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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
(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, 1998
                                       OR
[ ]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

              For the Transition Period from N/A to _______________

                         Commission File Number: 1-9566

                            FirstFed Financial Corp.
             (Exact name of registrant as specified in its charter)

               Delaware                                      95-4087449
    (State or other jurisdiction of                       (I.R.S. Employer
    incorporation or organization)                       Identification No.)

        401 Wilshire Boulevard
      Santa Monica, California                                 90401-1490
(Address of principal executive offices)                       (Zip Code)

       Registrant's telephone number, including area code: (310) 319-6000

           Securities registered pursuant to Section 12(b) of the Act:
                          Common Stock $0.01 par value
                                (Title of Class)

        Securities registered pursuant to Section 12(g) of the Act: None

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 ___

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates of the Registrant as of February 12, 1999: $304,897,240.


The number of shares of Registrant's $0.01 par value common stock outstanding as
of February 12, 1999: 20,623,198.

                           DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement for Annual Meeting of  Stockholders,  April 21,
1999 (Parts III & IV).

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (sub-section 229.405 of this chapter) 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 the
Form 10-K or any amendment to this Form 10-K. [ ]

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<PAGE>

                            FirstFed Financial Corp.
                                      Index

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----
<S>                                                                                                        <C>
Part I     Item 1.       Business................................................................           3
           Item 2.       Properties..............................................................          23

           Item 3.       Legal Proceedings.......................................................          23
           Item 4.       Submission of Matters to a Vote of Security Holders.....................          23

Part II    Item 5.       Market for Registrant's Common Equity and Related
                         Stockholder Matters.....................................................          23

           Item 6.       Selected Financial Data.................................................          24
           Item 7.       Management's Discussion and Analysis of Financial
                         Condition and Results of Operations.....................................          25
           Item 8.       Financial Statements and Supplementary Data.............................          46
                         Notes to Consolidated Financial Statements..............................          50
                         Independent Auditors' Report............................................          81
           Item 9.       Changes In and Disagreements with Accountants on
                         Accounting and Financial Disclosure.....................................          82

Part III   Item 10.      Directors and Executive Officers of the Registrant......................          82
           Item 11.      Executive Compensation..................................................          82
           Item 12.      Security Ownership of Certain Beneficial Owners and
                         Management..............................................................          82
           Item 13.      Certain Relationships and Related Transactions..........................          82

Part IV    Item 14.      Exhibits, Consolidated Financial Statement
                         Schedules, and Reports on Form 8K.......................................          82

Signatures and Power of Attorney.................................................................          84
</TABLE>


                                       2
<PAGE>

                                     PART I

ITEM 1--BUSINESS

General Description

     FirstFed Financial Corp., a Delaware  corporation  ["FFC," and collectively
with its sole and wholly-owned subsidiary, First Federal Bank of California (the
"Bank"),  the "Company"],  was incorporated on February 3, 1987. Since September
22,  1987,  FFC has  operated  as a savings  and loan  holding  company  engaged
primarily  in the  business of owning the Bank.  Because  the  Company  does not
presently  engage in any  independent  business  operations,  substantially  all
earnings and performance figures herein reflect the operations of the Bank.

     The  Bank  was  organized  in 1929 as a  state-chartered  savings  and loan
association,  and, in 1935,  converted to a federal mutual charter.  In February
1983 the Bank obtained a federal  savings bank charter,  and, in December  1983,
converted from mutual to stock ownership.

     The  principal  business of the Bank is  attracting  savings  and  checking
deposits  from the  general  public,  and using  such  deposits,  together  with
borrowings and other funds, to make real estate, business and consumer loans.

     At  December  31,  1998,  the  Company had assets  totaling  $3.7  billion,
compared to $4.2  billion at December  31, 1997 and $4.1 billion at December 31,
1996.  The Company  recorded  net  earnings of $34.6  million for the year ended
December 31, 1998, net earnings of $23.1 million for the year ended December 31,
1997, and net earnings of $8.2 million for the year ended December 31, 1996.

     The Bank  derives  its  revenues  principally  from  interest  on loans and
investments,  loan  origination fees and servicing fees on loans sold. Its major
items of expense  are  interest  on  deposits  and  borrowings,  and general and
administrative expense.

     As of February 13, 1999, the Bank operated 24 retail savings branches,  all
located in Southern California.  Permission to operate all full-service branches
must be granted by the Office of Thrift Supervision  ("OTS"). In addition to the
retail branches,  the Bank has a retail call center which conducts  transactions
with deposit customers by telephone,  five retail loan offices, a wholesale loan
office and  "LENDFFB,"  a loan  origination  group which  operates  primarily by
telephone.

     The Bank's  principal  loan  market is  Southern  California.  To a limited
extent,  LENDFFB  solicits  loans from areas  outside  of  Southern  California,
including certain areas in Northern California.  Loans originated by the LENDFFB
unit are originated primarily for sale.

     The  Bank  has   three   wholly-owned   subsidiaries:   Seaside   Financial
Corporation,  Oceanside  Insurance Agency,  Inc. and Santa Monica Capital Group,
all of which are California corporations.  See "Subsidiaries." The Bank conducts
its loan origination business under the name "FirstFed Mortgage Services."

Current Operating Environment

     The Company's  operating results are  significantly  influenced by national
and regional  economic  conditions,  monetary and fiscal policies of the federal
government,  housing  demand and  affordability  and general  levels of interest
rates.

     The Bank's primary market within Southern California is Los Angeles County.
The economic  climate in Los Angeles  County remains strong and has continued to
recover from the economic  recession earlier this decade.  According to the UCLA
Anderson Forecast for December, 1998 ("UCLA Forecast"),  the greater Los Angeles
area is now leading the state in  employment  growth.  The economic  recovery is
being  driven by strength in the durable  goods  manufacturing  industry and the
construction   industry,   particularly   commercial  and  industrial  building.
According to the UCLA Forecast,  consumer  confidence remains high due to strong
growth in employment and increases in personal income.



                                       3
<PAGE>

     The state's  economic  expansion has been  adversely  impacted by the Asian
international  economic  crisis.  According  to the UCLA  Forecast,  the state's
exports have  decreased by 5% compared to the prior year due to reduced  exports
to Asia.  Further  decreases  in exports  could  affect job growth in the coming
years.

     The real estate  markets in the greater Los Angeles area have  continued to
improve.  According to the UCLA Forecast,  home values in the Los Angeles County
area  increased by 8% during 1998  compared to 1997 and are expected to increase
by 6% in 1999.  Demand for housing by  immigrants  in the Los  Angeles  area has
helped to  strengthen  home sales in the  region.  Also,  according  to the UCLA
Forecast,  non-residential  construction  increased 18% in 1998 compared to 1997
and is expected to increase by 9% in 1999.  This  accounts  for the recent large
increase in construction employment in the area.

     Consistent with the improved real estate climate in the greater Los Angeles
area, the Bank's  non-performing assets declined to 0.84% of total assets at the
end of 1998 from 0.95% at the end of 1997 and 1.77% at the end of 1996.

     The Bank continually monitors the sufficiency of the collateral  supporting
its loan portfolio.  The portfolio is evaluated on a number of factors including
property location, date of origination and the original loan-to-value ratio. The
Bank adjusts its general  allowance for  anticipated  loan losses as a result of
these  evaluations.  The  provision  for loan  losses  was $7.2  million in 1998
compared to $20.5 million in 1997 and $35.2 million in 1996.

     The ratio of general  valuation  allowance  to the Bank's  assets with loss
exposure (the Bank's loan portfolio plus real estate owned) was 2.26% at the end
of 1998  compared to 1.86% at the end of 1997 and 1.73% at the end of 1996.  The
general valuation allowance at December 31, 1998 increased because the provision
for loan losses exceeded net  charge-offs.  See "Business - Loan Loss Experience
Summary."

     The Bank also maintains  separate  valuation  allowances for impaired loans
and loans sold with recourse.  See "Business - Loan Loss Experience Summary" for
additional information regarding valuation allowances for these loans.

     Current  Interest  Rate  Environment.  The Federal  Reserve  Board  ("FRB")
decreased  interest  rates during 1998 and during 1996. The FRB did not make any
changes to interest rates during 1997. In a declining interest rate environment,
the Bank's interest rate spread typically increases (savings and borrowing costs
decrease immediately while the loan portfolio yield stays approximately the same
or decreases slowly.) The reverse is true during periods of increasing  interest
rates.  Changes in interest  rates have a less severe  impact on the Bank's loan
portfolio due to the interest rate  adjustment  features of its loans.  However,
changes in interest  rates for the Bank's loan  portfolio  have an inherent time
lag resulting from operational and regulatory constraints which do not allow the
Bank to pass  through  monthly  changes in the primary  index  utilized  for the
majority of its adjustable  rate loan customers for a period of ninety days. Due
primarily to the decreasing  interest rate  environment  during 1998, the Bank's
interest rate margin increased to 2.43% from 2.13% in 1997. See "Asset-Liability
Management" and "Components of Earnings - Net Interest  Income" in "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  for
additional information.

     Competition.  The Bank  experiences  strong  competition  in attracting and
retaining  deposits and originating  real estate loans. It competes for deposits
with many of the nation's largest savings institutions and commercial banks that
have significant operations in Southern California.

     The Bank also  competes for deposits  with credit  unions,  thrift and loan
associations,  money market mutual funds,  issuers of corporate debt  securities
and the government.  In addition to the rates of interest offered to depositors,
the Bank's ability to attract and retain  deposits  depends upon the quality and
variety of services  offered,  the  convenience of the Bank's  locations and its
financial strength as perceived by depositors.

     The  Bank   competes   for  real  estate  loans   primarily   with  savings
institutions,   commercial  banks,  mortgage  banking  companies  and  insurance
companies.  The primary factors in competing for loans are interest rates,  loan
fees,  interest rate caps,  interest rate adjustment  provisions and the quality
and extent of service to borrowers and mortgage brokers.



                                       4
<PAGE>

     Environmental Concerns. Under certain circumstances, such as if it actively
participates  in the  management or operation of a property  securing its loans,
the Bank could have  liability  for any  properties  found to have  pollutant or
toxic  features.  Environmental  protection laws are strict and impose joint and
several liability on numerous parties. It is possible for the cost of cleanup of
environmental  problems to exceed the value of the security  property.  The Bank
has adopted  environmental  underwriting  requirements  when  considering  loans
secured  by  properties   which  appear  to  have   environmentally   high  risk
characteristics  (e.g.  commercial,  industrial and  construction  of all types,
which may contain friable  asbestos or lead paint hazards).  These  requirements
are intended to minimize the risk of environmental hazard liability.  The Bank's
policies  are also  designed to avoid the  potential  for  liability  imposed on
lenders who assume the management of a property.

     Business  Concentration.  The  Bank  has no  single  customer  or  group of
customers,  either as depositors  or  borrowers,  the loss of any one or more of
which would have a material adverse effect on the Bank's  operations or earnings
prospects.

     Yields Earned and Rates Paid. Net interest  income,  the major component of
core earnings for the Bank,  depends  primarily upon the difference  between the
combined average yield earned on the loan and investment security portfolios and
the combined average  interest rate paid on deposits and borrowings,  as well as
the  relative   balances  of   interest-earning   assets  and   interest-bearing
liabilities.  See "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations - Overview and  Components of Earnings - Net Interest
Income" for further analysis and discussion.

Lending Activities

     General.  The Bank's primary  lending  activity has been the origination of
loans for the purpose of enabling borrowers to purchase,  refinance or construct
improvements on residential real property. The loan portfolio primarily consists
of loans made to  homebuyers  and  homeowners  on the security of single  family
dwellings and  multi-family  dwellings.  The loan  portfolio also includes loans
secured by commercial and industrial properties.

     For an analysis of loan portfolio  composition and an analysis of the types
of loans  originated,  see  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations - Balance  Sheet  Analysis - Loan  Portfolio
and Loan Composition."

     Origination  and  Sale of  Loans.  The Bank  employs  loan  officers  on an
incentive  compensation basis to obtain qualified applicants for loans. The Bank
also derives  business  from other  sources such as mortgage  brokers,  borrower
referrals, direct telephone sales and clients from its retail banking branches.

     Loan  originations  were $637.0 million in 1998, $481.3 million in 1997 and
$302.8 million in 1996. Loan origination volume improved in 1998 and 1997 due to
the increase in real estate activity in the Bank's market areas.  Also, in 1998,
lower  interest  rates  created an increase  in loan  refinance  activity.  Loan
originations by LENDFFB were $158.0 million in 1998 and $46.6 million in 1997.

     Loans sold totaled $379.6 million in 1998,  $52.4 million in 1997 and $24.1
million in 1996. For the year ended  December 31, 1998,  $382.4 million in loans
were  originated  for sale  compared to $86.6  million in 1997 and $22.9 million
during  1996.  Loans  originated  for  sale  totaled  60%,  18%  and 8% of  loan
originations  during 1998, 1997 and 1996,  respectively.  The increase is due to
borrower  preference for fixed rate loans,  which were available at historically
low interest rates during 1998.

     Loans held-for-sale at December 31, 1998, 1997 and 1996 were $16.5 million,
$40.4  million and $6.2 million,  respectively,  constituting  0.59%,  1.30% and
0.20%, respectively, of the Bank's total loans at such dates.

     Loans  originated  for resale are  recorded at the lower of cost or market.
The  time  from  origination  to  sale  may  take  up to  three  months  due  to
administrative requirements. During this time period the Bank will be exposed to
price adjustments as a result of fluctuations in market interest rates.



                                       5
<PAGE>

     The Bank structures mortgage-backed securities with loans from its own loan
portfolio for use in collateralized borrowing arrangements.  In exchange for the
improvement  in credit  risk when the  mortgage-backed  securities  are  formed,
guarantee fees are paid to the Federal Home Loan Mortgage Corporation  ("FHLMC")
or the Federal National Mortgage Association  ("FNMA").  No loans were converted
into  mortgage-backed  securities in 1998,  1997 or 1996.  All loans  underlying
mortgage-backed   securities   were   originated   by   the   Bank.   Therefore,
mortgage-backed  securities  generally have the same  experience with respect to
prepayment,  repayment,  delinquencies and other factors as the remainder of the
Bank's portfolio.

     The portfolio of  mortgage-backed  securities was recorded at fair value as
of December 31, 1998,  1997 and 1996.  Negative fair value  adjustments  of $413
thousand,  $78  thousand  and $4.1  million,  net of  taxes,  were  recorded  in
stockholders' equity at December 31, 1998, 1997 and 1996, respectively.

