------------------------------------------------------
            Total deposits ............      2.31%   $9,238,350     3.65%   $8,619,566
     ===================================================================================
<FN>
     (1)  Included amounts swept into money market accounts.
</FN>
</TABLE>

     The  aggregate  amount  of jumbo  certificates  of  deposit  with a minimum
     denomination  of $100,000 was $1.6 billion and $2.4 billion at December 31,
     2002 and 2001, respectively.

     At December 31, 2002,  scheduled  maturities of certificates of deposit are
     as follows:

<TABLE>
<CAPTION>
                                   Weighted
     (Dollars in Thousands)      Average Rate      Amount
     -------------------------------------------------------
     <S>                           <C>          <C>
     2003 .................        2.92%        $3,534,174
     2004 .................        3.04            377,890
     2005 .................        4.18            250,080
     2006 .................        4.72            134,257
     2007 .................        4.68            371,253
     Thereafter ...........        --                 --
     -------------------------------------------------------
        Total .............        3.19%        $4,667,654
     -------------------------------------------------------
</TABLE>

     The  weighted  average  cost of deposits  averaged  2.79%,  4.88% and 5.20%
     during 2002, 2001 and 2000, respectively.

                                       92
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     At December 31, 2002 and 2001 public funds of  approximately $1 million and
     $3 million,  respectively,  are  secured by mortgage  loans with a carrying
     value of approximately $2 million and $4 million, respectively.

     Interest expense on deposits by type is summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                        2002       2001       2000
     --------------------------------------------------------------------
     <S>                                 <C>        <C>        <C>
     Interest-bearing checking (1) ...   $  1,391   $  2,057   $  3,520
     Money market ....................      1,929      2,436      2,544
     Regular passbook ................     69,113     34,553     27,841
     Certificate accounts ............    172,108    385,809    345,398
     --------------------------------------------------------------------
        Total deposit interest expense   $244,541   $424,855   $379,303
     ====================================================================
<FN>
     (1)  Included amounts swept into money market deposit accounts.
</FN>
</TABLE>

     Accrued  interest on  deposits,  which is included in accounts  payable and
     accrued liabilities,  was $1 million at December 31, 2002 and $2 million at
     December 31, 2001.

(13) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Securities sold under agreements to repurchase are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                           2002            2001        2000
     ------------------------------------------------------------------------------------------------------
     <S>                                                           <C>             <C>        <C>
     Balance at year end .......................................   $   --          $   --     $     --
     Average balance outstanding during the year ...............      7,494            --            753
     Maximum amount outstanding at any month-end during the year    182,358            --         39,250
     Weighted average interest rate during the year ............       1.86%         --   %         6.10%
     Weighted average interest rate at year end ................       --            --            --
     ======================================================================================================
</TABLE>

     The securities  collateralizing  these transactions were delivered to major
     national  brokerage  firms who arranged the  transactions.  Securities sold
     under  agreements  to  repurchase  generally  mature  within 30 days of the
     various dates of sale.

(14) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

     FHLB advances are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                           2002          2001          2000
     -------------------------------------------------------------------------------------------------------
     <S>                                                           <C>           <C>           <C>
     Balance at year end .......................................   $1,624,084    $1,522,705    $1,978,348
     Average balance outstanding during the year ...............    1,403,268     1,216,495     2,117,787
     Maximum amount outstanding at any month-end during the year    1,687,431     1,763,677     2,460,276
     Weighted average interest rate during the year ............         4.33%         5.40%         6.15%
     Weighted average interest rate at year end ................         3.88          3.73          6.26
     As of year end secured by:
        Loans receivable .......................................   $1,860,292    $1,791,068    $2,222,863
     =======================================================================================================
</TABLE>

     In addition to the collateral  securing  existing  advances,  Downey had an
     additional  $2.4 billion in loans  available at the FHLB as collateral  for
     any future advances as of December 31, 2002.

                                       93
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     FHLB advances have the following maturities at December 31, 2002:

<TABLE>
<CAPTION>
     (In Thousands)
     -------------------------------------
     <S>                      <C>
     2003 ..............      $  413,934
     2004 ..............         194,100
     2005 ..............         415,750
     2006 ..............          76,300
     2007 ..............          65,000
     Thereafter ........         459,000
     -------------------------------------
        Total ..........      $1,624,084
     =====================================
</TABLE>

     Other borrowings are summarized as follows:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                   ---------------------------
     (Dollars in Thousands)                                                             2002          2001
     ---------------------------------------------------------------------------------------------------------
     <S>                                                                           <C>            <C>
     Long-term notes payable to banks, secured by real estate and mortgage loans
        with a carrying value of $239 at December 31, 2001, bearing an interest
        rate of 7.88% ..........................................................   $      --      $      7
     =========================================================================================================
</TABLE>

                                       94
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(15) INCOME TAXES

     Current income taxes payable were $9 million and $5 million at December 31,
     2002 and 2001, respectively.

     Deferred tax liabilities  (assets) are comprised of the following temporary
     differences  between the financial  statement  carrying amounts and the tax
     basis of assets:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                 -------------------------
     (In Thousands)                                                  2002         2001
     -------------------------------------------------------------------------------------
     <S>                                                          <C>          <C>
     Deferred tax liabilities:
         Mortgage servicing rights, net of allowances .........   $  25,595    $  25,193
         Deferred loan costs ..................................      25,546         --
         Tax reserves in excess of base year ..................      20,067       22,115
         FHLB stock dividends .................................      15,739       12,900
         Deferred loan fees ...................................       9,102        7,720
         Depreciation on premises and equipment ...............       2,775        2,290
         Equity in joint ventures .............................       2,613        2,424
         Unrealized gains on investment securities ............         880          357
         Fair value adjustment on loans held for sale .........        --            533
     -------------------------------------------------------------------------------------
            Total deferred tax liabilities ....................     102,317       73,532
     -------------------------------------------------------------------------------------
     Deferred tax assets:
         Loan valuation allowances, net of bad debt charge-offs     (16,136)     (18,396)
         California franchise tax .............................      (6,777)      (7,173)
         Deferred compensation ................................      (2,073)      (2,126)
         Derivative instrument adjustment .....................      (1,924)        (533)
         Fair value adjustment on loans held for sale .........      (1,606)        --
         Real estate and joint venture valuation allowances ...        (332)      (1,100)
         Other deferred income items ..........................      (3,389)      (2,779)
     -------------------------------------------------------------------------------------
            Total deferred tax assets .........................     (32,237)     (32,107)
     Deferred tax assets valuation allowance ..................        --           --
     -------------------------------------------------------------------------------------
     Net deferred tax liability ...............................   $  70,080    $  41,425
     =====================================================================================
</TABLE>

     Deferred loan costs include  refund claims of $23 million filed by the Bank
     related to loan origination costs that were originally capitalized in prior
     years, and would be deductible under the claims.  After initially  allowing
     the  refunds,  the  Internal  Revenue  Service  has  stated  its  intent to
     challenge the deductibility of these costs. The Bank has not recorded these
     amounts as a reduction to income taxes, and has provided  deferred taxes to
     cover the potential disallowance of the claims.

                                       95
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Income taxes are summarized as follows:
<TABLE>
<CAPTION>
     (In Thousands)                         2002      2001      2000
     ------------------------------------------------------------------
     <S>                                  <C>       <C>       <C>
     Federal:
          Current .....................   $33,290   $59,288   $48,714
          Deferred ....................    27,785     6,071     5,567
     ------------------------------------------------------------------
             Total federal income taxes   $61,075   $65,359   $54,281
     ==================================================================
     State:
          Current .....................   $19,380   $20,493   $16,214
          Deferred ....................     1,738     2,317     2,563
     ------------------------------------------------------------------
             Total state income taxes .   $21,118   $22,810   $18,777
     ==================================================================
     Total:
          Current .....................   $52,670   $79,781   $64,928
          Deferred ....................    29,523     8,388     8,130
     ------------------------------------------------------------------
             Total income taxes .......   $82,193   $88,169   $73,058
     ==================================================================
</TABLE>

     A  reconciliation  of  income  taxes  to  the  expected  statutory  federal
     corporate income taxes follows:

<TABLE>
<CAPTION>
                                                              2002                 2001                  2000
                                                       ----------------------------------------------------------------
     (Dollars in Thousands)                             Amount    Percent    Amount    Percent     Amount    Percent
     ------------------------------------------------------------------------------------------------------------------
     <S>                                               <C>         <C>      <C>         <C>       <C>         <C>
     Expected statutory income taxes ...............   $68,070     35.0%    $72,922     35.0%     $60,308     35.0%
     California franchise tax, net of federal income
        tax benefit ................................    13,727      7.1      14,827      7.1       12,206      7.1
     Increase resulting from other items ...........       396      0.2         420      0.2          544      0.3
     ------------------------------------------------------------------------------------------------------------------
     Income taxes ..................................   $82,193     42.3%    $88,169     42.3%     $73,058     42.4%
     ==================================================================================================================
</TABLE>

     Downey made income and franchise tax payments, net of refunds, amounting to
     $73.5  million,  $78.0  million and $73.7  million in 2002,  2001 and 2000,
     respectively.