     The Bank  serviced  $424.9  million  in loans  for  other  investors  as of
December  31,  1998.  $203.0  million of these  loans  were sold under  recourse
arrangements. The Bank has an additional $17.6 million in loans that were formed
into mortgage-backed  securities with recourse features, but were still owned by
the Bank as of December  31,  1998.  Due to  regulatory  requirements,  the Bank
maintains  capital  for loans sold with  recourse as if those loans had not been
sold. The Bank had been active in these types of  transactions  in the past, but
has not entered into any new recourse  arrangements  since 1989 when a change in
the capital  regulations  took effect.  Loans sold with recourse are  considered
along with the Bank's own loans in  determining  the  adequacy  of general  loan
valuation  allowances.  The decrease in the principal balance of loans sold with
recourse to $203.0  million at the end of 1998 from $218.1 million at the end of
1997 and $230.8 million at the end of 1996 was due to loan amortization, payoffs
and foreclosures.

     Interest Rates,  Terms and Fees. The Bank makes  adjustable  mortgage loans
("AMLs")  with 30 and 40 year terms and  interest  rates which adjust each month
based upon the Federal Home Loan Bank's  Eleventh  District  Cost of Funds Index
("Index").  (See  "Asset-Liability  Management" in "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations.")  While the monthly
payment adjusts annually, the maximum annual change in the payment is limited to
7.5%. Any additional  interest due as a result of a rising Index is added to the
principal balance of the loan ("negative  amortization").  Payments are adjusted
every five  years  without  regard to the 7.5%  limitation  to provide  for full
amortization  during the balance of the loan term.  Although the interest  rates
are  adjusted  monthly,  these loans have  maximum  interest  rates which can be
charged ranging from 400 to 750 basis points above their initial  interest rate.
Generally,  these  loans may be assumed at any time during  their term  provided
that the person  assuming the loan meets the Bank's credit  standards and enters
into a separate written agreement with the Bank. Additionally,  the new borrower
is required to pay assumption fees customarily charged for similar transactions.

     The Bank offers two primary AML products based on the Index,  the "AML IIC"
and the "AML IID." The initial  interest rate on the AML IIC is below-market for
the first three months of the loan term. The AML IID has no below-market initial
interest rate but starts with a pay rate similar to the AML IIC. This results in
immediate negative amortization but allows the loan to earn at the fully indexed
interest rate immediately.  The difference in negative amortization on these two
products is minor.  The Bank also originates  adjustable rate loans based on the
one year U.S. Treasury and LIBOR rates.

     Under current portfolio loan programs, the Bank normally lends no more than
90%  of a  single  family  property's  appraised  value  at  the  time  of  loan
origination.  In addition,  the Bank has special Community Reinvestment Act loan
programs in which it lends up to 95%.

     The  Bank  generally   requires  that  borrowers  obtain  private  mortgage
insurance on loans in excess of 80% of the appraised  property value. On certain
loans  originated for the portfolio,  the Bank charges premium rates and/or fees
in exchange for waiving the insurance requirement.  Management believes that the
additional  rates and fees  charged on these loans  compensate  the Bank for the
additional  risks  associated  with  this  type  of  loan.   Subsequent  to  the
origination  of a  portfolio  loan,  the  Bank  may  purchase  private  mortgage
insurance  with  its own  funds.  Under  certain  of  these  mortgage  insurance
programs,  the Bank acts as  co-insurer  and  participates  with the  insurer in
absorbing  any future loss.  As of December  31, 1998 and 1997,  loans which had
co-insurance totaled $206.5 million and $219.9 million, respectively. Loans over
80% loan-to-value,  for which there was no private mortgage  insurance,  totaled
$265.0  million 


                                       6
<PAGE>

at December 31, 1998 compared to $163.8  million at December 31, 1997 and $122.5
million at December 31, 1996.

     Because AML  loan-to-value  ratios may increase above those  established at
the time of loan origination due to negative amortization, the Bank rarely lends
in  excess  of 90% of the  appraised  value on AMLs.  When the Bank does lend in
excess of 90% of the  appraised  value,  additional  fees and  higher  rates are
charged,  and there is no below  market  initial  interest  rate.  The amount of
negative  amortization  recorded by the Bank increases  during periods of rising
interest  rates.  As of December 31, 1998,  negative  amortization  on all loans
serviced by the Bank was immaterial.

     Although  regulations permit a maximum  amortization period of 40 years for
real estate  secured  home loans and 30 years for other real estate  loans,  the
majority of the Bank's real estate loans provide for a maximum amortization term
of 30 years or less.  Loans with 40-year  terms  constituted  4% and 11% of loan
originations during 1998 and 1997, respectively.

     The  following  table shows the  contractual  remaining  maturities  of the
Bank's loans at December 31, 1998:

<TABLE>
<CAPTION>
                                                              Loan Maturity Analysis
                                                                  Maturity Period                                  
                                 ----------------------------------------------------------------------------------------
                                                           >1 Year
                                    Total       1 Year       To 5         >5-10       >10-20       >20-30        >30
                                   Balance      or Less      Years        Years        Years        Years        Years
                                 ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                                   (Dollars In Thousands)
<S>                              <C>          <C>          <C>          <C>          <C>          <C>          <C>       
Interest rate sensitive loans:
 AMLs ........................   $2,854,657   $   73,254   $  216,705   $  373,668   $1,247,872   $  864,220   $   78,938
 Fixed-rate loans:
  1st mortgages ..............       30,683        3,781        6,591        6,463        6,600        7,248           --
  2nd mortgages ..............          377          340           14           23           --           --           --
  Consumer and other loans ...        6,807          825        3,183          601        2,198           --           --
                                 ----------   ----------   ----------   ----------   ----------   ----------   ----------
 Total .......................   $2,892,524   $   78,200   $  226,493   $  380,755   $1,256,670   $  871,468   $   78,938
                                 ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

Non-accrual, Past Due, Impaired and Restructured Loans

     The Bank establishes allowances for delinquent interest equal to the amount
of  accrued  interest  on all loans 90 days or more past due or in  foreclosure.
This practice  effectively places such loans on non-accrual status for financial
reporting purposes.

     The  following  is a summary  of  non-accrual  loans  for which  delinquent
interest  allowances  had been  established as of the end of each of the periods
indicated:

<TABLE>
<CAPTION>
                                         % of                 % of                 % of                % of                  % of
                               1998      Total       1997     Total      1996      Total      1995     Total       1994      Total
                              -------   -------    -------   -------    -------   -------    -------   -------    -------   -------
                                                                     (Dollars In Thousands)
<S>                           <C>           <C>    <C>           <C>    <C>           <C>    <C>           <C>    <C>           <C> 
Non-accrual Loans:
Single family .............   $12,270        42%   $16,799        49%   $25,602        35%   $25,991        26%   $13,041        14%
Multi-family ..............    13,005        44     15,785        46     44,754        62     69,579        70     60,213        64
Commercial ................     4,040        14      1,533         5      2,223         3      3,313         4     20,986        22
Other .....................        --        --         --        --         --        --        220        --        245        --
                              -------   -------    -------   -------    -------   -------    -------   -------    -------   -------
   Total Non-accrual
    Loans .................   $29,315       100%   $34,117       100%   $72,579       100%   $99,103       100%   $94,485       100%
                              =======   =======    =======   =======    =======   =======    =======   =======    =======   =======
</TABLE>


     The allowance for delinquent interest, based on loans past due more than 90
days or in foreclosure,  totaled $1.9 million,  $1.8 million, $4.2 million, $5.6
million and $5.2  million at  December  31,  1998,  1997,  1996,  1995 and 1994,
respectively.

     The Bank's modified loans result primarily from temporary  modifications of
principal  and  interest  payments.  Under  these  arrangements,  loan terms are
typically  reduced to no less than a monthly interest payment required under the
note.  If the borrower is unable to return to scheduled  principal  and interest
payments at the end of the  modification  period,  foreclosure  proceedings  are
initiated or the modification  period may be extended.  As of December 31, 1998,
the Bank had modified loans totaling $11.0 million,  net of loan loss allowances
of $3.3 million.  This compares with $16.7 million,  net of loan loss allowances

                                       7
<PAGE>

of $4.1 million as of December 31, 1997. No modified  loans were 90 days or more
delinquent as of December 31, 1998 or December 31, 1997.  Modified loans 90 days
or more delinquent as of December 31, 1996 were $472 thousand.

     Statement  of  Financial  Accounting  Standards  No.  114,  "Accounting  by
Creditors for Impairment of a Loan" ("SFAS No. 114"),  requires the  measurement
of  impaired  loans based on 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 at the fair value of its collateral. SFAS No. 114 does not apply
to large  groups  of  homogeneous  loans  that  are  collectively  reviewed  for
impairment. For the Bank, loans collectively reviewed for impairment include all
single  family loans less than $500  thousand and  multi-family  loans less than
$750 thousand.

     Pursuant  to  SFAS  No.  114,  a loan is  considered  to be  impaired  when
management  believes that it is probable that the Bank will be unable to collect
all amounts due under the contractual  terms of the loan.  Estimated  impairment
losses are recorded as separate  valuation  allowances  and may be  subsequently
adjusted based upon changes in the  measurement of impairment.  Impaired  loans,
which are disclosed net of valuation allowances, include non-accrual major loans
(single family loans with an outstanding  principal amount greater than or equal
to $500  thousand  and  multi-family  and  commercial  real estate loans with an
outstanding  principal amount greater than or equal to $750 thousand),  modified
loans,  and major loans less than 90 days  delinquent  in which full  payment of
principal and interest is not expected to be received.

     Valuation  allowances  for  impairment  totaled $7.6 million,  $9.8 million
$12.4  million  as of  December  31,  1998,  1997 and  1996,  respectively.  The
following  is a summary of  impaired  loans,  net of  valuation  allowances  for
impairment, for the periods indicated:

                                     December 31,   December 31,    December 31,
                                         1998           1997            1996 
                                        -------        -------        -------
                                               (Dollars In Thousands)

Non-accrual loans ..............        $ 5,934        $ 8,260        $20,052
Modified loans .................          5,976          8,090          9,728
Other impaired loans ...........          5,613          9,335          7,854
                                        -------        -------        -------
                                        $17,523        $25,685        $37,634
                                        =======        =======        =======


     When a loan is considered  impaired,  the Bank measures impairment based on
the present  value of expected  future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the loan is
"collateral-dependent"  or a probable foreclosure,  impairment is measured based
on the fair value of the  collateral.  When the measure of an  impaired  loan is
less than the recorded  investment  in the loan,  the Bank records an impairment
allowance equal to the excess of the Bank's recorded investment in the loan over
its measured  value.  All impaired  loans as of December 31, 1998 had  valuation
allowances  established.  As of December 31, 1997 and December 31, 1996 impaired
loans  totaling  $2.5 million and $4.1 million,  respectively,  had no valuation
allowances  established.  The following  summary details impaired loans measured
using  the  present  value of  expected  future  cash  flows  discounted  at the
effective  interest rate of the loan and impaired  loans measured using the fair
value method for the periods indicated:

                                     December 31,   December 31,    December 31,
                                         1998           1997            1996 
                                        -------        -------        -------
                                               (Dollars In Thousands)

Present value method ...........        $ 1,067        $ 1,067        $ 2,992
Fair value method ..............         16,456         24,618         34,642
                                        -------        -------        -------
Total impaired loans ...........        $17,523        $25,685        $37,634
                                        =======        =======        =======


                                       8
<PAGE>

     The present  value of an impaired  loan's  expected  future cash flows will
change from one reporting  period to the next because of the passage of time and
also may change  because of revised  estimates  in the amount or timing of those
cash  flows.  The Bank  records the entire  change in the  present  value of the
expected  future  cash flows as an  impairment  valuation  allowance,  which may
necessitate  an increase in the provision for loan losses.  Similarly,  the fair
value of the collateral of an impaired collateral-dependent loan may change from
one reporting  period to the next. The Bank also records a change in the measure
of  these  impaired  loans  as an  impairment  valuation  allowance,  which  may
necessitate an adjustment to the provision for loan losses.

     The  following  is an  analysis  of the  activity  in the Bank's  valuation
allowance  for  impaired  loans  during  the  periods   indicated   (dollars  in
thousands):

     Balance at December 31, 1995 ......................          $ 26,101
        Provision for loan losses ......................            11,387
        Net charge-offs ................................           (25,138)
                                                                  --------
     Balance at December 31, 1996 ......................            12,350
        Provision for loan losses ......................             7,345
        Net charge-offs ................................            (9,920)
                                                                  --------
     Balance at December 31, 1997 ......................             9,775
        Provision for loan losses ......................               640
        Net charge-offs ................................            (2,781)
                                                                  --------
     Balance at December 31, 1998 ......................          $  7,634
                                                                  ========

     Cash payments  received from impaired loans are recorded in accordance with
the contractual  terms of the loan. The principal portion of the payment is used
to reduce the  principal  balance of the loan,  whereas the interest  portion is
recognized as interest income.

     The average  recorded  investment in impaired  loans during 1998,  1997 and
1996 was $17.5  million,  $24.5  million and $52.7  million,  respectively.  The
amount of interest  income  recognized from impaired loans during 1998, 1997 and
1996 was $1.3 million,  $1.9 million and $2.7 million,  respectively,  under the
cash basis method of accounting.  Interest income  recognized  under the accrual
basis method of accounting  for 1998,  1997 and 1996 totaled $1.3 million,  $1.9
million and $2.5 million, respectively.

     The table  below  shows the  Bank's net  investment  in  non-accrual  loans
determined to be impaired, by property type, as of the periods indicated:

                                    December 31,  December 31,    December 31,
                                       1998           1997            1996      
                                      -------        -------        -------
                                             (Dollars In Thousands)

     Single family ...........        $    --        $   856        $ 2,002
     Multi-family ............          5,456          6,893         17,417
     Commercial ..............            478            511            633
                                      -------        -------        -------
                                      $ 5,934        $ 8,260        $20,052
                                      =======        =======        =======

     Loan Loss  Experience  Summary.  The Bank  maintains  a  general  valuation
allowance  to absorb  possible  future  losses  that may be realized on its loan
portfolio.  The allowance is reviewed and adjusted at least quarterly based upon
a number of factors, including asset classifications,  economic trends, industry
experience, industry and geographic concentrations, estimated collateral values,
management's  assessment  of credit risk inherent in the  portfolio,  historical
loss experience and the Bank's underwriting practices.