     Downey and its wholly owned subsidiaries file a consolidated federal income
     tax return and various state income and franchise tax returns on a calendar
     year basis. The Internal Revenue Service and state taxing  authorities have
     examined  Downey's tax returns for all tax years through  1997.  Management
     believes it has adequately  provided for potential  exposure to issues that
     may be raised by tax auditors in the years subsequent to 1997, which remain
     open to review.

(16) CAPITAL SECURITIES

     On July 23, 1999,  Downey,  through Downey  Financial  Capital Trust I (the
     "Trust"),  issued $120 million in 10.00%  capital  securities.  The capital
     securities,  which  were  sold  in  a  public  underwritten  offering,  pay
     quarterly  cumulative cash distributions at an annual rate of 10.00% of the
     liquidation  value of $25 per share and are recorded as interest expense by
     Downey. The capital securities  represent undivided beneficial interests in
     the Trust,  which was  established by Downey for the purpose of issuing the
     capital  securities.  Downey owns all of the issued and outstanding  common
     securities  of the Trust.  Proceeds from the offering and from the issuance
     of  common   securities  were  invested  by  the  Trust  in  10.00%  Junior
     Subordinated  Deferrable  Interest Debentures due September 15, 2029 issued
     by  Downey  (the  "Junior  Subordinated  Debentures"),  with  an  aggregate
     principal amount of $124 million. The sole asset of the Trust is the Junior
     Subordinated  Debentures.  The obligations of the Trust with respect to the
     securities are fully and unconditionally  guaranteed by Downey. The payment
     of distributions on the capital securities may be deferred if Downey defers
     payments  of interest on the junior  subordinated  debentures.  Downey will
     have the right, on one or more occasions,  to defer payments of interest on
     the  junior  subordinated  debentures  for up to 20  consecutive  quarterly
     periods. During the time Downey defers interest payments, interest on the

                                       96
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     junior subordinated debentures will continue to accrue and distributions on
     the  capital  securities  will  continue  to  accumulate  and the  deferred
     interest and deferred  distributions  will themselves accrue interest at an
     annual rate of 10.00%,  compounded  quarterly,  to the extent  permitted by
     applicable  law.  Downey  may  redeem,  in  whole or in  part,  the  junior
     subordinated debentures before their maturity at a redemption price of 100%
     of their principal amount plus accrued and unpaid interest on or after July
     23, 2004.

     Downey  invested  $108 million of the $115 million of net proceeds from the
     sale of the Junior Subordinated  Debentures (net of underwriting  discounts
     and commissions and other offering  expenses) as additional common stock of
     the Bank thereby  increasing the Bank's  regulatory core / tangible capital
     by that amount.  The balance of the net proceeds have been used for general
     corporate purposes.

(17) STOCKHOLDERS' EQUITY

     REGULATORY CAPITAL

     Downey is not subject to any regulatory capital requirements.  However, the
     Bank is subject to regulation by the Office of Thrift  Supervision  ("OTS")
     which  has  adopted  regulations  ("Capital  Regulations")  that  contain a
     capital standard for savings  institutions.  The Bank is in compliance with
     the Capital Regulations at December 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                       Under Prompt Corrective Action Provisions
                                                                  ------------------------------------------------------
                                                                     To Be Adequately               To Be Well
                                                 Actual                Capitalized                  Capitalized
                                          ----------------------  -----------------------    ---------------------------
     (Dollars in Thousands)                 Amount     Ratio        Amount      Ratio          Amount         Ratio
     -------------------------------------------------------------------------------------------------------------------
     <S>                                   <C>        <C>           <C>         <C>           <C>            <C>
     2002
         Risk-based capital
           (to risk-weighted assets) ..    $859,445   14.08%        $488,318    8.00%         $610,398       10.00%
         Core capital
           (to adjusted assets) .......     824,965    6.92          357,478    3.00           595,797        5.00
         Tangible capital
           (to adjusted assets) .......     824,965    6.92          178,739    1.50              --          --     (1)
         Tier I capital
           (to risk-weighted assets) ..     824,965   13.52             --      --   (1)       366,239        6.00
     ===================================================================================================================
     2001
         Risk-based capital
           (to risk-weighted assets) ..    $819,875   14.53%        $451,295    8.00%         $564,119       10.00%
         Core capital
           (to adjusted assets) .......     784,267    7.10          331,544    3.00           552,574        5.00
         Tangible capital
           (to adjusted assets) .......     784,267    7.10          165,772    1.50              --          --     (1)
         Tier I capital
           (to risk-weighted assets) ..     784,267   13.90             --      --   (1)       338,471        6.00
     ===================================================================================================================
<FN>
     (1) Ratio is not specified under capital regulations.
</FN>
</TABLE>

     CAPITAL DISTRIBUTIONS

     The OTS rules impose certain  limitations  regarding stock  repurchases and
     redemptions,  cash-out mergers and any other distributions  charged against
     an institution's capital accounts.  The payment of dividends by the Bank is
     subject  to OTS  regulations.  Inasmuch  as the Bank is owned by a  holding
     company,  the Bank is  required  to  provide  the OTS with a notice  before
     payment of any  dividend.  Prior OTS approval is required to the extent the
     Bank  would not be  considered  adequately  capitalized  under  the  prompt
     corrective action  regulations of the OTS following the distribution or the
     amount of the dividend exceeds the Bank's retained net income for that year
     to date plus retained net income for the preceding two years.

                                       97
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     As of December  31,  2002,  the Bank had the capacity to declare a dividend
     totaling $237 million without obtaining prior OTS approval.

     TREASURY STOCK

     On July 24,  2002,  the Board of  Directors  of Downey  authorized  a share
     repurchase  program of up to $50 million of Downey's  common stock. To fund
     this program, the Bank paid a special $50 million dividend during the third
     quarter to the  holding  company.  The shares  are being  repurchased  from
     time-to-time in open market transactions.  The timing,  volume and price of
     purchases  will be made at the  discretion  of  Downey,  and  will  also be
     contingent upon Downey's  overall  financial  condition,  as well as market
     conditions  in general.  Since July 25,  2002,  306,300  shares of Downey's
     common  stock  have been  repurchased  at an  aggregate  cost of $39.73 per
     share.  No shares  were  reissued  during  the year,  leaving  $38  million
     available for future purchases.

     EMPLOYEE STOCK OPTION PLANS

     During  1994,  the Bank  adopted and the  stockholders  approved the Downey
     Savings and Loan  Association  1994 Long Term  Incentive Plan (the "LTIP").
     The LTIP provides for the granting of stock appreciation rights, restricted
     stock,   performance  awards  and  other  awards.  The  LTIP  specifies  an
     authorization  of 434,110 shares  (adjusted for stock dividends and splits)
     of the Bank's common stock available for issuance under the LTIP. Effective
     January 23, 1995, Downey Financial Corp. and the Bank executed an amendment
     to the LTIP by which Downey  Financial Corp.  adopted and ratified the LTIP
     such that shares of Downey Financial Corp. shall be issued upon exercise of
     options  or  payment of other  awards,  for which  payment is to be made in
     stock,  in lieu of the Bank's common stock.  At December 31, 2002, the Bank
     had  306,300  shares of  treasury  stock  that may be used to  satisfy  the
     exercise  of options or for payment of other  awards.  No other stock based
     plan exists.

     No shares were granted under the LTIP since 1998.

     Options  outstanding  under  the  LTIP at  December  31,  2002 and 2001 are
     summarized as follows:

<TABLE>
<CAPTION>
                                  Outstanding Options
                              ---------------------------
                                 Number        Average
                                   of          Option
                                 Shares         Price
     ----------------------------------------------------
     <S>                        <C>        <C>
     December 31, 1999 .....    200,750    $   20.66
     Options granted .......       --        --
     Options exercised .....    (57,332)       14.91
     Options canceled ......        --        --
     ----------------------------------------------------
     December 31, 2000 .....    143,418        22.96
     Options granted .......       --        --
     Options exercised .....     (7,307)       22.01
     Options canceled ......    (15,922)       25.44
     ----------------------------------------------------
     December 31, 2001 .....    120,189        22.69
     Options granted .......       --        --
     Options exercised .....    (21,974)       17.83
     Options canceled ......     (5,740)       25.44
     ----------------------------------------------------
     December 31, 2002 .....     92,475    $   23.67
     ====================================================
</TABLE>

     Under the LTIP,  options are exercisable over vesting periods  specified in
     each grant and, unless exercised, the options terminate between five or ten
     years from the date of the grant. Further, under the LTIP, the option price
     shall at least equal or exceed the fair market  value of such shares on the
     date the options are granted.

                                       98
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     At December  31,  2002,  options for 92,475  shares were  outstanding  at a
     weighted average remaining  contractual life of five years, of which 76,583
     options were  exercisable  at a weighted  average option price per share of
     $23.31 and 131,851  shares were available for future grants under the LTIP.
     At December 31, 2001 and 2000, options of 82,667 and 71,214,  respectively,
     were exercisable at a weighted average option price per share of $21.44 and
     $20.45, respectively.

     Downey measures its employee  stock-based  compensation  arrangements under
     the provisions of APB 25.  Accordingly,  no  compensation  expense has been
     recognized for the stock option plan. Had compensation expense for Downey's
     stock option plan been  determined  based on the fair value estimated using
     the Black-Scholes model at the grant date for previous awards, Downey's net
     income  and  income  per share  would  have been  reduced  to the pro forma
     amounts indicated below:

<TABLE>
<CAPTION>
     (In Thousands, Except Per Share Data)                    2002           2001          2000
     -----------------------------------------------------------------------------------------------
     <S>                                                 <C>            <C>            <C>
     Net income:
          As reported ................................   $   112,293    $   120,181    $   99,251
          Stock based compensation expense, net of tax           (13)           (36)          (79)
     -----------------------------------------------------------------------------------------------
          Pro forma ..................................       112,280        120,145        99,172
     Earnings per share - Basic:
          As reported ................................   $      3.99    $      4.26    $     3.52
          Pro forma ..................................          3.99           4.26          3.52
     Earnings per share - Diluted:
          As reported ................................          3.99           4.25          3.51
          Pro forma ..................................          3.99           4.25          3.51
     ===============================================================================================
</TABLE>

(18) EARNINGS PER SHARE

     Earnings per share of common stock is based on the weighted  average number
     of common and common equivalent shares outstanding, excluding common shares
     in treasury.  A  reconciliation  of the components used to derive basic and
     diluted earnings per share for 2002, 2001 and 2000 follows:

<TABLE>
<CAPTION>
                                                          Net      Weighted Average     Per Share
     (Dollars in Thousands, Except Per Share Data)      Income    Shares Outstanding     Amount
     ---------------------------------------------------------------------------------------------
     <S>                                             <C>              <C>               <C>
     2002:
        Basic earnings per share .......             $  112,293       28,128,013        $   3.99
        Effect of dilutive stock options                   --             45,646              --
     ---------------------------------------------------------------------------------------------
            Diluted earnings per share .             $  112,293       28,173,659        $   3.99
     =============================================================================================
     2001:
        Basic earnings per share .......             $  120,181       28,211,587        $   4.26
        Effect of dilutive stock options                   --             59,516            0.01
     ---------------------------------------------------------------------------------------------
            Diluted earnings per share .             $  120,181       28,271,103        $   4.25
     =============================================================================================
     2000:
        Basic earnings per share .......             $   99,251       28,177,152        $   3.52
        Effect of dilutive stock options                   --             48,399            0.01
     ---------------------------------------------------------------------------------------------
            Diluted earnings per share .             $   99,251       28,225,551        $   3.51
     =============================================================================================
</TABLE>

     There were no options  excluded from the  computation of earnings per share
     due to anti-dilution.

                                       99
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(19) EMPLOYEE BENEFIT PLANS

     RETIREMENT AND SAVINGS PLAN

     Downey  amended its profit sharing plan (the "Plan") and restated it in its
     entirety  as of October 1, 1997.  The Plan  continues  to qualify as both a
     profit  sharing  plan and a qualified  cash or deferred  arrangement  under
     Internal  Revenue Code  Sections 401 (a) and 401 (k).  Under the Plan,  all
     employees of Downey are eligible to participate  provided they are 18 years
     of age and have completed one year of service.  Participants may contribute
     up to 15% of their  compensation  each  year,  subject to  limitations  and
     provisions in the Plan. Downey makes a matching  contribution  equal to 50%
     of the  participant's  pretax  contributions  which do not exceed 6% of the
     participant's annual compensation.

     Prior to  January  1,  2002,  all  employees  of Downey  were  eligible  to
     participate  provided  they were 21 years of age and had completed one year
     of service.  Participants  could contribute up to 15% of their compensation
     each year, subject to limitations and provisions in the Plan. Downey made a
     matching   contribution   equal   to  25%  of  the   participant's   pretax
     contributions  which  did  not  exceed  4%  of  the  participant's   annual
     compensation.  In  addition,  Downey  made an annual  discretionary  profit
     sharing  contribution to the Plan based on Downey's net income.  Allocation
     of the  discretionary  contribution  was based on points  credited  to each
     eligible  participant  and  salary.  Points  were  credited  based  on  the
     employee's age and vested years of service.

     Downey's  contributions to the Plan totaled $1.6 million for 2002, compared
     to $2.4 million in 2001 and $2.0 million in 2000.

     Downey has a Deferred  Compensation  Plan for key management  employees and
     directors.  The Deferred Compensation Plan is considered to be an essential
     element in a comprehensive competitive benefits package designed to attract
     and  retain   individuals   who   contribute  to  the  success  of  Downey.
     Participants  are  eligible  to  defer  compensation  on a  pre-tax  basis,
     including  director  fees,  and  earn a  competitive  interest  rate on the
     amounts  deferred.  As of December 31, 2002,  93  management  employees and
     eight directors are eligible to participate in the program. During 2002, 16
     management  employees  and  one  director  elected  to  defer  compensation
     pursuant to the plan. Downey's expense related to the Deferred Compensation
     Plan has been less than $0.1 million each year since inception. At December
     31, 2002, the associated liability was $2.1 million.

     GROUP BENEFIT PLAN

     Downey provides  certain health and welfare  benefits for active  employees
     under a cafeteria  plan (the  "Benefit  Plan") as defined by section 125 of
     the  Internal  Revenue  Code.  Under  the  Benefit  Plan,   employees  make
     appropriate  selections  as to the  type  of  benefits  and the  amount  of
     coverage desired. The benefits are provided through insurance companies and
     other health  organizations  and are funded by  contributions  from Downey,
     employees and retirees and include deductibles, co-insurance provisions and
     other  limitations.  Downey's  expense for health and welfare  benefits was
     $5.8  million,  $4.3  million  and $3.9  million  in 2002,  2001 and  2000,
     respectively.

                                      100
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(20) COMMITMENTS, CONTINGENCIES AND HEDGING ACTIVITIES (RISK MANAGEMENT)

     DERIVATIVES

     Downey offers  short-term  interest rate lock  commitments  to help attract
     potential  home loan  borrowers.  The  commitments  guarantee  a  specified
     interest  rate for a loan if  underwriting  standards  are met,  but do not
     obligate  the  potential  borrower.   Accordingly,   a  certain  number  of
     commitments   never  become  loans  and  merely  expire.   The  residential
     one-to-four unit rate lock commitments  Downey ultimately expects to result
     in loans and sell in the  secondary  market  are  treated  as  derivatives.
     Consequently,  as  derivatives,  the  hedging  of the  expected  rate  lock
     commitments  do not qualify  for hedge  accounting.  Associated  fair value
     adjustments  to the notional  amount of the expected rate lock  commitments
     are recorded in current earnings under net gains (losses) on sales of loans
     and  mortgage-backed  securities  with an  offset to the  balance  sheet in
     either other  assets,  or accounts  payable and accrued  liabilities.  Fair
     values for the notional amount of expected rate lock  commitments are based
     on observable  market  prices  acquired  from third  parties.  The carrying
     amount  of loans  held for sale  includes  a basis  adjustment  to the loan
     balance at funding resulting from the change in fair value of the rate lock
     derivative from the date of commitment to the date of funding.  At December
     31, 2002,  Downey had a notional  amount of expected rate lock  commitments
     identified  to sell as part of its secondary  marketing  activities of $615
     million,  with an estimated fair value gain of $12.3 million, of which $6.9
     million was associated with mortgage servicing rights not recognized in the
     financial statements until the expected loans are sold.