                                       9
<PAGE>


     The  following  is an analysis of the  activity in the Bank's  general loan
valuation allowance for the periods indicated:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,                  
                                                       ----------------------------------------------------------------------------
                                                         1998             1997             1996             1995             1994  
                                                       --------         --------         --------         --------         --------
                                                                                   (Dollars In Thousands)
<S>                                                    <C>              <C>              <C>              <C>              <C>     
Beginning General Loan Valuation
  Allowance ...................................        $ 61,237         $ 54,900         $ 42,876         $ 55,353         $ 46,900
Provision for Loan Losses .....................           6,560           13,155           23,768            6,958           53,175
Charge-Offs, Net of Recoveries:
  Single Family ...............................          (1,497)          (5,633)          (8,845)          (6,040)         (16,127)
  Multi-Family ................................           1,354            2,341           (2,448)         (13,676)         (19,800)
  Commercial ..................................             (32)             482              240              851             (664)
  Non-Real Estate .............................              16              226                9              (67)            (180)
                                                       --------         --------         --------         --------         --------
  Total Net Charge-Offs .......................            (159)          (2,584)         (11,044)         (18,932)         (36,771)
                                                       --------         --------         --------         --------         --------
Transfer to Liability Account for
        Loans Sold with Recourse ..............              --           (4,234)              --             (503)          (7,948)
Transfer to Real Estate General
  Valuation Allowance .........................              --               --             (700)              --               --
                                                       --------         --------         --------         --------         --------
Ending General Loan Valuation
        Allowance .............................        $ 67,638         $ 61,237         $ 54,900         $ 42,876         $ 55,356
                                                       ========         ========         ========         ========         ========
</TABLE>

     The Bank also maintains a valuation allowance for loans sold with recourse,
which is included in Other  Liabilities in the Company's  Statement of Financial
Condition.  The activity in the general valuation  allowance for loans sold with
recourse for 1998,  1997,  1996,  1995 and 1994 is presented  below  (dollars in
thousands):

     Balance at December 31, 1994 ........................        $  7,948
     Provision for losses ................................           2,123
     Transfer from general valuation allowance ...........             503
     Net charge-offs .....................................          (1,524)
                                                                  --------
     Balance at December 31, 1995 ........................           9,050
     Net charge-offs .....................................            (652)
                                                                  --------
     Balance at December 31, 1996 ........................           8,398
     Transfer from general valuation allowance ...........           4,234
     Net recoveries ......................................             397
                                                                  --------
     Balance at December 31, 1997 ........................          13,029
     Net charge-offs .....................................            (483)
                                                                  --------
     Balance at December 31, 1998 ........................        $ 12,546
                                                                  ========

     In years  prior to 1994,  the  valuation  allowance  for  loans  sold  with
recourse was included in the general valuation  allowance for loans. The balance
of such valuation allowance as of December 31, 1993 was $6.2 million.

     The Bank's total general valuation  allowance for loans (including  general
valuation  allowances  for loans sold with  recourse)  was 2.51% of total assets
with loss exposure  (including  loans sold with  recourse) at December 31, 1998,
2.12% at December  31, 1997 and 1.86% at December  31,  1996.  Depending  on the
economy and real estate  markets in which the Bank  operates,  increases  in the
general  valuation  allowance  may be required in future  periods.  In addition,
various regulatory  agencies,  as an integral part of their examination process,
periodically review the Bank's general valuation  allowance.  These agencies may
require the Bank to establish  additional general valuation  allowances based on
their judgment of the information available at the time of their examination.


                                       10
<PAGE>

     The following  table details the general  valuation  allowance by loan type
for the periods indicated,  including the general valuation  allowance for loans
sold with recourse:

<TABLE>
<CAPTION>
                                     % of                  % of                 % of                  % of                   % of
                           1998      Total      1997       Total      1996      Total      1995       Total       1994       Total
                          -------   -------    -------    -------    -------   -------    -------    -------     -------    -------
                                                                   (Dollars In Thousands)
<S>                       <C>           <C>    <C>            <C>    <C>           <C>    <C>            <C>     <C>            <C> 
Real Estate Loans:
  Single Family .......   $27,611        34%   $21,583         29%   $15,355        24%   $ 8,887         17%    $ 6,938         11%
  Multi-Family ........    47,264        59     45,029         61     44,078        70     35,278         68      50,018         79
  Commercial ..........     5,247         7      6,658          9      3,587         6      7,529         15       6,170         10
  Non-Real Estate Loans        62        --        996          1        278        --        232         --         175         --
                          -------   -------    -------    -------    -------   -------    -------    -------     -------    -------
  Total ...............   $80,184       100%   $74,266        100%   $63,298       100%   $51,926        100%    $63,301        100%
                          =======   =======    =======    =======    =======   =======    =======    =======     =======    =======
</TABLE>

     Net loan charge-offs,  including net charge-offs from the general valuation
allowance,  impaired  allowance,  and the general valuation  allowance for loans
sold with recourse  totaled $3.4 million,  $12.1 million,  $37.5 million,  $39.7
million and $45.4 million for 1998,  1997,  1996,  1995 and 1994,  respectively,
representing  0.09%, 0.39%, 1.21%, 1.28% and 1.58% of the average loan portfolio
for such  periods.  Charge-offs  have  improved  due to the  improvement  in the
Southern California economy and real estate market.

     Any increase in charge-offs  would  adversely  impact the Company's  future
loan loss provisions and earnings.

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations  - Asset  Quality  Ratios"  for an analysis of the Bank's
general  valuation  allowances as a percentage of non-accrual  loans,  the total
loan portfolio and total loans with loss exposure.

     Potential Problem Loans. The Bank also had $16.6 million, $41.6 million and
$44.0  million in  potential  problem real estate loans as of December 31, 1998,
December 31, 1997 and December 31, 1996, respectively.  These are loans which do
not meet the  criteria of impaired or  non-performing  loans but have  displayed
some past or present weakness. If the weakness is not corrected,  the loan could
eventually result in a loss to the Bank.

     The Bank's  Asset  Classification  Committee  meets at least  quarterly  to
review and monitor the condition of the loan portfolio.  Additionally, a special
workout  group  of the  Bank's  officers  meets  at  least  monthly  to  resolve
delinquent loan situations and to initiate  actions  enforcing the Bank's rights
in security properties pending foreclosure and liquidation.

     Non-performing  Assets. For a further discussion of non-performing  assets,
see "Management's  Discussion and Analysis of Financial Condition and Results of
Operations - Non-Performing Assets."

     Generally,   loans  greater  than  60  days   delinquent  are  placed  into
foreclosure  and a valuation  allowance is established,  if necessary.  The Bank
acquires title to the property in most foreclosure  actions in which the loan is
not reinstated by the borrower.  Once real estate is acquired in settlement of a
loan, the property is recorded at fair value less estimated costs to sell.

     Following the  acquisition  of  foreclosed  real estate  ("REO"),  the Bank
evaluates the property and establishes a plan for marketing and disposing of the
property.  After  inspecting  the  property,  the Bank  determines  whether  the
property   may  be  disposed  of  in  its  present   condition  or  if  repairs,
rehabilitation or improvements are necessary.


                                       11
<PAGE>

     The following table provides information  regarding the Bank's REO activity
for the periods indicated:

                                              Real Estate Owned Activity
                                                Year Ended December 31, 
                                     ------------------------------------------
                                       1998             1997             1996  
                                     --------         --------         --------
                                               (Dollars In Thousands)

Beginning Balance ...........        $ 10,218         $ 14,331         $ 19,701
Additions ...................          17,096           49,150           74,886
Sales .......................         (22,559)         (53,263)         (80,256)
                                     --------         --------         --------
Ending Balance ..............        $  4,755         $ 10,218         $ 14,331
                                     ========         ========         ========

     Other Interest-Earning  Assets. The Bank owned no contractually  delinquent
interest-earning assets other than loans as of December 31, 1998.

Investment Activities

     Savings  institutions  are  required by federal  regulations  to maintain a
minimum ratio of liquid assets which may be invested in certain  government  and
other specified securities. This level is adjusted from time to time in response
to prevailing  economic  conditions and as a means of controlling  the amount of
available  mortgage  credit.  At December 31,  1998,  the  regulatory  liquidity
requirement was 4.00% and the Bank's liquidity percentage was 5.38%.

     It is the Bank's policy to maintain liquidity investments at a modest level
and to use available cash to originate  mortgages which normally  command higher
yields. Therefore, interest income on investments generally represents less than
5% of total revenues.

     The following table summarizes the total investment portfolio at historical
cost by type at the end of the periods indicated:

<TABLE>
<CAPTION>
                                                                                       December 31,  
                                                   --------------------------------------------------------------------------------
                                                     1998              1997              1996              1995              1994 
                                                   --------          --------          --------          --------          --------
                                                                                 (Dollars In Thousands)
<S>                                                <C>               <C>               <C>               <C>               <C>     
U.S. Treasury Securities ..................        $    300          $    300          $    301          $    301          $  4,205
U.S. Agency Securities ....................          28,156            48,142            49,989            46,561            36,565
Collateralized Mortgage
 Obligations ("CMOs") .....................          36,380             1,009             8,776            29,874            43,282
                                                   --------          --------          --------          --------          --------
                                                     64,836            49,451            59,066            76,736            84,052
Unrealized loss on
 securities available-for-sale ............            (503)             (541)             (157)             (552)               --
                                                   --------          --------          --------          --------          --------
                                                   $ 64,333          $ 48,910          $ 58,909          $ 76,184          $ 84,052
                                                   ========          ========          ========          ========          ========

Weighted average yield on
 interest-earnings invest-
 ments end of period ......................            5.38%             5.17%             5.98%             5.15%             5.08%
                                                   ========          ========          ========          ========          ========
</TABLE>


                                       12
<PAGE>

     The following is a summary of the  maturities  of investment  securities at
historical value as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                             Maturity
                                     -----------------------------------------------------------------------------------------------
                                                                                                        Total Historical
                                        Within 1 Year                1-5 Years                               Value 
                                     --------------------     ------------------------     -----------------------------------------
                                                 Weighted                     Weighted                      Weighted        Average
                                                  Average                      Average                       Average        Maturity
                                      Amount       Yield      Amount            Yield      Amount            Yield           Yrs/Mos
                                     -------      -------     -------           ------     -------           ------          -------
                                                                     (Dollars In Thousands)
U.S. Treasury
<S>                                  <C>             <C>      <C>                <C>       <C>                <C>             <C>
 Securities ...................      $    --         --%      $   300            5.79%     $   300            5.79%            2/7
U.S. Agency Securities ........           --         --        28,156            4.51       28,156            4.51            4/11
                                     -------                  -------                      -------
                                     $    --                  $28,456            4.52      $28,456            5.17            4/11
                                     =======                  =======                      =======
</TABLE>

The Bank's CMOs all have expected maturities within five years.

Sources of Funds

     General.  The  Bank's  principal  sources  of funds are  savings  deposits,
advances  from the  Federal  Home  Loan  Bank of San  Francisco  ("FHLBSF")  and
securities sold under agreements to repurchase.

     Deposits. The Bank obtains deposits through three different sources: 1) its
retail branch system,  2) phone  solicitations by designated  employees,  and 3)
national brokerage firms.

     Deposits acquired through  telemarketing  efforts are typically placed with
the Bank by  professional  money managers and represented 5%, 5% and 6% of total
deposits  at  December  31,  1998,  1997 and  1996,  respectively.  The level of
telemarketing  deposits varies based on yields  available to depositors on other
investment   instruments   and  the   depositors'   perception   of  the  Bank's
creditworthiness.

     Deposits acquired through national brokerage firms represented 23%, 20% and
20% of total  deposits at December 31, 1998,  1997 and 1996,  respectively.  Any
fees paid to deposit  brokers are amortized over the term of the deposit.  Based
on historical renewal percentages, management believes that these deposits are a
stable source of funds.  Institutions  meeting the regulatory  capital standards
necessary to be deemed well-capitalized are not required to obtain a waiver from
the FDIC in order to accept brokered deposits. See "Management's  Discussion and
Analysis - Capital Resources and Liquidity."

     Deposits  obtained  through the retail  branch  system were $1.5 billion at
December  31,  1998,  1997 and  1995.  Retail  deposits  comprised  72% of total
deposits at December  31, 1998,  75% of total  deposits at December 31, 1997 and
74% at December  31, 1996.  The level of deposits  has remained  stable over the
last three years due to increased  competition  for retail  savings  deposits in
Southern California.  In order to increase fee income at the retail branches and
decrease  interest costs, the Bank's retail deposit  marketing efforts have been
concentrated on obtaining  demand deposit  accounts over the last several years.
The Bank operated 24 retail branches at the end of 1998.

     The  following  table shows the average  balances and average rates paid on
deposits by deposit type for the periods indicated:

<TABLE>
<CAPTION>
                                                                            During the Year Ended December 31, 
                                                      ------------------------------------------------------------------------------
                                                                1998                       1997                        1996         
                                                      -----------------------     ----------------------      ----------------------
                                                       Average        Average       Average      Average       Average      Average
                                                       Balance         Rate         Balance       Rate         Balance        Rate  
                                                      ----------     --------     ----------    --------      ----------    --------
                                                                                  (Dollars In Thousands)
<S>                                                   <C>              <C>        <C>              <C>        <C>              <C>  
Passbook Accounts ..............................      $   84,711       2.04%      $   83,958       2.06%      $   94,858       2.02%
Money Market Deposit Accounts ..................         251,866       3.89          138,764       3.16          125,722       2.61
Interest-bearing Checking Accounts .............         102,367       1.04          111,246       1.00          142,487       0.96
Fixed Term Certificate Accounts ................       1,682,080       5.06        1,638,892       5.22        1,772,621       5.36
                                                      ----------                  ----------                  ----------
                                                      $2,121,024       4.61%      $1,972,860       4.70%      $2,135,688       4.76%
                                                      ==========                  ==========                  ==========
</TABLE>


                                       13
<PAGE>

     The following table shows the maturity  distribution of jumbo  certificates
of  deposit  ($100,000  and  greater)  as  of  December  31,  1998  (dollars  in
thousands):

     Maturing in:
       1 month or less ................................            $ 82,648
       Over 1 month to 3 months .......................              93,045
       Over 3 months to 6 months ......................              76,723
       Over 6 months to 12 months .....................              67,170
       Over 12 months .................................               1,265
                                                                   --------
           Total ......................................            $320,851
                                                                   ========

     Based on historical renewal  percentages at maturity,  management  believes
that jumbo  certificates of deposit are a stable source of funds. For additional
information  with respect to deposits,  see Note 8 of the Notes to  Consolidated
Financial Statements.