     HEDGING ACTIVITIES

     As  part of  secondary  marketing  activities,  Downey  typically  utilizes
     short-term forward sale and purchase contracts--derivatives--that mature in
     less than one year to offset the impact of changes in market interest rates
     on the value of residential one-to-four unit expected rate lock commitments
     and loans held for sale.  Downey does not generally  enter into  derivative
     transactions for purely speculative purposes. Contracts designated to loans
     held for sale are accounted for as cash flow hedges because these contracts
     have a high  correlation  to the price  movement of the loans being  hedged
     (within a range of 80% - 125%).  The  measurement  approach for determining
     the ineffective aspects of the hedge is established at the inception of the
     hedge.  Changes  in fair  value of the  notional  amount  of  forward  sale
     contracts not designated to loans held for sale and the  ineffectiveness of
     hedge  transactions  that are not perfectly  correlated are recorded in net
     gains (losses) on sales of loans and mortgage-backed securities. Changes in
     fair value of the notional  amount of forward sale contracts  designated as
     cash  flow   hedges  for  loans  held  for  sale  are   recorded  in  other
     comprehensive income, net of tax, provided cash flow hedge requirements are
     met. The offset to these  changes in fair value of the  notional  amount of
     forward sale  contracts  are recorded in the balance  sheet as either other
     assets, or accounts payable and accrued  liabilities.  The amounts recorded
     in accumulated other comprehensive  income will be recognized in the income
     statement when the hedged forecasted  transactions settle. Downey estimates
     that all of the related  unrealized  gains or losses in  accumulated  other
     comprehensive  income will be  reclassified  into earnings  within the next
     three months. Fair values for the notional amount of forward sale contracts
     are based on observable  market  prices  acquired  from third  parties.  At
     December 31, 2002, the notional  amount of forward sale contracts  amounted
     to $1.2 billion,  with an estimated  fair value loss of $12.5  million,  of
     which $624 million were designated as cash flow hedges. The notional amount
     of forward purchase  contracts  amounted to $50 million,  with an estimated
     fair value gain of $0.6  million  that  partially  offsets  the loss on our
     forward sale contracts not designated to loans held for sale.

     Downey  has  not   discontinued  any  designated   derivative   instruments
     associated  with loans held for sale due to a change in the  probability of
     settling a forecasted transaction.

                                      101
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The  following  table shows the impact from  non-qualifying  hedges and the
     ineffectiveness of cash flow hedges on net gains (losses) on sales of loans
     and mortgage-backed securities (i.e., SFAS 133 effect as adopted on January
     1, 2001), as well as the impact to other  comprehensive  income (loss) from
     qualifying cash flow  transactions for the years  indicated.  Also shown is
     the notional amount of expected rate lock commitment  derivatives for loans
     originated for sale, loans held for sale and the notional amounts for their
     associated hedging derivatives (i.e., forward sale contracts).

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     ---------------------------
     (In Thousands)                                                       2002         2001
     -------------------------------------------------------------------------------------------
     <S>                                                               <C>          <C>
     Net gains (losses) on non-qualifying hedge transactions .......   $   6,098    $  (5,964)
     Net losses on qualifying cash flow hedge transactions:
        Unrealized hedge ineffectiveness ...........................        --           (467)
        Less reclassification of realized hedge ineffectiveness ....        --            467
     -------------------------------------------------------------------------------------------
           Total net gains (losses) recognized in sales of loans and
             mortgage-backed securities (SFAS 133 effect) ..........       6,098       (5,964)
     Other comprehensive loss ......................................      (1,895)        (727)
     ===========================================================================================
     NOTIONAL AMOUNT AT PERIOD END
     Non-qualifying hedge transactions:
        Expected rate lock commitments .............................   $ 614,592    $ 269,315
        Associated forward sale contracts ..........................     624,062      278,319
        Associated forward purchase contracts ......................      50,000         --
     Qualifying cash flow hedge transactions:
        Loans held for sale, at lower of cost or fair value ........     652,052      499,024
        Associated forward sale contracts ..........................     623,975      508,706
     ===========================================================================================
</TABLE>

     These  forward  contracts  expose  Downey  to  credit  risk in the event of
     nonperformance   by  the  other   parties--primarily   government-sponsored
     enterprises  such  as  Federal  National  Mortgage   Association--to   such
     agreements.  This  risk  consists  primarily  of the  termination  value of
     agreements where Downey is in an unfavorable position.  Downey controls the
     credit risk  associated  with its other  parties to the various  derivative
     agreements   through   credit  review,   exposure   limits  and  monitoring
     procedures. Downey does not anticipate nonperformance by the other parties.

     FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

     Downey utilizes  financial  instruments with off-balance  sheet risk in the
     normal course of business to meet the financing  needs of its customers and
     to reduce  its own  exposure  to  fluctuations  in  interest  rates.  These
     financial  instruments  include commitments to originate fixed and variable
     rate  mortgage   loans,   commitments   to  sell  or  purchase   loans  and
     mortgage-backed securities, letters of credit, lines of credit and loans in
     process.  The contract or notional amounts of those instruments reflect the
     extent  of  involvement  Downey  has in  particular  classes  of  financial
     instruments.

     Downey uses the same credit  policies in making  commitments  to  originate
     loans,  lines of credit  and  letters  of credit as it does for  on-balance
     sheet instruments.  For commitments to originate loans held for investment,
     the contract amounts represent exposure to loss from market fluctuations as
     well as credit loss. In regard to these  commitments,  adverse changes from
     market  fluctuations  are generally not hedged.  Downey controls the credit
     risk of its  commitments  to originate  loans held for  investment  through
     credit approvals, limits and monitoring procedures.

                                      102
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     The following is a summary of commitments and contingent  liabilities  with
     off-balance sheet risk:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                 ----------------------
     (In Thousands)                                                 2002        2001
     ----------------------------------------------------------------------------------
     <S>                                                          <C>        <C>
     Commitments to originate loans held for investment:
         Adjustable ...........................................   $249,121   $322,209
         Fixed ................................................        716       --
     Undisbursed loan funds and unused lines of credit ........    189,283    137,151
     Standby letters of credit and other contingent liabilities      2,662      2,640
     ==================================================================================
</TABLE>

     Commitments  to  originate  fixed  and  variable  rate  mortgage  loans are
     agreements  to lend to a customer as long as there is no  violation  of any
     condition  established in the commitment.  Commitments generally have fixed
     expiration dates or other termination  clauses and may require payment of a
     fee. Since some of the commitments may expire without being drawn upon, the
     total  commitment   amounts  do  not  necessarily   represent  future  cash
     requirements.  The credit  risk  involved  in issuing  lines and letters of
     credit  requires the same  creditworthiness  evaluation as that involved in
     extending loan  facilities to customers.  Downey  evaluates each customer's
     creditworthiness on a case-by-case basis. Undisbursed loan funds and unused
     lines  of  credit  include  home  equity  lines of  credit  and  funds  not
     disbursed,  but committed to  construction  and  commercial  lending by the
     Bank.

     Standby letters of credit are conditional commitments issued by the Bank to
     guarantee the performance of a customer to a third party.

     Downey receives  collateral to support  commitments for which collateral is
     deemed  necessary.  The most significant  categories of collateral  include
     real  estate  properties  underlying  mortgage  loans,  liens  on  personal
     property and cash on deposit with Downey.

     In connection with its interest rate risk management, Downey may enter into
     interest rate exchange  agreements ("swap contracts") with certain national
     investment  banking  firms  under  terms  that  provide  mutual  payment of
     interest  on the  outstanding  notional  amount of the swap.  The effect of
     these swaps serve to reduce Downey's  interest rate risk between  repricing
     assets and  liabilities.  At December  31,  2002,  no swap  contracts  were
     outstanding.

     LITIGATION

     Downey  has been  named as a  defendant  in legal  actions  arising  in the
     ordinary  course of business,  none of which, in the opinion of management,
     is material.

(21) FAIR VALUE OF FINANCIAL INSTRUMENTS

     Fair  value  estimates  are made at a  specific  point in time  based  upon
     relevant  market  information  and other  information  about the  financial
     instrument. The estimates do not necessarily reflect the price Downey might
     receive if it were to sell at one time its entire  holding of a  particular
     financial  instrument.  Because no active  market  exists for a significant
     portion of Downey's financial  instruments,  fair value estimates are based
     upon the following methods and assumptions, some of which are subjective in
     nature. Changes in assumptions could significantly affect the estimates.

     CASH, FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS

     The  carrying  amounts  reported  in the  balance  sheet  for  these  items
     approximate fair value.

     INVESTMENT   SECURITIES   INCLUDING  U.S.  TREASURIES  AND  MORTGAGE-BACKED
     SECURITIES

     Fair value is based upon bid prices published in financial  newspapers,  or
     bid quotations received from securities dealers or readily available market
     quote systems.

                                      103
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     LOANS RECEIVABLE

     For residential  mortgage loans,  fair value is estimated based upon market
     prices obtained from readily available market quote systems.  The remaining
     portfolio was  segregated  into those loans with variable rates of interest
     and those with fixed rates of interest.  For  non-residential  loans,  fair
     values  are  based on  discounting  future  contractual  cash  flows  using
     discount rates offered for such loans with similar remaining maturities and
     credit  risk.  The  amounts so  determined  for each  category  of loan are
     reduced by the  associated  allowance  for loan losses which  thereby takes
     into consideration changes in credit risk.

     INTEREST-BEARING ADVANCES TO JOINT VENTURES

     The carrying amounts approximate fair value as the interest earned is based
     upon a variable rate.

     FEDERAL HOME LOAN BANK STOCK

     The carrying amounts approximate fair value.

     MORTGAGE SERVICING RIGHTS

     The fair value of MSRs related to loans  serviced for others is  determined
     by computing the present  value of the expected net  servicing  income from
     the portfolio.

     DERIVATIVE ASSETS AND LIABILITIES

     Fair values for expected  rate lock  commitments  and loan forward sale and
     purchase  contracts  are based on observable  market  prices  acquired from
     third parties.

     DEPOSITS

     The fair value of deposits with no stated maturity such as regular passbook
     accounts,  money market  accounts and  checking  accounts,  is the carrying
     amount  reported in the balance  sheet.  The fair value of deposits  with a
     stated  maturity such as  certificates  of deposit is based on  discounting
     future  contractual  cash flows by discount rates offered for such deposits
     with similar remaining maturities.

     BORROWINGS

     For short-term borrowings, fair value approximates carrying value. The fair
     value  of   long-term   borrowings   is  based  on  their   interest   rate
     characteristics.  For variable  rate  borrowings,  fair values  approximate
     carrying  values.  For  fixed  rate  borrowings,  fair  value  is  based on
     discounting  future  contractual  cash flows by discount rates paid on such
     borrowings with similar remaining maturities.

     CAPITAL SECURITIES

     Fair value is based upon the closing  stock price  published  in  financial
     information services or newspapers.

     OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

     Outstanding  commitments to originate loans and mortgage-backed  securities
     held for investment,  unused lines of credit, standby letters of credit and
     other  contingent  liabilities are essentially  carried at zero with a fair
     value of approximately $7 million. See Note 20 on page 101, for information
     concerning the notional amount of such financial instruments.

                                      104
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     Based on the above methods and  assumptions,  the following  table presents
     the estimated fair value of Downey's financial instruments:

<TABLE>
<CAPTION>
                                                             December 31, 2002            December 31, 2001
                                                        ---------------------------------------------------------
                                                           Carrying      Estimated      Carrying      Estimated
     (In Thousands)                                       Amount (1)    Fair Value     Amount (1)    Fair Value
     ------------------------------------------------------------------------------------------------------------
     <S>                                                <C>           <C>           <C>           <C>
     ASSETS:
     Cash ...........................................   $   123,524   $   123,524   $   106,079   $   106,079
     Federal funds ..................................         2,555         2,555        37,001        37,001
     U.S. Government and agency obligations and other
         investment securities available for sale ...       457,797       457,797       402,355       402,355
     Municipal securities held to maturity ..........         6,216         6,202         6,388         6,373
     Loans held for sale (2) ........................       652,052       668,336       499,024       506,989
     Mortgage-backed securities available for sale ..         2,253         2,253       118,981       118,981
     Loans receivable held for investment:
         Loans secured by real estate:
           Residential:
             Adjustable .............................     9,888,816    10,040,990     8,913,248     9,113,797
             Fixed ..................................       223,625       227,344       353,107       359,627
           Other ....................................       135,835       143,978       160,557       171,726
         Non-mortgage loans:
           Commercial ...............................         7,063         7,780        12,951        13,547
           Consumer .................................        67,298        68,882        74,545        76,313
     Interest-bearing advances to joint ventures ....        17,734        17,734         3,186         3,186
     Federal Home Loan Bank stock ...................       117,563       117,563       113,139       113,139
     Expected rate lock commitments (3) .............         5,386        17,423          --            --
     Designated forward sale contracts ..............          --            --           4,332         4,332
     MSRs and loan servicing portfolio (4) ..........        57,729        58,168        56,895        58,880

     LIABILITIES:
     Deposits:
         Transaction accounts .......................     4,570,696     4,570,696     2,926,736     2,926,736
         Certificates of deposit ....................     4,667,654     4,705,950     5,692,830     5,700,465
     Expected rate lock commitments (3) .............          --            --             600        (1,888)
     Undesignated loan forward sale and purchase
         contracts, net .............................         4,173         4,173           630           630
     Designated forward sale contracts ..............         7,711         7,711          --            --
     Borrowings .....................................     1,624,084     1,681,488     1,522,712     1,483,749
     Capital securities .............................       120,000       128,640       120,000       123,840
     ============================================================================================================
<FN>
     (1)  The carrying amount of loans is stated net of undisbursed  loan funds,
          unearned fees and discounts and allowances for losses.
     (2)  Included  capitalized  basis adjustment  reflecting the change in fair
          value of the rate lock  derivative  from the date of commitment to the
          date of funding.
     (3)  The estimated fair value included  mortgage  servicing rights totaling
          $6.9  million at December  31, 2002 and $3.1  million at December  31,
          2001  not to be  recognized  in the  financial  statements  until  the
          expected loans are sold.
     (4)  The estimated fair value included  mortgage  servicing rights acquired
          prior to January 1, 1996 when Downey began capitalizing the asset.
</FN>
</TABLE>

                                      105
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(22) BUSINESS SEGMENT REPORTING

     Downey  views  its  business  as  consisting  of  two  reportable  business
     segments--banking  and real estate investment.  The accounting  policies of
     the  segments  are the  same as  those  described  in  Note 1,  Summary  of
     Significant  Accounting  Policies on page 72. Downey evaluates  performance
     based  on the net  income  generated  by  each  segment.  Internal  expense
     allocations  between  segments  are  independently  negotiated  and,  where
     possible,  service  and  price  is  measured  against  comparable  services
     available in the external marketplace.

     The following describes the two business segments.

     BANKING

     The principal business activities of this segment are attracting funds from
     the general public and institutions and originating and investing in loans,
     primarily   residential   real  estate  mortgage   loans,   mortgage-backed
     securities and investment securities.

     This segment's  primary  sources of revenue are interest earned on mortgage
     loans and mortgage-backed  securities,  income from investment  securities,
     gains on sales of loans  and  mortgage-backed  securities,  fees  earned in
     connection  with loans and deposits and income  earned on its  portfolio of
     loans and mortgage-backed securities serviced for investors.

     This segment's principal expenses are interest incurred on interest-bearing
     liabilities,   including   deposits   and   borrowings,   and  general  and
     administrative costs.

     REAL ESTATE INVESTMENT

     Real  estate   development  and  joint  venture  operations  are  conducted
     principally through the Bank's wholly owned service corporation subsidiary,
     DSL Service Company.

     DSL Service Company participates as an owner of, or a partner in, a variety
     of  real  estate  development  projects,  principally  retail  neighborhood
     shopping center and residential developments,  most of which are located in
     California.

     In its joint  ventures,  DSL Service Company is entitled to interest on its
     equity invested in the project on a priority basis after  third-party  debt
     and shares profits and losses with the developer  partner,  generally on an
     equal basis.  Partnership equity (deficit) accounts are affected by current
     period  results of operations,  additional  partner  advances,  partnership
     distributions and partnership liquidations.