     The following tables set forth information regarding the amount of deposits
in the various types of savings  programs  offered by the Bank at the end of the
years indicated and the average balances and rates for those years:

<TABLE>
<CAPTION>
                                                                                   December 31, 
                                             ---------------------------------------------------------------------------------------

                                                       1998                            1997                          1996         
                                             -------------------------      -------------------------      -------------------------
                                               Amount            %            Amount           %             Amount            %  
                                             ----------     ----------      ----------     ----------      ----------     ----------
                                                                              (Dollars In Thousands)
<S>                                          <C>                   <C>      <C>                   <C>      <C>                  <C> 
Variable rate non-term  accounts:
  Money market deposit accounts
  (weighted average rate of 3.91%,
   3.36% and 2.82%) ......................   $  293,159             14%     $  156,221              8%     $  130,173             7%
  Interest-bearing checking accounts
   (weighted average rate of 1.06%
   1.78% and 1.01%) ......................      108,211              5         130,765              7         165,616             8
  Passbook accounts (2.01%, 2.04%
   and 2.04%) ............................       84,132              4          86,547              4          94,718             5
  Non-interest bearing checking
   accounts ..............................      137,822              6         112,373              6          40,404             2
                                             ----------     ----------      ----------     ----------      ----------     ---------
                                                623,324             29         485,906             25         430,911            22
                                             ----------     ----------      ----------     ----------      ----------     ---------
  Fixed term rate certificate accounts:
  Under six month term (weighted
    average rate of 4.18%, 5.07%
     and 5.11%) ..........................       62,642              3         120,637              6         160,430             8
  Six month term (weighted average
   rate of 5.14%, 6.00% and 5.69%) .......      301,313             14         103,901              5         204,048            10
  Nine month term (weighted average of
   5.42%, 5.64% and 5.45%)................      438,443             21         374,259             19         246,777            13
  One year to 18 month  term (weighted
   average rate of 5.14%, 5.53% and
   5.32%) ................................      263,291             12         348,941             18         304,532            16
  Two year or 30 month term (weighted
    average rate of 5.28%, 5.23% and
    5.32%) ...............................       23,015              1          30,689              2          40,498             2
  Over 30 month term (weighted
    average rate of 5.79%, 5.85%
    and 6.27%) ...........................      103,030              5         125,971              7         202,724            10
  Negotiable certificates of $100,000
    and greater, 30 day to one year terms
    (weighted average rate of 5.08%,
    5.50% and 5.39%) .....................      320,851             15         353,343             18         367,528            19
                                             ----------     ----------      ----------     ----------      ----------     ---------
                                              1,512,585             71       1,457,741             75       1,526,537            78
                                             ----------     ----------      ----------     ----------      ----------     ---------
  Total deposits (weighted average
   rate of 4.36%, 4.66% and 4.67%) .......   $2,135,909            100%     $1,943,647            100%     $1,957,448           100%
                                             ==========     ==========      ==========     ==========      ==========     =========
</TABLE>


                                       14
<PAGE>

     The  cost  of  funds,  operating  margins  and  net  earnings  of the  Bank
associated with brokered and telemarketing  deposits are generally comparable to
the cost of funds,  operating  margins and net  earnings of the Bank  associated
with retail deposits,  Federal Home Loan Bank ("FHLB") borrowings and securities
sold  under  agreements  to  repurchase.  As the  cost of each  source  of funds
fluctuates  from time to time,  the Bank seeks funds from the lowest cost source
until the relative costs change.  As the costs of funds,  operating  margins and
net  earnings of the Bank  associated  with each  source of funds are  generally
comparable,  the Bank does not deem the impact of a change in incremental use of
any one of the specific sources of funds at a given time to be material.

     Borrowings.  The FHLB System  functions  as a source of credit to financial
institutions  which are members of a regional  Federal Home Loan Bank.  The Bank
may apply for advances from the FHLBSF secured by the FHLBSF capital stock owned
by the Bank,  certain  of the Bank's  mortgages  and other  assets  (principally
obligations  issued or guaranteed  by the United  States  government or agencies
thereof).  Advances can be requested  for any sound  business  purpose  which an
institution is authorized to pursue.  Any  institution not meeting the qualified
thrift  lender  test will be subject to  restrictions  on its  ability to obtain
advances from the FHLBSF. See "Summary of Material  Legislation and Regulation -
Qualified Thrift Lender Test." In granting advances, the FHLBSF also considers a
member's creditworthiness and other relevant factors.

     Total  advances from the FHLBSF were $714 million at December 31, 1998 at a
weighted  average rate of 5.43%.  This compares with advances of $1.3 billion at
December  31,  1997 and $1.2  billion at December  31, 1996 at weighted  average
rates of 5.80%  and  5.71%,  respectively.  The  level  of FHLB  borrowings  was
decreased during 1998 due to the availability of lower cost sources of funds and
increased cash flows from loan payoffs.  The Bank has credit  availability  with
the  FHLBSF  which  allows  it to  borrow  up to  40% of the  Bank's  assets  or
approximately $1.5 billion at December 31, 1998.

     The Bank enters into sales of  securities  under  agreements  to repurchase
(reverse  repurchase  agreements)  which  require  the  repurchase  of the  same
securities.   The   agreements  are  treated  as  borrowings  in  the  Company's
Consolidated Statements of Financial Condition. There are certain risks involved
with doing these types of  transactions.  In order to minimize these risks,  the
Bank's  policy  is to  enter  into  agreements  only  with  well-known  national
brokerage firms which meet their  regulatory  capital  requirements.  Borrowings
under reverse repurchase  agreements totaled $471.2 million at December 31, 1998
at a  weighted  average  rate of  5.37%  and  were  secured  by  mortgage-backed
securities with principal  balances  totaling $490.4 million.  Borrowings  under
reverse  repurchase  agreements  totaled $577.7 million at December 31, 1997 and
$646.5  million at  December  31, 1996 at  weighted  average  rates of 5.66% and
5.42%, respectively.

     The Company has $50 million in 10-year senior unsecured notes ("Notes") due
in September  of 2004.  The Notes are interest  only,  with an interest  rate of
11.75%  and are due  October  2004.  The  $47.8  million  in net  proceeds  were
contributed  to the Bank as capital.  The Notes are  governed by the terms of an
indenture dated  September 28, 1994 (the  "Indenture").  The Indenture  contains
financial  and operating  covenants  which,  among other  things,  (i) limit the
incurrence  of debt by the Company,  (ii) limit the payment of dividends and the
making of certain  other  distributions  by the  Company  and its  subsidiaries,
including the Bank,  (iii) limit the  disposition of, and the existence of liens
on, the stock of the Company's subsidiaries, (iv) limit the existence of certain
liens on other  property  or assets of the  Company and (v) limit the ability of
the Company to enter into certain transactions with affiliates.  Management does
not believe that these  covenants  impair the Bank's  activities in the ordinary
course of  business.  The  amount of  annual  interest  due on the Notes is $5.9
million.  The Notes  are  callable  beginning  October  1, 1999 at a premium  of
5.875%.  The premium is reduced each year until October 1, 2002 when there is no
premium.  The  Company  is  solely  dependent  upon the  Bank's  ability  to pay
dividends to provide  funds for meeting the  interest  due on these  Notes.  See
"Summary of Material Legislation and Regulations" for a discussion of regulatory
restrictions on dividends and other capital distributions.

     Borrowings  from all sources  totaled $1.2  billion,  $1.9 billion and $1.9
billion at weighted  average  rates of 5.66%,  5.91% and 5.77% at  December  31,
1998, 1997 and 1996,  respectively.  The Bank reduced its borrowings during 1998
due to increased cash flows from loan payoffs.


                                       15
<PAGE>

     The Bank's portfolio of short term borrowings  includes short-term variable
rate  credit  advances  and FHLB  advances  due in less  than one year  from the
FHLBSF,  securities  sold under  agreements to  repurchase  and other short term
borrowings. The following schedule summarizes short term borrowings for the last
three years:

<TABLE>
<CAPTION>
                                                                                Maximum
                                                                               Month-End
                                                                              Outstanding
                                                        End of Period           Balance           Average Period     
                                                  -------------------------    During the    -------------------------
                                                  Outstanding        Rate        Period      Outstanding        Rate
                                                  -----------      --------    ----------    -----------      --------
                                                                          (Dollars In Thousands)
<S>                                                <C>               <C>       <C>            <C>               <C>  
1998
Short term FHLB Advances .....................     $  200,000        5.57%     $1,035,000     $  554,167        5.70%
Securities sold under agreements to repurchase        471,172        5.37         576,514        514,498        5.55
Other short term borrowings ..................             --          --           5,500          3,250        5.73

1997
Short term variable rate credit advances .....     $       --          --%     $       --     $      600        6.01%
Short term FHLB Advances .....................      1,310,000        5.80       1,345,000      1,170,417        5.75
Securities sold under agreements to repurchase        577,670        5.66         634,976        607,479        5.60
Other short term borrowings ..................          4,000        5.85          26,500         15,703        5.63

1996
Short term variable rate credit advances .....     $   32,000        7.33%     $   32,000     $       87        7.33%
Short term FHLB Advances .....................        980,000        5.69       1,140,000        896,250        5.74
Securities sold under agreements to repurchase        646,482        5.42         715,465        678,420        5.40
Other short term borrowings ..................          2,000        5.53          22,900         15,802        5.55
</TABLE>

Other Sources

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations  - Sources of Funds" for a  discussion  of other  funding
sources.

Subsidiaries

     The Bank has three wholly-owned subsidiaries: Seaside Financial Corporation
("Seaside"),  Oceanside Insurance Agency, Inc.  ("Oceanside"),  and Santa Monica
Capital Group ("SMCG"), all of which are California corporations.

     As of  December  31,  1998,  the Bank had  invested  an  aggregate  of $514
thousand  (primarily  equity)  in  Seaside,  Oceanside  and SMCG.  Revenues  and
operating  results  of  these  subsidiaries   accounted  for  less  than  1%  of
consolidated revenues in 1998 and no material change is presently foreseen.  For
the past several years, only Seaside and Oceanside have been active.

     Real Estate  Development  Activities.  Seaside has not been involved in any
real estate  development  activity for the last  several  years and there are no
plans for future real  estate  projects.  Therefore,  no gains or losses on real
estate development activities were recorded during 1998, 1997 or 1996.

     Seaside  continues to hold one condominium unit which is rented to the Bank
for use by its employees. In 1997, a condominium,  rented to the Bank, was sold.
At December 31, 1998,  Seaside's  investment in the  remaining  unit totaled $36
thousand.  There were no loans outstanding  against the property at December 31,
1998. The unit is located in Southern California.

     Trustee  Activities.  Seaside acts as trustee on the Bank's deeds of trust.
Trustee fees for this activity amounted to $274 thousand, $494 thousand and $695
thousand in 1998, 1997 and


                                       16
<PAGE>

1996,  respectively.  The  decrease in trustee fees over the last three years is
consistent with the decrease in loan foreclosure activity.

     Insurance  Brokerage  Activities.  Oceanside  engages in limited  insurance
agent  activities.  Income to date from this source has been  insignificant.  In
1996,  Oceanside  began  operating as a licensed  life  insurance  agent for the
purpose  of  receiving  commissions  on the  sale of  fixed  and  variable  rate
annuities and mutual funds  conducted in the Bank's  offices by a licensed third
party vendor.  Independent  Financial  Securities,  Inc.  ("IFS"),  a registered
broker-dealer,  conducts its sales  activities in the Bank's branch  offices and
the Bank  receives a percentage  of the  commissions  on such sales  through its
licensed  insurance  agency,  Oceanside.  During 1998, 1997 and 1996,  Oceanside
received  commission  income of $263 thousand,  $462 thousand and $428 thousand,
respectively, from the sale of non-insured investment products by IFS.

Employees

     As of December 31, 1998,  the Bank had a total of 475 full time  equivalent
employees, including 118 part-time employees. No employees were represented by a
collective  bargaining  group. At present,  the Company has no employees who are
not  also  employees  of the  Bank.  The Bank  provides  its  regular  full-time
employees with a  comprehensive  benefits  program that includes basic and major
medical insurance,  long-term disability coverage, sick leave, a 401(k) plan and
a profit sharing  employee stock ownership plan. The Bank considers its employee
relations to be excellent.

Summary of Material Legislation and Regulations

     General.  FFC, as a savings and loan holding  company,  is registered with,
and subject to regulation and examination  by, the Office of Thrift  Supervision
("OTS").  The Bank, which is a federally  chartered savings bank and a member of
the FHLBSF,  is subject to regulation and examination by the OTS with respect to
most of its business activities,  including,  among others,  lending activities,
capital standards,  general investment  authority,  deposit taking and borrowing
authority,  mergers and other  business  combinations,  establishment  of branch
offices,  and  permitted  subsidiary  investments  and  activities.  The  Bank's
deposits  are  insured by the FDIC  through the SAIF.  As  insurer,  the FDIC is
authorized  to conduct  examinations  of the Bank.  The Bank is also  subject to
Federal Reserve Board regulations  concerning reserves required to be maintained
against deposits.

     As a member of the FHLB System,  the Bank is required to own capital  stock
in its regional FHLB, the FHLBSF,  in an amount at least equal to the greater of
1% of the aggregate  principal amount of its unpaid residential  mortgage loans,
home purchase  contracts and similar  obligations at the end of each year, or 5%
of its outstanding  borrowings from the FHLBSF.  The Bank was in compliance with
this  requirement,  with an  investment  of $72.7  million  in  FHLBSF  stock at
December 31, 1998.

     The FHLBSF  serves as a source of  liquidity  for the  member  institutions
within its assigned region, the FHLB Eleventh  District.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes advances to members in accordance with policies and procedures
established by the Federal  Housing  Finance Board and the Board of Directors of
the FHLBSF.  At December 31, 1998, the Bank's  advances from the FHLBSF amounted
to $714.0 million,  or 21% of the Company's total funding sources  (deposits and
borrowings).

     The FHLBs provide funds for the resolution of troubled savings institutions
and are required to contribute to affordable  housing  programs  through  direct
loans or interest  subsidies on advances  targeted for community  investment and
low and moderate income housing  projects.  These  contributions  have adversely
affected the level of dividends  that the FHLBs have paid to its members.  These
contributions  also could  have an adverse  effect on the value of FHLB stock in
the future.  For the year ended December 31, 1998,  dividends paid by the FHLBSF
to the Bank totaled approximately $4.2 million.

     Savings and Loan Holding Company Regulations. The activities of savings and
loan  holding  companies  are governed by the Home Owners' Loan Act, as amended.
Pursuant to that statute,  the Company is subject to certain  restrictions  with
respect to its activities and investments.



                                       17
<PAGE>

     A savings and loan  holding  company,  like FFC,  which  controls  only one
savings  association,  is exempt from  restrictions  on the conduct of unrelated
business  activities  that are applicable to savings and loan holding  companies
that control more than one savings  association.  The  restrictions  on multiple
savings  and loan  holding  companies  are  similar to the  restrictions  on the
conduct of unrelated  business  activities  applicable to bank holding companies
under the Bank Holding  Company Act. The Company  would become  subject to these
restrictions if it were to acquire control of another savings  association or if
the Bank were to fail to meet its  qualified  thrift lender  ("QTL")  test.  See
"Qualified Thrift Lender Test."

     The OTS may impose  restrictions  when it has  reasonable  cause to believe
that the  continuation of any particular  activity by a savings and loan holding
company  constitutes  a  serious  risk to the  financial  safety,  soundness  or
stability of such holding company's savings institution.  Specifically,  the OTS
may,  as  necessary,   (i)  limit  the  payment  of  dividends  by  the  savings
institution;  (ii) limit  transactions  between the savings  institution and its
holding company or its affiliates; and (iii) limit any activities of the savings
institution  that  create a serious  risk that the  liabilities  of the  holding
company and its affiliates may be imposed on the savings  institution.  Any such
limits  will be  issued  in the  form of a  directive  having  the  effect  of a
cease-and-desist order.