     This segment's  primary  sources of revenue are net rental income and gains
     from the sale of real estate investment  assets.  This segment's  principal
     expenses are interest expense and general and administrative expense.

                                      106
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

     OPERATING RESULTS AND ASSETS

     The following table presents the operating  results and selected  financial
     data by major business segments for 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                        Real Estate
     (In Thousands)                                        Banking       Investment    Elimination      Totals
     -------------------------------------------------------------------------------------------------------------
     <S>                                                 <C>           <C>            <C>            <C>
     YEAR ENDED DECEMBER 31, 2002
     Net interest income .............................   $   315,353   $        45    $      --      $   315,398
     Provision for loan losses .......................           939          --             --              939
     Other income ....................................        55,051        11,631           --           66,682
     Operating expense ...............................       185,859           796           --          186,655
     Net intercompany income (expense) ...............           343          (343)          --             --
     -------------------------------------------------------------------------------------------------------------
     Income before income taxes ......................       183,949        10,537           --          194,486
     Income taxes ....................................        77,875         4,318           --           82,193
     -------------------------------------------------------------------------------------------------------------
        Net income ...................................   $   106,074   $     6,219    $      --      $   112,293
     =============================================================================================================
     AT DECEMBER 31, 2002
     Assets:
         Loans and mortgage-backed securities ........   $10,976,942   $      --      $      --      $10,976,942
         Investments in real estate and joint ventures          --          33,890           --           33,890
         Other .......................................       995,470        14,174        (42,325)       967,319
     -------------------------------------------------------------------------------------------------------------
            Total assets .............................    11,972,412        48,064        (42,325)    11,978,151
     -------------------------------------------------------------------------------------------------------------
     Equity ..........................................   $   823,104   $    42,325    $   (42,325)   $   823,104
     =============================================================================================================
     YEAR ENDED DECEMBER 31, 2001
     Net interest income (expense) ...................   $   305,573   $        (3)   $      --      $   305,570
     Provision for loan losses .......................         2,564          --             --            2,564
     Other income ....................................        63,340         5,196           --           68,536
     Operating expense ...............................       159,604         3,588           --          163,192
     Net intercompany income (expense) ...............           369          (369)          --             --
     -------------------------------------------------------------------------------------------------------------
     Income before income taxes ......................       207,114         1,236           --          208,350
     Income taxes ....................................        87,660           509           --           88,169
     -------------------------------------------------------------------------------------------------------------
         Net income ..................................   $   119,454   $       727    $      --      $   120,181
     =============================================================================================================
     AT DECEMBER 31, 2001
     Assets:
         Loans and mortgage-backed securities ........   $10,132,413   $      --      $      --      $10,132,413
         Investments in real estate and joint ventures          --          38,185           --           38,185
         Other .......................................       966,942         2,003        (34,513)       934,432
     -------------------------------------------------------------------------------------------------------------
            Total assets .............................    11,099,355        40,188        (34,513)    11,105,030
     -------------------------------------------------------------------------------------------------------------
     Equity ..........................................   $   733,896   $    34,513    $   (34,513)   $   733,896
     =============================================================================================================
     YEAR ENDED DECEMBER 31, 2000
     Net interest income .............................   $   262,232   $       243    $      --      $   262,475
     Provision for loan losses .......................         3,251          --             --            3,251
     Other income ....................................        41,406         9,148           --           50,554
     Operating expense ...............................       135,996         1,473           --          137,469
     Net intercompany income (expense) ...............           397          (397)          --             --
     -------------------------------------------------------------------------------------------------------------
     Income before income taxes ......................       164,788         7,521           --          172,309
     Income taxes ....................................        69,966         3,092           --           73,058
     -------------------------------------------------------------------------------------------------------------
         Net income ..................................   $    94,822   $     4,429    $      --      $    99,251
     =============================================================================================================
     AT DECEMBER 31, 2000
     Assets:
         Loans and mortgage-backed securities ........   $10,084,353   $      --      $      --      $10,084,353
         Investments in real estate and joint ventures          --          17,641           --           17,641
         Other .......................................       806,201         3,584        (17,916)       791,869
     -------------------------------------------------------------------------------------------------------------
            Total assets .............................    10,890,554        21,225        (17,916)    10,893,863
     -------------------------------------------------------------------------------------------------------------
     Equity ..........................................   $   624,636   $    17,916    $   (17,916)   $   624,636
     =============================================================================================================
</TABLE>

                                      107
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(23) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Selected unaudited  quarterly financial data are presented below by quarter
     for the years ended December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                            December 31,  September 30,  June 30,    March 31,
     (In Thousands, Except Per Share Data)                      2002          2002         2002        2002
     ----------------------------------------------------------------------------------------------------------
     <S>                                                      <C>         <C>          <C>          <C>
     Total interest income ................................   $ 158,291   $ 154,924    $ 153,425    $ 166,398
     Total interest expense ...............................      74,938      77,952       78,297       86,453
     ----------------------------------------------------------------------------------------------------------
        Net interest income ...............................      83,353      76,972       75,128       79,945
     Provision for (reduction of) loan losses .............         127         471       (1,106)       1,447
     ----------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses      83,226      76,501       76,234       78,498
     Total other income (loss), net .......................      35,993      (4,766)       4,102       31,353
     Total operating expense ..............................      50,026      46,489       45,023       45,117
     ----------------------------------------------------------------------------------------------------------
     Income before income taxes ...........................      69,193      25,246       35,313       64,734
     Income taxes .........................................      29,221      10,678       14,938       27,356
     ----------------------------------------------------------------------------------------------------------
     Net income ...........................................   $  39,972   $  14,568    $  20,375    $  37,378
     ==========================================================================================================
     Net income per share:
        Basic .............................................   $    1.43   $    0.52    $    0.72    $    1.32
        Diluted ...........................................        1.43        0.52         0.72         1.32
     ==========================================================================================================
     Market range:
        High bid ..........................................   $   41.55   $   49.25    $   55.56    $   48.83
        Low bid ...........................................       31.32       33.34        46.70        41.84
        End of period .....................................       39.00       34.25        47.30        45.60
     ==========================================================================================================
<CAPTION>
                                                            December 31,  September 30,  June 30,    March 31,
                                                                2001          2001         2001        2001
     ----------------------------------------------------------------------------------------------------------
     <S>                                                      <C>         <C>          <C>          <C>
     Total interest income ................................   $ 183,484   $ 193,696    $ 211,235    $ 219,966
     Total interest expense ...............................     103,769     120,249      134,989      143,804
     ----------------------------------------------------------------------------------------------------------
        Net interest income ...............................      79,715      73,447       76,246       76,162
     Provision for loan losses ............................       1,290         791          431           52
     ----------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses      78,425      72,656       75,815       76,110
     Total other income, net ..............................      33,170       7,070       22,283        6,013
     Total operating expense ..............................      43,866      41,935       40,141       37,250
     ----------------------------------------------------------------------------------------------------------
     Income before income taxes ...........................      67,729      37,791       57,957       44,873
     Income taxes .........................................      28,633      16,025       24,502       19,009
     ----------------------------------------------------------------------------------------------------------
     Net income ...........................................   $  39,096   $  21,766    $  33,455    $  25,864
     ==========================================================================================================
     Net income per share:
        Basic .............................................   $    1.39   $    0.77    $    1.18    $    0.92
        Diluted ...........................................        1.39        0.77         1.18         0.91
     ==========================================================================================================
     Market range:
        High bid ..........................................   $   44.46   $   58.81    $   48.85    $   54.31
        Low bid ...........................................       32.98       40.61        41.44        39.45
        End of period .....................................       41.25       44.13        47.26        45.30
     ==========================================================================================================
</TABLE>

     Variation in total other income  (loss) was primarily due to changes in the
     valuation allowance for mortgage servicing rights and net gains on sales of
     loans and mortgage-backed securities.