     Regulatory Capital  Requirements.  The capital  regulations of the OTS (the
"Capital  Regulations")  require the Bank to maintain  "tangible  capital" of at
least 1.5% of adjusted  total assets,  "core capital" of at least 3% of adjusted
total  assets,  and a  "risk-based  capital"  ratio of at least 8%.  The OTS may
establish,  on a case-by-case basis, individual minimum capital requirements for
a savings  institution  which vary from the  requirements  that would  otherwise
apply under the Capital Regulations.

     "Tangible capital" means  stockholders'  equity computed in accordance with
generally  accepted  accounting  principles  less any  intangible  assets,  less
unrealized  gains,  plus  unrealized  losses  on  certain   "available-for-sale"
securities,  plus purchased  mortgage servicing rights and purchased credit card
relationships,  subject to certain  limitations.  "Core  capital"  is  generally
defined the same as tangible capital except that certain  qualifying  intangible
assets may be included.  The Bank has no such qualifying intangible assets as of
December 31, 1998.  The  "risk-based  capital"  ratio is defined as the ratio of
total  capital to total  assets  after the  assets  have been  risk-weighted  in
accordance  with  certain  percentages  developed  by the OTS and the other bank
regulatory  agencies.  Total  capital  for  purposes of the  risk-based  capital
requirements  consists of core  capital  and  supplementary  capital,  less cash
pledged  for  credit  support  in  certain  loan  sales.  Supplementary  capital
includes, among other things, a portion of the general loan valuation allowance.
The general loan valuation  allowance may generally be included in supplementary
capital up to 1.25% of risk-weighted assets. At December 31, 1998, $26.5 million
of the Bank's  $67.6  million in general  valuation  allowances  was included in
supplementary  capital.   Supplementary  capital  may  be  used  to  satisfy  an
institution's  risk-based capital  requirement in an amount not greater than its
core capital.  The Bank is considered to be "well  capitalized"  for purposes of
these capital measures.  See "Management's  Discussion and Analysis of Financial
Condition and Results of Operations - Capital  Resources and Liquidity - Capital
Requirements."

     A savings institution which fails to meet its capital standards must submit
a capital  restoration  plan to the OTS District  Director  which  describes the
manner in which  the  institution  proposes  to  increase  its  capital  and the
activities in which it will engage, and requires that any increase in its assets
be met with a commensurate  increase in tangible capital and risk-based capital.
The OTS also  has the  authority  to  issue a  capital  directive  to a  savings
institution that does not satisfy its minimum capital requirements.  The capital
directive may also specify corrective actions to be taken.

     Insurance of Accounts.  The FDIC administers two separate deposit insurance
funds.  The Bank Insurance Fund ("BIF") insures the deposits of commercial banks
and other  institutions which were insured by the FDIC prior to the enactment of
the  Financial  Institutions  Reform,  Recovery  and  Enforcement  Act  of  1989
("FIRREA")  . The  Savings  Association  Insurance  Fund  ("SAIF")  insures  the
deposits of savings  institutions  which were insured by the Federal Savings and
Loan Insurance  Corporation ("FSLIC") prior to the enactment of FIRREA. The FDIC
is  authorized to increase  deposit  insurance  premiums if it  determines  such
increases are appropriate to maintain the reserves of either the SAIF or the BIF
or to fund the  administration of the FDIC. In addition,  the FDIC is authorized
to levy emergency special assessments on BIF and SAIF members.



                                       18
<PAGE>

     The FDIC has  implemented a risk-based  assessment  system,  under which an
institution's  deposit insurance assessment is based on the probability that the
deposit  insurance fund will incur a loss with respect to the  institution,  the
likely amount of any such loss,  and the revenue needs of the deposit  insurance
fund.  Under  the  risk-based   assessment  system,  a  savings  institution  is
categorized into one of three capital categories:  well capitalized,  adequately
capitalized,  and  undercapitalized.  A savings  institution is also categorized
into one of three supervisory  subgroup  categories based on examinations by the
OTS.

     The FDIC may terminate the deposit  insurance of any insured  depository if
the FDIC  determines,  after a hearing,  that the  institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue  operations or has violated any applicable law,  regulation or order or
any condition  imposed in writing by the FDIC. The FDIC may also suspend deposit
insurance  temporarily  during the  hearing  process if the  institution  has no
tangible capital (which may be calculated under certain  conditions by including
goodwill).  In addition,  FDIC regulations  provide that any insured institution
that falls  below a 2% minimum  leverage  ratio will be subject to FDIC  deposit
insurance termination proceedings unless it has submitted,  and is in compliance
with, a capital plan with its primary federal regulator and the FDIC.

     The  OTS  also  imposes   assessments  and  examination   fees  on  savings
institutions.  OTS  assessments  for the Bank were $599  thousand in 1998,  $610
thousand in 1997 and $611 thousand in 1996.

     The SAIF was  recapitalized  as part of the Economic  Growth and Regulatory
Paperwork  Reduction Act of 1996 (the "Economic  Growth Act").  This legislation
included the Deposit Insurance Funds Act of 1996 (the "DIFA") which provided for
the  recapitalization  of the SAIF  through a special  assessment  levied on all
institutions that have SAIF-insured deposits.

     Liquidity.  Federal regulations  currently require a savings institution to
maintain a monthly  average  daily  balance of liquid  assets  (including  cash,
certain  time  deposits,   bankers'  acceptances  and  specified  United  States
government,  state or federal agency  obligations)  equal to at least 4% of: (i)
the  average  daily  balance of its net  withdrawable  accounts  and  short-term
borrowings  during the preceding  calendar quarter or (ii) the ending balance of
its net withdrawable  accounts as of the end of the preceding  calendar quarter.
This  liquidity  requirement  may be changed from time to time by the OTS to any
amount within the range of 4% to 10% of such accounts and  borrowings  depending
upon  economic  conditions  and the  deposit  flows of member  institutions.  On
November 24, 1997, the OTS reduced this liquidity requirement to 4% from 5%. The
OTS also gave institutions the option of using a quarterly  average  calculation
or an end  of  quarter  calculation  of  the  liquidity  base  and  removed  the
requirement of maintaining a monthly average balance of short-term liquid assets
equal  to at least  1% of the  average  daily  balance  of its net  withdrawable
accounts  and short term  borrowings.  Monetary  penalties  may be  imposed  for
failure to meet these liquidity ratio  requirements.  The Bank's liquidity ratio
for the quarter ended December 31, 1998 was 5.38%, which exceeded the applicable
requirements.

     Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each savings institution, as well as commercial banks and certain other lenders,
to identify the communities served by the institution's  offices and to identify
the  types of  credit  the  institution  is  prepared  to  extend  within  those
communities.   The  CRA  also  requires  the  OTS  to  assess  an  institution's
performance in meeting the credit needs of its identified communities as part of
its  examination  of  the  institution,   and  to  take  such  assessments  into
consideration in reviewing  applications  with respect to branches,  mergers and
other business combinations,  including acquisitions by savings and loan holding
companies.  An  unsatisfactory  CRA rating may be the basis for denying  such an
application and community groups have successfully protested applications on CRA
grounds.  In connection with its assessment of CRA performance,  the OTS assigns
CRA ratings of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance."  The Bank was rated  "satisfactory" in its last CRA examination,
which was conducted in 1998. New CRA regulations which were enacted in late 1995
took effect starting in 1996, for examinations in 1997 and thereafter. Under the
new regulations, institutions are evaluated based on: (i) performance in lending
in their  assessment  areas;  (ii) the provision of deposit and other  community
services in their assessment areas; and (iii) the investment in  housing-related
and  other  qualified  community  investments.  Under  the new  regulations,  an
institution  which is found to be  deficient in its  performance  in meeting its
community's credit needs may be subject to enforcement actions,  including cease
and desist orders and civil money penalties.



                                       19
<PAGE>

     Restrictions  on  Dividends  and  Other  Capital   Distributions.   Savings
association  subsidiaries of holding companies generally are required to provide
not less than thirty days' advance notice to their OTS District  Director of any
proposed declaration of a dividend on the association's stock.

     Under OTS regulations,  limitations are imposed on "capital  distributions"
by savings  institutions,  including cash  dividends,  payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a  cash-out  merger  and  other  distributions   charged  against  capital.  The
regulations,  which  establish a three-tiered  system of  regulation,  establish
"safe-harbor"  amounts of capital distributions that institutions can make after
providing  notice to the OTS, but without needing prior  approval.  Institutions
can distribute amounts in excess of the safe-harbor only with the prior approval
of the OTS.

     Although  the OTS has  never  prohibited  the Bank  from  making a  capital
distribution, the OTS nevertheless retains the authority to prohibit any capital
distribution  otherwise  authorized  under the regulations if the OTS determines
that the capital  distribution  would constitute an unsafe or unsound  practice.
The regulations also state that the capital  distribution  limitations  apply to
direct and indirect  distributions  to affiliates,  including those occurring in
connection  with  corporate  reorganizations.  Moreover,  the Bank  would not be
permitted to pay cash  dividends  if it were deemed to be an  "undercapitalized"
institution  for purposes of the "prompt  corrective  action" rules. At December
31,  1998,  the  Bank  met the  standards  necessary  to be  deemed  to be "well
capitalized" for purposes of the "prompt corrective action" rules.

     Limits on Types of Loans and Investments.  Federal savings institutions are
authorized,  without quantitative limits, to make loans on the security of liens
upon residential real property and to invest in a variety of instruments such as
obligations of, or fully  guaranteed as to principal and interest by, the United
States;  stock or bonds of the FHLB;  certain mortgages,  obligations,  or other
securities which have been sold by FHLMC or FNMA; and certain  securities issued
by, or fully  guaranteed  as to  principal  and  interest  by, the Student  Loan
Marketing Association and the Government National Mortgage Association.  Certain
other  types of loans or  investments  may be acquired  subject to  quantitative
limits:  secured or unsecured  loans for  commercial,  corporate,  business,  or
agricultural  purposes,  loans on the security of liens upon nonresidential real
property,   investments  in  personal  property,   consumer  loans  and  certain
securities such as commercial paper and corporate debt, and  construction  loans
without security.

     Savings institutions are subject to the same loans-to-one borrower ("LTOB")
restrictions that are applicable to national banks, with limited  provisions for
exceptions.  In general,  the national bank standard restricts loans to a single
borrower to no more than 15% of a bank's capital and surplus, plus an additional
10% if the loan is collateralized by certain readily marketable collateral.  The
Bank's loans were within the LTOB limitations at December 31, 1998.

     Savings  institutions and their  subsidiaries are prohibited from acquiring
or retaining any corporate  debt security that, at the time of  acquisition,  is
not  rated  in one  of the  four  highest  rating  categories  by at  least  one
nationally  recognized   statistical  rating  organization.   The  Bank  has  no
impermissible equity investments in its investment portfolio.

     Safety  and  Soundness  Standards.  OTS  regulations  contain  "safety  and
soundness"  standards  covering  various  aspects of the  operations  of savings
institutions.  The guidelines relate to internal controls,  information  systems
and internal audit systems,  loan documentation,  credit underwriting,  interest
rate  exposure,  asset  growth,   executive  compensation,   maximum  ratios  of
classified assets to capital,  and minimum earnings  sufficient to absorb losses
without impairing capital.  If the OTS determines that a savings institution has
failed  to  meet  the  safety  and  soundness  standards,  it  may  require  the
institution to submit to the OTS, and thereafter  comply with, a compliance plan
acceptable to the OTS describing the steps the  institution  will take to attain
compliance  with the  applicable  standard and the time within which those steps
will be taken.

     Federal  regulations contain a number of measures intended to promote early
identification of management  problems at depository  institutions and to ensure
that regulators intervene promptly to require corrective action by institutions.
The Bank's annual  management  report on the  effectiveness  of internal control
standards and compliance with certain  designated laws will be made available in
March of 1999.



                                       20
<PAGE>

     Prompt  Corrective  Action.  The  "prompt  corrective  action"  regulations
require  insured  depository  institutions  to be  classified  into  one of five
categories   based   primarily  upon  capital   adequacy,   ranging  from  "well
capitalized"  to  "critically   undercapitalized."  These  regulations  require,
subject to certain  exceptions,  the appropriate  federal banking agency to take
"prompt  corrective  action"  with  respect  to  an  institution  which  becomes
"undercapitalized"  and to take additional  actions if the  institution  becomes
"significantly undercapitalized" or "critically undercapitalized."

     Only "well capitalized" institutions may obtain brokered deposits without a
waiver.  An "adequately  capitalized"  institution can obtain brokered  deposits
only if it receives a waiver from the FDIC.  An  "undercapitalized"  institution
may not  accept  brokered  deposits  under any  circumstances.  The Bank met the
"well-capitalized"  standards  during 1998 and was  eligible to accept  brokered
deposits without a waiver.

     Qualified Thrift Lender Test. In general, the QTL test requires that 65% of
an institution's  portfolio assets be invested in "qualified thrift investments"
(primarily loans, securities and other investments related to housing), measured
on a monthly  average basis for nine out of every 12 months on a rolling  basis.
Any savings institution that fails to meet the QTL test must either convert to a
bank charter or become subject to national bank-type  restrictions on branching,
business activities,  and dividends,  and its ability to obtain FHLB advances is
affected.  The Bank  met the QTL  test at  December  31,  1998,  with 97% of its
portfolio assets comprised of "qualified thrift investments."

     Transactions with Affiliates.  Federal savings  institutions are subject to
the provisions of Sections 23A and 23B of the Federal  Reserve Act.  Section 23A
restricts  loans or extensions of credit to, or investments in, or certain other
transactions with,  affiliates and as to the amount of advances to third parties
collateralized  by the  securities or  obligations  of  affiliates.  Section 23B
generally   requires   that   transactions   with   affiliates   must  be  on  a
non-preferential  basis. Federal savings institutions may not make any extension
of credit to an affiliate  which is engaged in activities  not permitted by bank
holding  companies,  and may not  invest in  securities  issued by an  affiliate
(except with respect to a subsidiary). The Company is an "affiliate" of the Bank
for the purposes of these provisions.

     Transactions with Insiders. Federal savings institutions are subject to the
restrictions of Sections 22(g) and (h) of the Federal  Reserve Act which,  among
other  things,  restrict the amount of extensions of credit which may be made to
executive  officers,  directors,  certain principal  shareholders  (collectively
"insiders"), and to their related interests. When lending to insiders, a savings
association  must  follow  credit  underwriting  procedures  that  are not  less
stringent than those applicable to comparable  transactions with persons outside
the association. The amount that a savings association can lend in the aggregate
to insiders  (and to their  related  interests) is limited to an amount equal to
the  association's  core capital and surplus.  Insiders are also prohibited from
knowingly receiving (or knowingly permitting their related interests to receive)
any extensions of credit not authorized under these statutes.

     Federal Reserve System.  Federal Reserve Board regulations  require savings
institutions to maintain non-interest bearing reserves against their transaction
accounts. The reserve for transaction accounts as of December 31, 1998 was 3% of
the first $43.1  million of such  accounts and 10% (subject to adjustment by the
Federal  Reserve Board between 8% and 14%) of the balance of such accounts.  The
Bank is in compliance with these requirements.