                                      108
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

(24) PARENT COMPANY FINANCIAL INFORMATION

     Downey Financial Corp. was incorporated in Delaware on October 21, 1994. On
     January 23, 1995,  after  obtaining  necessary  stockholder  and regulatory
     approvals,   Downey  Financial  Corp.  acquired  100%  of  the  issued  and
     outstanding  capital stock of the Bank, and the Bank's  stockholders became
     stockholders of Downey Financial Corp. The transaction was accounted for in
     a manner  similar to a  pooling-of-interests.  Downey  Financial  Corp. was
     thereafter  funded  by a $15  million  dividend  from the  Bank.  Condensed
     financial statements of Downey Financial Corp. only are as follows:

<TABLE>
     CONDENSED BALANCE SHEETS
<CAPTION>
                                                  December 31,
                                           -----------------------
     (In Thousands)                            2002        2001
     -------------------------------------------------------------
     <S>                                     <C>        <C>
     ASSETS
     Cash ................................   $     11   $     12
     Due from Bank - interest bearing ....     65,360     22,215
     Investment in subsidiaries:
        Bank .............................    873,851    827,381
        Downey Financial Capital Trust I .      3,711      3,711
        Downey Affiliated Insurance Agency        207        204
     Other assets ........................      4,859      5,183
     -------------------------------------------------------------
                                             $947,999   $858,706
     =============================================================
     LIABILITIES AND STOCKHOLDERS' EQUITY
     Junior subordinated debentures ......   $123,711   $123,711
     Accounts payable and accrued expenses      1,184      1,099
     -------------------------------------------------------------
        Total liabilities ................    124,895    124,810
     Stockholders' equity ................    823,104    733,896
     -------------------------------------------------------------
                                             $947,999   $858,706
     =============================================================
</TABLE>

                                      109
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

<TABLE>
     CONDENSED STATEMENTS OF INCOME
     AND OTHER COMPREHENSIVE INCOME
<CAPTION>
                                                                             Years Ended December 31,
                                                                       -------------------------------------
     (In Thousands)                                                       2002         2001         2000
     -------------------------------------------------------------------------------------------------------
     <S>                                                               <C>          <C>          <C>
     INCOME
     Dividends from the Bank .......................................   $  71,984    $  21,984    $  21,985
     Interest income ...............................................         634          700          933
     Other income ..................................................          59           59           59
     -------------------------------------------------------------------------------------------------------
        Total income ...............................................      72,677       22,743       22,977
     -------------------------------------------------------------------------------------------------------
     EXPENSE
     Interest expense ..............................................      12,163       12,163       12,163
     General and administrative expense ............................         981          940          816
     -------------------------------------------------------------------------------------------------------
        Total expense ..............................................      13,144       13,103       12,979
     -------------------------------------------------------------------------------------------------------
     INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
        NET INCOME OF SUBSIDIARIES .................................      59,533        9,640        9,998
     Income tax benefit ............................................       5,104        5,061        4,895
     -------------------------------------------------------------------------------------------------------
     INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
        OF SUBSIDIARIES ............................................      64,637       14,701       14,893
     Equity in undistributed net income of subsidiaries ............      47,656      105,480       84,358
     -------------------------------------------------------------------------------------------------------
        NET INCOME .................................................     112,293      120,181       99,251
     -------------------------------------------------------------------------------------------------------
     OTHER COMPREHENSIVE INCOME (LOSS), NET OF
        INCOME TAXES (BENEFITS)
     Unrealized gains (losses) on securities available for sale:
        U.S. Treasury securities, agency obligations and other
           investment securities available for sale, at fair value .          61          705        2,032
        Mortgage-backed securities available for sale, at fair value         935         (714)         173
        Less reclassification of realized (gains) losses
           included in net income ..................................        (284)        (190)          50
     Unrealized losses on cash flow hedges:
        Net derivative instruments .................................     (11,434)      (5,981)        --
        Less reclassification of realized losses
           included in net income ..................................       9,539        5,254         --
     -------------------------------------------------------------------------------------------------------
     Total other comprehensive income (loss), net of
        income taxes (benefits) ....................................      (1,183)        (926)       2,255
     -------------------------------------------------------------------------------------------------------
     COMPREHENSIVE INCOME ..........................................   $ 111,110    $ 119,255    $ 101,506
     =======================================================================================================
</TABLE>

                                      110
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED)

<TABLE>
     CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                  Years Ended December 31,
                                                            --------------------------------------
     (In Thousands)                                            2002         2001         2000
     ---------------------------------------------------------------------------------------------
     <S>                                                    <C>          <C>          <C>
     CASH FLOWS FROM OPERATING ACTIVITIES
     Net income .........................................   $ 112,293    $ 120,181    $  99,251
     Equity in undistributed net income of subsidiaries .     (47,656)    (105,480)     (84,358)
     Increase (decrease) in liabilities .................          85           30         (639)
     (Increase) decrease in other, net ..................         324         (155)         (13)
     ---------------------------------------------------------------------------------------------
        Net cash provided by operating activities .......      65,046       14,576       14,241
     ---------------------------------------------------------------------------------------------
     CASH FLOWS FROM INVESTING ACTIVITIES
     Increase in due from Bank - interest bearing .......     (43,145)      (4,580)      (4,949)
     ---------------------------------------------------------------------------------------------
        Net cash used for investing activities ..........     (43,145)      (4,580)      (4,949)
     ---------------------------------------------------------------------------------------------
     CASH FLOWS FROM FINANCING ACTIVITIES
     Exercise of stock options ..........................         392          161          855
     Dividends on common stock ..........................     (10,124)     (10,156)     (10,143)
     Purchase of treasury stock .........................     (12,170)        --           --
     ---------------------------------------------------------------------------------------------
        Net cash used for financing activities ..........     (21,902)      (9,995)      (9,288)
     ---------------------------------------------------------------------------------------------
     Net increase (decrease) in cash and cash equivalents          (1)           1            4
     Cash and cash equivalents at beginning of period ...          12           11            7
     ---------------------------------------------------------------------------------------------
     CASH AND CASH EQUIVALENTS AT END OF PERIOD .........   $      11    $      12    $      11
     =============================================================================================
</TABLE>

(25) SALE OF SUBSIDIARY

     On February 29, 2000,  Downey Savings and Loan  Association,  F.A. sold its
     indirect automobile finance subsidiary,  Downey Auto Finance Corp., to Auto
     One  Acceptance  Corp.,  a  subsidiary  of  California   Federal  Bank  and
     recognized a pre-tax gain from the sale of $9.8 million. As of December 31,
     1999,  Downey Auto Finance Corp.  had loans totaling $366 million and total
     assets  of $373  million.  The  proceeds  of the sale  provided  additional
     capital to further the growth of our residential lending business.

                                      111
<PAGE>
Item 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURES

     None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Downey  Financial  Corp.  intends to file with the  Securities and Exchange
Commission a definitive  proxy  statement  (the "Proxy  Statement")  pursuant to
Regulation 14A, which will involve the election of directors, within 120 days of
the end of the year covered by this Form 10-K.  Information  regarding directors
of Downey Financial Corp. will appear under the caption "Proposal 1. Election of
Directors" in the Proxy  Statement for the Annual Meeting of  Stockholders to be
held  on  April  23,  2003,  and  is  incorporated  herein  by  this  reference.
Information  regarding  executive officers of Downey Financial Corp. will appear
under  the  caption   "Executive   Officers"  in  the  Proxy  Statement  and  is
incorporated herein by this reference.

ITEM 11. EXECUTIVE COMPENSATION

     Information regarding executive  compensation will appear under the caption
"Executive  Compensation"  in the Proxy Statement and is incorporated  herein by
this reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

     Information  included  under the  captions  "Security  Ownership of Certain
Beneficial  Owners"  and "Equity  Compensation  Plan  Information"  in the Proxy
Statement is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  included under the caption "Certain  Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by this reference.

ITEM 14. CONTROLS AND PROCEDURES

     Within the 90 days prior to the date of this report,  Downey carried out an
evaluation,  under  the  supervision  and with  the  participation  of  Downey's
management,  including  Downey's  Chief  Executive  Officer and Chief  Financial
Officer, of the effectiveness of the design and operation of Downey's disclosure
controls and  procedures  pursuant to Exchange Act Rule 13a-14.  Based upon that
evaluation,  the Chief Executive  Officer and Chief Financial  Officer concluded
that  Downey's  disclosure  controls  and  procedures  are  effective  in timely
alerting them to material information relating to Downey required to be included
in Downey's periodic Securities and Exchange Commission filings.  There has been
no significant  changes in Downey's  internal  controls or in other factors that
could significantly affect these controls subsequent to the evaluation date.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  1.  Financial  Statements.  These  documents  are  listed  in the  Index to
         Consolidated Financial Statements under Item 8.

     2.   Financial Statement Schedules. Financial Statement Schedules have been
          omitted because they are not applicable or the required information is
          shown in the Consolidated Financial Statements or Notes thereto.

                                      112
<PAGE>

(b) Reports on Form 8-K during the last quarter of 2002.

     1.   Form 8-K filed  October  16,  2002,  with  respect to a press  release
          reporting  results of  operations  for the three and nine months ended
          September 30, 2002.

     2.   Form 8-K filed  November  18, 2002,  with  respect to a press  release
          reporting  monthly  selected  financial  data for the thirteen  months
          ended October 31, 2002.

     3.   Form 8-K filed  December  17, 2002,  with  respect to a press  release
          reporting  monthly  selected  financial  data for the thirteen  months
          ended November 30, 2002.

(c) Exhibits.

  EXHIBIT
   NUMBER                                                        DESCRIPTION

     3.1  (2) Certificate of Incorporation of Downey Financial Corp.

     3.2  (1) Bylaws of Downey Financial Corp.

     4.1  (4) Junior  Subordinated  Indenture  dated as of July 23, 1999 between
          Downey  Financial  Corp.  and  Wilmington  Trust  Company as Indenture
          Trustee.

     4.2  (4)  10%  Junior  Subordinated   Debenture  due  September  15,  2029,
          Principal Amount $123,711,350.

     4.3  (4) Certificate of Trust of Downey Financial Capital Trust I, dated as
          of May 25, 1999.

     4.4  (4) Trust Agreement of Downey Financial Capital Trust I, dated May 25,
          1999.

     4.5  (4) Amended and Restated Trust Agreement of Downey  Financial  Capital
          Trust I, between Downey Financial Corp.,  Wilmington Trust Company and
          the Administrative Trustees named therein, dated as of July 23, 1999.

     4.6  (4)  Certificate  Evidencing  Common  Securities  of Downey  Financial
          Capital Trust I, 10% Common Securities.

     4.7  (4)  Certificate  Evidencing  Capital  Securities of Downey  Financial
          Capital Trust I, 10% Capital Securities (Global Certificate).

     4.8  (4) Common  Securities  Guarantee  Agreement of Downey Financial Corp.
          (Guarantor), dated July 23, 1999.

     4.9  (4) Capital Securities  Guarantee  Agreement of Downey Financial Corp.
          and Wilmington Trust Company, dated as of July 23, 1999.

     10.1 (3) Downey Savings and Loan Association,  F.A. Employee Stock Purchase
          Plan (Amended and Restated as of January 1, 1996).

     10.2 (3)  Amendment  No.  1,  Downey  Savings  and Loan  Association,  F.A.
          Employee Stock  Purchase Plan.  Amendment No. 1, Effective and Adopted
          January 22, 1997.

     10.3 (3) Downey Savings and Loan Association,  F.A.  Employees'  Retirement
          and Savings Plan (October 1, 1997 Restatement).

     10.4 (3)  Amendment  No.  1,  Downey  Savings  and Loan  Association,  F.A.
          Employees'  Retirement and Savings Plan (October 1, 1997  Restatement)
          Amendment No. 1, Effective and Adopted January 28, 1998.

     10.5 (3) Trust  Agreement  for Downey  Savings and Loan  Association,  F.A.
          Employees'  Retirement  and Savings  Plan,  Effective  October 1, 1997
          between  Downey  Savings  and  Loan  Association,  F.A.  and  Fidelity
          Management Trust Company.

                                      113
<PAGE>
(c) Exhibits (Continued)

  EXHIBIT
   NUMBER                                                        DESCRIPTION

     10.6 (2) Downey Savings and Loan Association 1994 Long-Term  Incentive Plan
          (as amended).

     10.10(1)  Founder  Retirement  Agreement  of  Maurice L.  McAlister,  dated
          December 21, 1989.

     10.11(5)  Amendment  No. 1,  Founders  Retirement  Agreement  of Maurice L.
          McAlister,  dated  December 21, 1989.  Amendment No. 1,  Effective and
          Adopted July 26, 2000.

     10.13 (6) Deferred Compensation Program.

     10.14 (6) Director Retirement Benefits.

     10.15     Director  Retirement  Benefits Agreement of Sam Yellen,  dated
          January 15, 2003.

     21   Subsidiaries.

     23   Consent of Independent Auditors.

     99.1 Certification  of Chief Executive  Officer  pursuant to Section 906 of
          Sarbanes-Oxley Act of 2002.

     99.2 Certification  of Chief Financial  Officer  pursuant to Section 906 of
          Sarbanes-Oxley Act of 2002.



(1) Filed as part of Downey's Registration Statement on Form 8-B/A filed January
    17, 1995.
(2) Filed as part of Downey's Registration  Statement on Form S-8 filed February
    3, 1995.
(3) Filed as part of Downey's report on Form 10-K filed March 16, 1998.
(4) Filed as part of Downey's report on Form 10-Q filed November 2, 1999.
(5) Filed as part of Downey's report on Form 10-Q filed August 2, 2000.
(6) Filed as part of Downey's report on Form 10-K filed March 7, 2001.

AVAILABILITY OF REPORTS

Annual reports on Form 10-K,  quarterly reports on Form 10-Q, current reports on
Form 8-K and all  amendments to those reports are available  free of charge from
our internet site,  www.downeysavings.com,  by clicking on "Investor  Relations"
located on our home page and proceeding to "Corporate Filings."

We will furnish any or all of the  non-confidential  exhibits  upon payment of a
reasonable fee. Please send request for exhibits and/or fee information to:


                             Downey Financial Corp.
                               3501 Jamboree Road
                         Newport Beach, California 92660
                         Attention: Corporate Secretary

                                      114
<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.


                                                     DOWNEY FINANCIAL CORP.


                                           By:    /s/ DANIEL D. ROSENTHAL
                                             -----------------------------------
                                                      Daniel D. Rosenthal
                                           President and Chief Executive Officer
                                                           Director

DATED: March 6, 2003

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.

       Signature                     Title                               Date
       ---------                     -----                               ----

/s/ MAURICE L. MCALISTER      Chairman of the Board                March 6, 2003
------------------------
    Maurice L. McAlister             Director

/s/ CHERYL E. OLSON         Vice Chairman of the Board             March 6, 2003
------------------------
    Cheryl E. Olson                  Director

/s/ DANIEL D. ROSENTHAL           President and                    March 6, 2003
------------------------    Chief Executive Officer
    Daniel D. Rosenthal              Director

/s/ THOMAS E. PRINCE        Executive Vice President               March 6, 2003
------------------------    Chief Financial Officer
    Thomas E. Prince        (Principal Financial and
                               Accounting Officer)

/s/ MICHAEL ABRAHAMS                 Director                      March 6, 2003
------------------------
    Michael Abrahams

/s/ JAMES H. HUNTER                  Director                      March 6, 2003
------------------------
    James H. Hunter

/s/ DR. PAUL KOURI                   Director                      March 6, 2003
------------------------
    Dr. Paul Kouri

/s/ BRENT MCQUARRIE                  Director                      March 6, 2003
------------------------
    Brent McQuarrie

/s/ LESTER C. SMULL                  Director                      March 6, 2003
------------------------
    Lester C. Smull


------------------------             Director                      March 6, 2003
    Gerald E. Finnell

                                      115
<PAGE>
                            CERTIFICATION PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Daniel D. Rosenthal, certify that:

1. I have reviewed this annual report on Form 10-K of Downey Financial Corp.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a) designed  such  disclosure  controls and  procedures to ensure that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

          c)  presented  in  this  annual  report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors:

          a) all significant deficiencies in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

          b) any fraud,  whether or not material,  that  involves  management or
          other  employees  who  have a  significant  role  in the  registrant's
          internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.





Date: March 6, 2003                             /s/  Daniel D. Rosenthal
                                           -------------------------------------
                                                     Daniel D. Rosenthal
                                           President and Chief Executive Officer

                                      116
<PAGE>
                            CERTIFICATION PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Thomas E. Prince, certify that:

1. I have reviewed this annual report on Form 10-K of Downey Financial Corp.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

          a) designed  such  disclosure  controls and  procedures to ensure that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

          c)  presented  in  this  annual  report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors:

          a) all significant deficiencies in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

          b) any fraud,  whether or not material,  that  involves  management or
          other  employees  who  have a  significant  role  in the  registrant's
          internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.





Date: March 6, 2003                    /s/  Thomas E. Prince
                            ----------------------------------------------------
                                            Thomas E. Prince
                            Executive Vice President and Chief Financial Officer

                                      117