     Taxation.  The Company,  the Bank and its subsidiaries  file a consolidated
federal income tax return on a calendar year basis using the accrual method. The
maximum marginal federal tax rate is currently 35%.

     In August  1996,  the Small  Business  Job  Protection  Act (the "Act") was
signed  into law.  One  provision  of the Act  repealed  the  reserve  method of
accounting  for bad debts for savings  institutions  effective for taxable years
beginning after 1995. Therefore, the Bank used the specific charge-off method in
filing its 1996 and 1997  federal tax returns and will use this method in filing
its 1998 federal tax return.

     The Bank may be required to recapture its "applicable excess reserves",  if
its federal tax bad debt reserves are in excess of its base year reserve amount.
As of December 31, 1998, the Bank had no applicable  excess  reserves.  The base
year  reserves  will be subject to  recapture  and the Bank could be 


                                       21
<PAGE>

required  to  recognize a tax  liability  if: (1) the Bank fails to qualify as a
"bank" for federal income tax purposes;  (2) certain distributions are made with
respect  to the stock of the Bank;  (3) the bad debt  reserves  are used for any
purpose  other  than to  absorb  bad debt  losses;  or (4)  there is a change in
federal tax law. The enactment of this  legislation  has not and is not expected
to have a material impact on the Bank's operations or financial position.

     For state tax purposes, the Bank is allowed an addition to its tax bad debt
reserves in an amount necessary to fill up to its tax reserve balance calculated
using the experience method.

     To the  extent  that  distributions  by the  Bank to the  Company  that are
permitted under federal  regulations  exceed the Bank's earnings and profits (as
computed for federal income tax purposes),  such distributions  would be treated
for tax  purposes  as being made out of the Bank's  excess bad debt  reserve and
would thereby  constitute  taxable  income to the Bank in an amount equal to the
lesser of the Bank's excess bad debt reserve or the amount  which,  when reduced
by the amount of income tax  attributable  to the  inclusion  of such  amount in
gross income, is equal to the amount of such distribution. At December 31, 1998,
the Bank's  excess bad debt reserve was zero.  At December 31, 1998,  the Bank's
earnings  and  profits  (as  computed  for  federal  income tax  purposes)  were
approximately $207.4 million.

     At December 31, 1998, the Bank had $41.6 million in deferred tax assets. No
valuation  allowance was established because management believes that it is more
likely than not that the  deferred  tax assets will be  realized.  Deferred  tax
liabilities totaled $33.2 million at December 31, 1998.

     The Bank is subject  to an  alternative  minimum  tax if such tax is larger
than the tax otherwise payable. Generally, alternative minimum taxable income is
a taxpayer's regular taxable income,  increased by the taxpayer's tax preference
items for the year and adjusted by  computing  certain  deductions  in a special
manner which negates the  acceleration of such deductions under the regular tax.
The adjusted income is then reduced by an exemption amount and is subject to tax
at a 20% rate. The excess of the addition to the bad debt reserve computed under
the  percentage  of taxable  income  method  over the  increase  in the  reserve
calculated on the basis of actual  experience is an item of tax  preference.  No
alternative  minimum taxes were  applicable to the Bank for tax years 1998, 1997
or 1996.

     California tax laws  generally  conform to federal tax laws. For California
franchise  tax  purposes,   federal   savings  banks  are  taxed  as  "financial
corporations"  at a  rate  2%  higher  than  that  applicable  to  non-financial
corporations  because of exemptions from certain state and local taxes.  The tax
rates for 1998, 1997 and 1996 were 10.84%, 10.84% and 11.30%, respectively.  The
Franchise Tax Board ("FTB") has not yet announced the rate for 1999.

     During 1997, the Internal Revenue Service ("IRS") completed its examination
of the Company's consolidated federal income tax returns for tax years up to and
including 1992. The adjustments made by the IRS related to temporary differences
as to the  recognition of certain  taxable  income and expense items.  While the
Company had provided deferred taxes for federal and state purposes,  the changes
in the period of  recognition  of certain  income and expense items  resulted in
interest  due to the IRS and FTB. As a result,  the Company paid $7.4 million in
interest to the IRS and FTB during 1997 and accrued an additional  $210 thousand
in interest  during the year.  During 1998,  the Company  paid $598  thousand in
interest to the IRS and FTB and reversed $300 thousand. During 1996, the Company
recorded a net reversal of $5.1 million in accrued interest.  The remaining $500
thousand  remaining  balance in accrued  interest as of December 31, 1998 is for
interest due with amended returns which have not yet been filed.


                                       22
<PAGE>

ITEM 2--PROPERTIES

     At December 31, 1998, the Bank owned the building and land for seven of its
branch  offices,  owned the  building  but leased the land for three  additional
offices, and leased its remaining offices. Properties leased by the Bank include
its home and executive  offices  located in a 12-story  office tower in downtown
Santa Monica and a general services and corporate  operations office building in
Santa Monica. FFC does not lease or own properties.  For information  concerning
rental  obligations,   see  Note  6  of  the  Notes  to  Consolidated  Financial
Statements.

ITEM 3--LEGAL PROCEEDINGS

     The  Company is  involved  as a plaintiff  or  defendant  in various  legal
actions incident to its business, none of which are believed by management to be
material to the Company.

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

     None.


PART II

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

     (a) Market  Information.  The  Company's  common stock is traded on the New
York Stock Exchange  ("NYSE") under the symbol "FED." Included in  "Management's
Discussion  and Analysis of Financial  Condition and Results of Operations" is a
chart  representing  the range of high and low stock  prices  for the  Company's
common stock for each quarterly period for the last five years.

     (b) Holders.  As of February 12, 1999, the Company had 20,623,198 shares of
its   common   stock   outstanding,   representing   approximately   891  record
stockholders,  which  total does not include  the number of  stockholders  whose
shares are held in street name.

     (c) Dividends.  As a publicly traded company, the Company has no history of
dividend  payments on its common stock.  However,  the Company may in the future
adopt a policy of paying  dividends,  depending on its net  earnings,  financial
position  and capital  requirements,  as well as  regulatory  restrictions,  tax
consequences  and the ability of the Company to obtain a dividend  from the Bank
for payment to stockholders. OTS regulations limit amounts that the Bank can pay
as a dividend to the  Company.  No dividend  may be paid if the Bank's net worth
falls  below  regulatory  requirements.  (See  "Business  - Summary of  Material
Legislation and Regulations"  for other  regulatory  restrictions on dividends.)
Within these  regulations,  the Board of Directors of the Bank declared and paid
$5.9 million in dividends  during each of the years 1998,  1997 and 1996.  These
dividends  enabled  the  Company to service the $50 million in Notes due October
2004.

     The  ability of the  Company to pay  dividends  is also  restricted  by the
covenants  contained  in its  Indenture  pertaining  to $50 million in Notes due
October 2004. See "Business - Borrowings."


                                       23
<PAGE>

ITEM 6--SELECTED FINANCIAL DATA

     Selected financial data for the Company is presented below:

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
                                                      1998             1997             1996             1995             1994
                                                   -----------      -----------      -----------      -----------      -----------
                                                                    (Dollars In Thousands, Except per Share Data)
<S>                                                <C>              <C>              <C>              <C>              <C>        

For the Year Ended December 31:
  Interest income ............................     $   289,769      $   299,220      $   297,178      $   301,735      $   235,424
  Interest expense ...........................         186,491          204,226          198,031          224,077          157,655
  Net interest income ........................         103,278           94,994           99,147           77,658           77,769
  Provision for loan losses ..................           7,200           20,500           35,155           28,376           85,700
  Other income ...............................          13,657           10,218           10,915            8,725           11,264
  Non-interest expense .......................          48,924           44,151           59,175           45,903           45,496
  Earnings (loss) before
   income taxes (benefit) ....................          60,811           40,561           15,732           12,104          (42,163)
  Income taxes (benefit) .....................          26,182           17,461            7,488            5,569          (17,699)
  Net earnings (loss) ........................          34,629           23,100            8,244            6,535          (24,464)
  Basic earnings (loss) per share(1) .........            1.63             1.09             0.39             0.31            (1.16)
  Diluted earnings (loss)
   per share(1) ..............................            1.60             1.07             0.39             0.31            (1.16)
End of Year:
  Loans receivable, net ......................       2,808,221        3,145,164        3,048,469        3,059,780        3,072,309
  Mortgage-backed securities .................         556,679          676,058          746,006          843,819          830,715
  Investment securities ......................          64,333           48,910           58,909           67,813           74,654
  Total assets ...............................       3,677,128        4,160,115        4,143,852        4,139,737        4,157,414
  Deposits ...................................       2,135,909        1,943,647        1,957,448        2,205,036        2,298,914
  Borrowings .................................       1,235,172        1,941,670        1,940,482        1,666,943        1,604,821
  Liabilities ................................       3,420,128        3,937,328        3,949,302        3,943,446        3,972,727
  Stockholders' equity .......................         257,000          222,787          194,550          196,291          184,687
  Book value per share(1) ....................           12.16            10.52             9.24             9.25             8.71
Selected Ratios:
  Return on average assets ...................            0.88%            0.56%            0.20%            0.16%           (0.64)%
  Return on average equity ...................           14.40%           11.25%            4.22%            3.47%          (12.78)%
  Ratio of non-performing
    assets to total assets ...................            0.84%            0.95%            1.77%            2.33%            2.23%
Other Data:
  Number of Bank full service
    branches .................................              24               24               25               25               25
</TABLE>

(1)  All per share  amounts have been adjusted for the  two-for-one  stock split
     declared June 25, 1998.

     Also see  summarized  results of operations on a quarterly  basis for 1998,
1997 and 1996 in Note 15 of the Notes to Consolidated Financial Statements.


                                       24
<PAGE>

ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

OVERVIEW

     The Company's results of operations are primarily affected by its levels of
net  interest  income,   provisions  for  loan  losses,   non-interest   income,
non-interest  expense and income  taxes.  The  Company's  results  are  strongly
influenced by the Southern California economy in which it operates.

     Net  earnings  of $34.6  million or $1.60 per share were  recorded in 1998,
compared to net  earnings  of $23.1  million or $1.07 per share in 1997 and $8.2
million or $0.39 per share in 1996.  All per share  amounts are  presented  on a
diluted  basis and have been  adjusted for the two for one stock split  declared
June 25, 1998.  The  Company's  results over the last three years have  improved
primarily due to lower loan loss  provisions and increased net interest  income.
The Southern  California  economy continued to improve in 1998 from the economic
recession of the early 1990's.  As a result,  loan charge-offs  declined to $3.4
million in 1998  compared to $12.1 million in 1997 and $37.5 million in 1996. In
addition,  transfers to valuation allowances for impaired loans declined to $640
thousand in 1998 compared to $7.3 million in 1997 and $11.4 million in 1996.

     Certain key financial ratios for the Company are presented below:

                                                                  Average
                                    Return on     Return on      Equity to
                                     Average       Average        Average
                                     Assets        Equity         Assets
                                     ------        ------         ------
      1998 ..............             .88%          14.40%         6.09%
      1997 ..............             .56           11.25          4.95
      1996 ..............             .20            4.22          4.61
      1995 ..............             .16            3.47          4.49
      1994 ..............            (.64)         (12.78)         4.97


     Core earnings reflect the Company's  results from basic operations and were
$63.6 million in 1998,  $60.6  million in 1997 and $60.5  million in 1996.  Core
earnings are defined as net interest  income  before  provision  for loan losses
plus  other  income  (excluding  gain on  sale of  loans  and  securities)  less
non-interest  expense.  Non-recurring  items and  provision  for loan losses are
excluded from core  earnings.  Core earnings  increased in 1998 compared to 1997
due to decreased levels of non-performing assets and lower interest rates.

     Non-performing  assets  (primarily loans 90 days past due or in foreclosure
plus foreclosed real estate) decreased to $30.7 million or 0.84% of total assets
at December  31,  1998  compared  to $40.1  million or 0.95% of total  assets at
December  31, 1996 and $73.9  million or 1.77% of total  assets at December  31,
1996. The decreasing trend in  non-performing  assets over the last two years is
due to lower  balances of  delinquent  loans and  foreclosed  properties  of all
collateral types.

     The Company  repurchased  100,800  shares of its common  stock during 1998.
Total shares  repurchased  as of December 31, 1998 were  1,947,840 at an average
price of $6.86 per share.  As of February 12, 1999,  the Company  repurchased an
additional  685,400  shares  at  an  average  price  of  $16.15.   Total  shares
repurchased as of February 12, 1999 were 2,633,240 at an average price of $9.27.


                                       25
<PAGE>

     At December 31, 1998 the Bank's  regulatory  risk-based  capital  ratio was
15.43% and the  tangible and core  capital  ratios were 7.98%.  The Bank met the
regulatory  capital  standards to be deemed  "well-capitalized"  at December 31,
1998.

     The Bank's deposits are insured by the SAIF up to a maximum of $100,000 for
each insured  depositor.  The Bank's FDIC insurance  premiums  decreased to $1.2
million in 1998  compared to $1.9 million in 1997 and $5.4  million in 1996.  In
addition,  the Bank paid a $15.0 million one time SAIF  assessment  during 1996.
The decrease in 1998 compared to 1997 was due to a drop in the Bank's assessment
rate to 6.3 basis  points  from 9.3 basis  points due to an  improvement  in its
regulatory  rating.  The decrease in 1997  compared to 1996 was due to a drop in
the  assessment  rate to 9.3 basis points from 23 basis points after  payment of
the special assessment.

Risks and Uncertainties

     In the normal course of business,  the Company  encounters two  significant
types of risk: economic risk and regulatory risk.

                                  ECONOMIC RISK

     There are two main components of economic risk: credit risk and market risk
(which includes interest rate risk.)

     Credit Risk

     Credit risk is the risk of default in the  Company's  loan  portfolio  that
results from a borrower's inability to make contractually required payments. See
"Loan Loss Provisions" and "Non-performing Assets."

     The  determination  of the  allowance  for loan losses and the valuation of
real estate  collateral is based on estimates that are susceptible to changes in
the economic  environment and market  conditions.  Management  believes that the
allowance  for  loan  losses  as of  December  31,  1998 was  adequate  based on
information  available  at that time.  A downward  turn in the current  economic
climate could increase the likelihood of losses due to credit risks.  This could
create the need for additional loan loss provisions.

     Market Risk

     Market risk is the risk of loss from  unfavorable  changes in market prices
and interest  rates.  The Bank's market risk arises  primarily from the interest
rate risk inherent in its lending and deposit taking activities.

     See  "Asset-Liability  Management" for additional  information  relating to
market risk.

                                 REGULATORY RISK

     Regulatory  risk is the  risk  that the  regulators  will  reach  different
conclusions than management regarding the financial position of the Company. The
OTS  examines  the  Bank's  financial  results  annually.  The OTS  reviews  the
allowance for loan losses and may require the Bank to adjust the allowance based
on information available at the time of their examination.


                                       26
<PAGE>

                                   OTHER RISKS

     Year 2000 Issue

     The Year 2000 issue arises  because many computer  systems  identify  dates
using  only the last two  digits  of the  year.  These  systems  are  unable  to
distinguish  between  dates in the year 2000 and dates in the year 1900.  If not
corrected,  these  systems  could fail or provide  incorrect  information  after
December 31, 1999 or when using dates after  December 31, 1999. Any such failure
on the Bank's  systems could have a material  adverse  impact on the Company and
its ability to process customer transactions or to provide customer service.

     Over the course of the past two years,  the Bank  developed  a process  for
addressing  the Year 2000  issue  for the  Bank's  major  computer  systems  and
applications. An internal committee was formed to address the issue and a formal
project plan was developed.  The Company has identified and prioritized systems,
software and equipment with potential for being affected by the year 2000 issue.
All significant vendors have been contacted regarding their Year 2000 readiness.
In each case where the Bank is vulnerable  to a third party's  failure to remedy
its own year 2000 issues,  the Bank has developed  contingency  plans to utilize
other vendors or alternative work flows if adequate response and verification is
not received from the vendor in a timely fashion.

     The Bank's  major  computer  applications  are owned and  operated by third
party vendors. Therefore, the Bank's challenge is to ensure that its vendors are
ready for the Year 2000 or have  plans to become  ready  before  the Year  2000.
Because the Bank had plans to convert its major data  processing  to new systems
during 1997 and 1998,  requirements  for Year 2000 compliance have been included
in all major systems contracts.  Contractual  arrangements with the Bank's major
data processing vendors provide for regular monitoring of the vendors' Year 2000
projects,  substantial  system  compliance  by the end of 1998 and  testing  and
verification in early 1999.

     During 1988 and the first two months of 1999,  the Bank  completed  testing
for  substantially  all of the significant data processing  systems deemed to be
critical to the Bank. The remediation  process is complete for these systems and
no material problems have arisen during the testing process.  The Bank's process
of testing and  verifying  the year 2000  readiness  of the systems  provided by
third parties will continue through the middle of 1999, as system  modifications
are made and further testing of interfaces and less critical systems continues.

     Because  of  the  third   party   nature  of  its  major  data   processing
relationships,  the Bank has not  borne  any  programming  costs of  making  its
systems Year 2000 ready.  All of these costs will be borne by the  vendors.  The
Bank's major cost of becoming Year 2000 ready is related to staff and management
time spent planning,  monitoring and testing the systems.  Therefore,  Year 2000
issues are expected to have an  immaterial  impact on the  Company's  results of
operations, liquidity and capital expenditures.

     Inflation

     Inflation  substantially  impacts the financial  position and operations of
financial intermediaries, such as banks and savings institutions. These entities
primarily  hold monetary  assets and  liabilities  and, as such,  can experience
significant  purchasing  power gains and losses over relatively short periods of
time. In addition,  interest rate changes during inflationary periods change the
amounts  and   composition   of  assets  and   liabilities   held  by  financial
intermediaries and could result in regulatory  pressure for an additional equity
investment.

     Pending Lawsuits

     The Bank has been named as a defendant in various  lawsuits,  none of which
is expected to have a materially adverse effect on the Company.


                                       27
<PAGE>

                             COMPONENTS OF EARNINGS

Net Interest Income

     Net interest income is the primary component of the Company's earnings. The
chief   determinants   of  net  interest   income  are  the  dollar  amounts  of
interest-earning assets and interest-bearing  liabilities and the interest rates
earned or paid  thereon.  The  greater  the excess of  average  interest-earning
assets over average interest-bearing liabilities, the more beneficial the impact
on net  interest  income.  The excess of average  interest-earning  assets  over
average interest-bearing  liabilities was $131.7 million in 1998, $109.9 million
in 1997 and $92.9 million in 1996.  The increase over the last two years was due
to improved net earnings and a continued improvement in asset quality.

     The  Company's  net interest  income is also impacted by a three month time
lag  before  changes  in the  cost of  funds  can be  passed  along  to  monthly
adjustable  rate loan  customers.  Savings and borrowing  costs adjust to market
rates  immediately  while it takes several  months for the loan yield to adjust.
This time lag  decreases the  Company's  net interest  income during  periods of
rising interest rates. The reverse is true during periods of declining  interest
rates. See "Asset-Liability Management" for further discussion.

     The following  table sets forth the components of  interest-earning  assets
and liabilities,  the excess of  interest-earning  assets over  interest-bearing
liabilities,  the yields  earned and rates paid and net interest  income for the
periods indicated:

<TABLE>
<CAPTION>
                                              1998            1997           1996
                                           ----------      ----------      ----------
                                                      (Dollars In Thousands)
<S>                                        <C>             <C>             <C>       
Average loans and mortgage-backed
 securities (1) ......................     $3,638,628      $3,811,179      $3,806,979
Average investment securities ........        148,871         160,224         165,710
                                           ----------      ----------      ----------
Average interest-earning assets ......      3,787,499       3,971,403       3,972,689
                                           ----------      ----------      ----------
Average savings deposits .............      2,121,024       1,972,860       2,135,688
Average borrowings ...................      1,534,820       1,888,662       1,744,091
                                           ----------      ----------      ----------
Average interest-bearing liabilities .      3,655,844       3,861,522       3,879,779
                                           ----------      ----------      ----------
Excess of interest-earning assets over
 interest-bearing liabilities ........     $  131,655      $  109,881      $   92,910
                                           ==========      ==========      ==========

Yields earned on average interest
 earning assets ......................           7.54%           7.40%           7.36%
Rates paid on average interest-
 bearing liabilities .................           5.11            5.27            5.25(3)
Net interest rate spread .............           2.43            2.13            2.11
Effective net spread .................           2.60            2.28            2.24
Total interest income (2) ............     $  285,395      $  293,931      $  292,564
Total interest expense (2) ...........        186,890         203,434         203,633(3)
                                           ----------      ----------      ----------
Net interest income ..................     $   98,505      $   90,497      $   88,931
                                           ==========      ==========      ==========
</TABLE>

(1)  Non-accrual  loans were  included  in the  average  dollar  amount of loans
     outstanding,  but no income was recognized during the period that each such
     loan was on non-accrual status.

(2)  Dividends on FHLB stock and miscellaneous  interest income and expense were
     not considered in this analysis.

(3)  Excludes the effect of the IRS accrued interest reversal.

     The yield on earning assets increased  slightly to 7.54% in 1998 from 7.40%
in 1997 due to a decline in non-performing  assets and an 8 basis point increase
in the  Index  which  determines  the  yield  on  over  93% of the  Bank's  loan
portfolio.  The  Bank's  cost of  funds  decreased  by 16 basis  points  in 1998
compared to 1997 due to lower market interest rates in 1998 compared to 1997.


                                       28
<PAGE>

     The table below sets forth  certain  information  regarding  changes in the
interest income and interest expense of the Bank for the periods indicated.  For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes in average  balance  multiplied  by old rate) and (ii) changes in rates
(changes in rate multiplied by prior year average balance):

<TABLE>
<CAPTION>
                                              Year Ended                              Year Ended
                                          December 31, 1998                        December 31, 1997
                                               Versus                                   Versus
                                          December 31, 1997                        December 31, 1996
                                ------------------------------------      ------------------------------------
                                            Change Due To                            Change Due To           
                                ------------------------------------      ------------------------------------
                                  Rate         Volume        Total          Rate         Volume       Total  
                                --------      --------      --------      --------      --------      --------
                                                            (Dollars In Thousands)
<S>                             <C>           <C>           <C>           <C>           <C>           <C>     
Interest Income:
  Loans and mortgage-backed
   Securities .............     $  5,324      $(13,088)     $ (7,764)     $  1,867      $    312      $  2,179
  Investments .............         (168)         (604)         (772)         (505)         (307)         (812)
                                --------      --------      --------      --------      --------      --------
    Total interest income .        5,156       (13,692)       (8,536)        1,362             5         1,367
                                --------      --------      --------      --------      --------      --------

Interest Expense:
  Deposits ................       (1,892)        6,861         4,969        (1,137)       (7,671)       (8,808)
  Borrowings (1) ..........         (962)      (20,551)      (21,513)          141         8,468         8,609
                                --------      --------      --------      --------      --------      --------
    Total interest expense        (2,854)      (13,690)      (16,544)         (996)          797          (199)
                                --------      --------      --------      --------      --------      --------

    Change in net
     interest income ......     $  8,010      $     (2)     $  8,008      $  2,358      $   (792)     $  1,566
                                ========      ========      ========      ========      ========      ========
</TABLE>

(1)  Excludes the IRS interest reversal.

Note: Changes in rate/volume (change in rate multiplied by the change in average
volume) have been  allocated to the change in rate or the change in volume based
upon the  respective  percentages of the combined  totals.  Dividends on Federal
Home Loan Bank stock and  miscellaneous  interest  income and  expense  were not
considered in this analysis.


                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                 Interest Rate Spreads and Yield on Average Interest-Earning Assets
                                                                       Year Ended December 31,
                                  --------------------------------------------------------------------------------------------------
                                        1998                1997               1996                  1995                1994 
                                  ----------------    ----------------   ------------------    -----------------   -----------------
                                  During    End of    During    End of   During      End of    During     End of   During    End of
                                  Period    Period    Period    Period   Period      Period    Period     Period   Period    Period
<S>                                <C>       <C>       <C>       <C>       <C>         <C>       <C>       <C>       <C>       <C>  
Weighted average yield
 on loans and mortgage-
 backed securities ...........     7.63%     7.48%     7.49%     7.48%     7.44%       7.47%     7.31%     7.63%     6.25%     6.50%
Weighted average yield
 on investment portfolio(1) ..     5.29      5.14      5.40      6.06      5.71        5.98      5.56      5.15      5.00      5.08
Weighted average yield
 on all interest-earning
 assets ......................     7.54      7.39      7.40      7.42      7.36        7.45      7.23      7.59      6.20      6.47
Weighted average rate
 paid on deposits ............     4.61      4.36      4.70      4.66      4.76        4.67      4.86      4.89      3.85      4.49
Weighted average rate
 paid on borrowings and
 FHLB advances ...............     5.81      5.66      5.86      5.91      5.85(4)     5.77      6.32      6.11      4.93      6.04
Weighted average rate
 paid on all interest-
 bearing liabilities .........     5.11      4.84      5.27      5.28      5.25        5.22      5.51      5.41      4.27      5.12
Effective net spread(2) ......     2.60                2.28                2.24                  1.80                1.99
Interest rate spread(3) ......     2.43      2.55      2.13      2.14      2.11        2.23      1.72      2.18      1.93      1.35
</TABLE>

(1)  Dividends  on  FHLB  stock  and  miscellaneous  interest  income  were  not
     considered in this analysis.

(2)  Net  interest  income  (the  difference  in the dollar  amounts of interest
     earned and paid) divided by average interest-earning assets.

(3)  Weighted average yield on all interest-earning assets less weighted average
     rate paid on all interest-bearing liabilities.

(4)  Excludes effect of IRS accrued interest reversal.

Loss Provision

     The Company  recorded  $7.2  million in loan loss  provisions  during 1998,
compared to $20.5 million  recorded in 1997 and $35.2 million in 1996.  The Bank
has a policy of providing for general valuation  allowances,  unallocated to any
specific loan, but available to offset any future loan losses.  The allowance is
maintained at an amount that management believes adequate to cover estimable and
probable loan losses.  The general  valuation  allowance,  excluding the general
valuation  allowance  for loans sold with  recourse,  totaled  $67.6 million and
$61.2  million at December 31, 1998 and December  31,  1997,  respectively.  The
increase  in  general  valuation  allowances  from 1998 to 1997 is a result of a
decrease in loan  charge-offs.  In addition,  the Bank  recorded a $640 thousand
provision  for  losses  on  the  impaired  loan  portfolio   during  1998.  Loan
charge-offs  decreased from 0.32% of average loans  outstanding in 1997 to 0.09%
of average  loans  outstanding  in 1998.  The Company also  maintains  valuation
allowances for impaired loans and loans sold with recourse.  See "Allowances for
Loan Losses."  Management  performs  regular risk assessments of the Bank's loan
portfolio to maintain appropriate general valuation allowances.  Additional loan
loss provisions may also be required to the extent that charge-offs are recorded
against the  valuation  allowance  for  impaired  loans,  the general  valuation
allowance,  or the  valuation  allowance  for  loans  sold with  recourse.  Loan
charge-offs  decreased  to $3.4  million in 1998 from $12.1  million in 1997 and
$37.5  million in 1996.  Charge-offs  result  from  declines in the value of the
underlying collateral of the non-performing loans.

Non-interest Income

     Loan  servicing  and other fees were $4.2 million in 1998,  $6.2 million in
1997 and $6.4 million in 1996. Loan servicing fees during 1998 were reduced by a
$1.4  million   provision  for  impairment  of  the  Bank's   servicing   asset.
Additionally,  fees  decreased in 1998 compared to 1997 due to decreased fees on
loans serviced for other lenders due to loan prepayments.

     Gain (loss) on sale of loans  increased to $4.1 million in 1998 compared to
$652 thousand in 1997, and $253 thousand in 1996. The increased  gains from 1997
to 1998 and from 1996 to 1997 were due to cash gains and fees earned on the sale
of fixed rate loans which were available to the Bank's borrowers at historically
low rates.  In 1998, 62% of single family loans  originated  were originated for
sale in the secondary market.


                                       30
<PAGE>

     Real  estate  operations  resulted  in a net gain of $1.2  million  in 1998
compared to gains of $20 thousand in 1997 and $1.2 million in 1996.  Included in
the above  amounts  are  provisions  for  losses on real  estate  totaling  $572
thousand in 1998,  $1.6  million in 1997 and $745  thousand in 1996.  Gains from
real estate  operations  generally  result from the recovery of excess valuation
allowances  upon the sale of  foreclosed  properties.  The Bank  normally  sells
foreclosed properties within a few months after acquisition.

     Other operating income, which increased to $4.3 million in 1998 compared to
$3.3 million in 1997 and $3.0 million in 1996, consists primarily of fees earned
for  services  provided in the retail  savings  branches.  The  increase in 1998
compared  to 1997 is due to the fact  that item  processing  costs,  which  were
reported as an offset to service fee income in years prior to 1998, are included
in other operating expenses starting in 1998.

Non-interest Expense

     The ratio of  non-interest  expense  to average  total  assets for 1998 was
1.24% compared with 1.06% in 1997.  The ratio for 1996 was 1.43%,  including the
one-time SAIF special  assessment.  The increased ratio in 1998 compared to 1997
resulted from  increased  salaries and related  benefits,  and higher  occupancy
costs.

     Salary and  benefit  costs  increased  14% in 1998  compared to 1997 due to
higher incentive costs, profit sharing costs and bonus expense.  Incentive costs
were higher due to the Bank's increase in loan  originations.  Loan officers are
compensated based on loans originated.  Salary and benefit costs increased 4% in
1997 compared to 1996 due to higher retirement and incentive costs.

     Occupancy  expense  increased  23% in 1998  compared to 1997 due to mark to
market  adjustments of $995 thousand on leased  properties no longer occupied by
the Bank.  Also,  equipment  costs  increased in connection with the Bank's data
processing  conversion  during  1998.  Occupancy  expense  increased  9% in 1997
compared to 1996 due primarily to the additional costs and depreciation  expense
associated with the Bank's new loan origination system and call center.

     Other  operating  expenses  increased  16% in 1998  compared to 1997 due an
increase in costs associated with the data processing conversion and an increase
in uninsured  losses related to the conversion.  Item processing  costs totaling
$1.3 million were included in data processing  costs during 1998. In years prior
to 1998,  item processing  costs were offset against  service fee income.  Other
operating  expense  increased  21% in 1997  compared  to 1996 due  primarily  to
increases in data processing and legal expenses.

     Advertising  expense  decreased  by 30% in 1998  compared  to  1997  due to
advertising plans that were revised during 1998.  Advertising  expense increased
by 18% in  1997  compared  to  1996  due to  additional  brand  advertising  and
increased advertising for LENDFFB.

     Federal deposit  insurance  decreased in 1998 compared to 1997 due to lower
insurance  rates based on an improvement in the Bank's  regulatory  rating.  The
Bank's assessment rate dropped to 6.3 basis points in 1998 from 9.3 basis points
in 1997.  Federal deposit insurance  decreased in 1997 compared to 1996 due to a
drop in the deposit insurance rate from 26 basis points to 9.3 basis points as a
result of the Economic Growth Act and a decline in total deposits. Excluding the
$15.0  million  special SAIF  assessment,  deposit  insurance  decreased in 1996
compared  to 1995  due to a  decline  in  deposits  and a $268  thousand  refund
received  in the  fourth  quarter  of 1996 as a  result  of an  assessment  rate
reduction.


                                       31
<PAGE>

     The following table details the components of non-interest  expense for the
periods indicated:

<TABLE>
<CAPTION>
                                                                                 Non-Interest Expense
                                                                                Year Ended December 31,
                                                     ------------------------------------------------------------------------------
                                                      1998             1997             1996                1995             1994 
                                                     -------          -------          -------             -------          -------
                                                                                (Dollars In Thousands)
<S>                                                  <C>              <C>              <C>                 <C>              <C>    
Salaries and Employee Benefits:
   Salaries ................................         $16,643          $15,413          $15,749             $16,436          $16,887
   Incentive compensation ..................           1,478              883              556                 899            1,363
   Payroll taxes ...........................           1,455            1,371            1,389               1,400            1,498
   Employee benefit insurance ..............           1,069            1,048            1,137               1,180            1,225
   Bonus compensation ......................           1,335            1,100            1,000               1,001              300
   Profit sharing ..........................           1,000              501              500                 500              200
   Pension .................................              --               --              241                 436              481
   SERP ....................................             795              628              506                 408              471
   401(k) ..................................             235              392               --                  --               --
   Other salaries and benefits .............           1,801            1,404              850                 785              309
                                                     -------          -------          -------             -------          -------
                                                      25,811           22,740           21,928              23,045           22,734
                                                     -------          -------          -------             -------          -------
Occupancy:
   Rent ....................................           5,105            4,351            4,270               4,250            4,246
   Equipment ...............................           1,855            1,336              959                 885            1,246
   Maintenance costs .......................             344              450              477                 460              594
   Other occupancy .........................           1,189              741              583                 663              600
                                                     -------          -------          -------             -------          -------
                                                       8,493            6,878            6,289               6,258            6,686
                                                     -------          -------          -------             -------          -------
Other Operating Expense:
   Insurance ...............................             362              345              381                 528              748
   Goodwill ................................             565              839              915                 996              996
   Data processing .........................           3,359            2,539              945               1,012            1,094
   Contributions ...........................             509              412              401                 341              412
   Professional services ...................           1,738            1,682              832                 777              732
   Supervisory exam ........................             599              610              611                 603              547
   Other operating costs ...................           4,288            3,439            4,086               4,110            4,424
                                                     -------          -------          -------             -------          -------
                                                      11,420            9,866            8,171               8,367            8,953
                                                     -------          -------          -------             -------          -------
Federal Deposit Insurance:
   Deposit insurance premiums ..............           1,241            1,872            5,418               6,400            5,151
   SAIF special assessment .................              --               --           15,007                  --               --
                                                     -------          -------          -------             -------          -------
                                                       1,241            1,872           20,425               6,400            5,151
                                                     -------          -------          -------             -------          -------

   Advertising .............................           1,959            2,795            2,362               1,833            1,972
                                                     -------          -------          -------             -------          -------
     Total .................................         $48,924          $44,151          $59,175             $45,903          $45,496
                                                     =======          =======          =======             =======          =======

   Non-interest expense as
    % of average assets ....................            1.24%            1.06%            1.43%(1)            1.10%            1.18%
                                                     =======          =======          =======             =======          =======
</TABLE>

(1)  The ratio for 1996 includes the special SAIF assessment. Excluding the SAIF
     assessment, the ratio would have been 1.06%.


                                       32
<PAGE>

                             BALANCE SHEET ANALYSIS

     Consolidated  assets at the end of 1998 were $3.7 billion,  representing  a
12% decrease from $4.2 billion at the end of 1997 and $4.1 billion at the end of
1996.  Assets  decreased  during 1998 due to the  prepayment of adjustable  rate
mortgages and the borrowers'  preference for fixed rate mortgages in the current
interest rate market.

Loan Portfolio

     At the end of 1998,  over 93% of the Bank's loans had  adjustable  interest
rates  based on monthly  changes in the  Index.  As part of its  asset-liability
management  strategy,  the Bank has maintained the level of adjustable  loans in
its portfolio at over 90% for several years.  Management  believes that the high
level of adjustable rate mortgages will help insulate the Bank from fluctuations
in interest rates,  notwithstanding  the several month time lag between a change
in its monthly cost of funds and a corresponding  change in its loan yields. See
"Asset - Liability Management."

     The Bank also  originates  loans with  initial  fixed  interest  rates with
periods  ranging from 3 to 10 years.  By policy,  the Bank will either match the
fixed rate period of these loans with  borrowings for the same term or will hold
an amount up to $120  million of  unmatched  fixed rate loans in its  portfolio.
Management  believes  that the  limited  origination  of  fixed-rate  loans will
enhance the Company's  overall return on assets and improve loan originations in
this economy.

     In 1998 and 1997, the Bank through its lending division,  FirstFed Mortgage
Services, placed $21.3 million and $22.8 million, respectively in mortgages with
other  lenders  under fee  arrangements,  which  amount is not  included in loan
originations.  In 1998,  loans made on the security of single family  properties
(one to four units) comprised 93% of the dollar amount of new loan originations.
Loans made on the  security  of  multi-family  properties  (five or more  units)
comprised  6% of new  originations.  Loans  originated  through  the  Bank's new
consumer  lending and  commercial  lending  units  totaled $2.4 million and $1.7
million, respectively. No construction loans were originated in 1998. Adjustable
rate mortgages comprised 49% of new loan activity during 1998 compared to 85% in
1997.

     The following table details loan  originations by loan type for the periods
indicated:

<TABLE>
<CAPTION>
                                                        Loan Originations by Type
                                                         Year Ended December 31,
                                      ------------------------------------------------------------
                                        1998         1997         1996         1995        1994   
                                      --------     --------     --------     --------     --------
                                                         (Dollars In Thousands)
<S>                                   <C>          <C>          <C>          <C>          <C>     
Single Family (one to four units)     $594,763     $430,223     $239,866     $237,508     $734,438
Multi-Family ....................       37,720       48,033       57,414       55,832      164,788
Commercial Real Estate ..........          383        2,551        5,568        4,881        9,858
Commercial Business Loans .......        1,733           --           --           --           --
Other ...........................        2,428          444           --        1,031          230
                                      --------     --------     --------     --------     --------
  Total .........................     $637,027     $481,251     $302,848     $299,252     $909,314
                                      ========     ========     ========     ========     ========
</TABLE>

     Loans  originated  upon the sale of the Bank's real estate owned were $10.0
million or 2% of total  originations  in 1998. $844 thousand of these loans were
originated based on the security of single family properties,  $8.7 million were
originated  based on the security of  multi-family  properties and $383 thousand
were based on the security of commercial properties.

     From time-to-time,  the Bank converts loans into mortgage-backed securities
for use in securitized borrowings (reverse repurchase agreements). No loans were
converted  into   mortgage-backed   securities   during  1998,  1997,  or  1996.
Securitized loans have a lower risk weighting for regulatory  risk-based capital
purposes.   In  exchange  for  the   enhanced   credit  risk   associated   with
mortgage-backed securities, the Bank pays guarantee fees to FHLMC and/or FNMA.



                                       33
<PAGE>

     The Bank's  adjustable  rate loan  products  often  provide  for first year
monthly  payments that are lower than the  fully-indexed  interest and principal
due. Any  interest not fully paid by such lower first year  payments is added to
the  principal  balance of the loan.  This causes  negative  amortization  until
payments increase to cover interest and principal repayment  shortfalls.  Due to
negative amortization,  loan-to-value ratios may increase above those calculated
at the inception of the loan.

     To  date,  the  Bank's  foreclosure   experience  on  loans  with  negative
amortization has been no different from that on the fully-amortizing  portfolio.
The amount of negative amortization recorded by the Bank decreases in periods of
declining  interest rates and increases  during  periods of increasing  interest
rates. Due to the decreasing  interest rate environment during 1998, the balance
of negative  amortization on all loans serviced by the Bank was immaterial as of
December 31, 1998.

     The  Bank  does  not  normally  lend  in  excess  of 90%  of the  appraised
collateral value on adjustable mortgage loans ("AMLs"). Where the Bank does lend
in excess of 90% of the appraised value,  additional fees and rates are charged.
Mortgage insurance is required on loans in excess of 80% or premium rates and/or
fees are charged if the mortgage insurance requirement is waived.  Subsequent to
the origination of a loan, the Bank may purchase private mortgage insurance with
its own funds. Loans originated under this program for which there is no private
mortgage  insurance  totaled  $265.0  million at December  31, 1998  compared to
$163.8 million at December 31, 1997 and $122.5 million at December 31, 1996. See
"Business Interest Rates, Terms and Fees."

Loan Composition

     Loans based on the security of single family properties (one to four units)
comprise  the  largest   category  of  the  Bank's  loan  portfolio   (including
mortgage-backed  securities).  The loan portfolio also includes loans secured by
multi-family and commercial properties.  At December 31, 1998, approximately 54%
of the loan and mortgage-backed securities portfolio consisted of first liens on
single  family  properties.  First liens on  multi-family  properties  comprised
approximately  39% of the  portfolio,  and first liens on commercial  properties
represented approximately 7% of the portfolio.

     Multi-family   and  commercial   real  estate  loans  are  considered  more
susceptible  to market risk than single family loans and higher  interest  rates
and fees are charged to  borrowers  for these  loans.  Approximately  6% of loan
originations  in 1998 were  multi-family  loans  compared  to 10% in 1997 and 9%
during 1996.  Multi-family loans originated upon the sale of REO were 1%, 6% and
16% of total loan originations during 1998, 1997 and 1996, respectively.

     The Bank has loss exposure on certain loans sold with recourse. These loans
are  substantially  all  secured  by  multi-family  properties.  Loans sold with
recourse  totaled $203.0  million as of December 31, 1998,  $218.1 million as of
December 31, 1997 and $230.8 million as of December 31, 1996. Although no longer
owned by the Bank,  these loans are  evaluated  for the  purposes  of  computing
general valuation allowances and measuring risk exposure for regulatory capital.
Under the  Bank's  current  policy,  it no longer  enters  into  loans sold with
recourse agreements.


                                       34
<PAGE>

     The following table sets forth the  composition of the Bank's  portfolio of
loans and mortgage-backed securities for each of the last five years:

<TABLE>
<CAPTION>
                                                                                Loan Portfolio Composition
                                                                                       December 31,    
                                                      ------------------------------------------------------------------------------
                                                         1998             1997             1996             1995             1994 
                                                      ----------       ----------       ----------       ----------       ----------
                                                                                   (Dollars  In Thousands)
<S>                                                   <C>              <C>              <C>              <C>              <C>       
REAL ESTATE LOANS:
 First trust deed residential loans:
  One to four units ...........................       $1,565,105       $1,801,608       $1,621,497       $1,573,869       $1,542,969
  Five or more units ..........................        1,127,228        1,217,577        1,277,634        1,344,866        1,357,251
                                                      ----------       ----------       ----------       ----------       ----------
Residential loans .............................        2,692,333        3,019,185        2,899,131        2,918,735        2,900,220
OTHER REAL ESTATE LOANS:
  Commercial and industrial ...................          181,772          196,575          210,953          221,982          246,340
  Second trust deeds ..........................           15,357           15,441           17,497            2,213           20,401
  Other .......................................               --            6,303            2,137            3,157            4,793
                                                      ----------       ----------       ----------       ----------       ----------
    Real estate loans .........................        2,889,462        3,237,504        3,129,718        3,146,087        3,171,754
NON-REAL ESTATE LOANS:
  Manufactured housing ........................              893            1,154            1,480            1,938            2,439
  Deposit accounts ............................            1,002            1,644            1,042            1,104            1,301
  Consumer ....................................            1,167              185              236              359              506
                                                      ----------       ----------       ----------       ----------       ----------
    Loans receivable ..........................        2,892,524        3,240,487        3,132,476        3,149,488        3,176,000
LESS:
  General valuation allowance .................           67,638           61,237           54,900           42,876           55,353
  Valuation allowances -
  impaired loans ..............................            7,634            9,775           12,350           26,101           23,887
  Unrealized loan fees ........................            9,031           24,311           16,757           20,731           24,451
                                                      ----------       ----------       ----------       ----------       ----------
    Net loans receivable ......................        2,808,221        3,145,164        3,048,469        3,059,780        3,072,309
FHLMC AND FNMA MORT-
 GAGE-BACKED SECURITIES:
  Secured by single family
    Dwellings .................................          539,079          657,342          715,286          810,980          794,126
  Secured by multi-family
    Dwellings .................................           17,600           18,716           20,189           24,468           27,191
                                                      ----------       ----------       ----------       ----------       ----------
    Mortgage-backed securities ................          556,679          676,058          735,475          835,448          821,317
                                                      ----------       ----------       ----------       ----------       ----------
      TOTAL ...................................       $3,364,900       $3,821,222       $3,783,944       $3,895,228       $3,893,626
                                                      ==========       ==========       ==========       ==========       ==========
</TABLE>


                                       35
<PAGE>

                                  ASSET QUALITY


Asset Quality Ratios

     The following table sets forth certain asset quality ratios of the Bank for
the periods indicated:

<TABLE>
<CAPTION>
                                                                                             December 31, 
                                                                -------------------------------------------------------------------
                                                                  1998           1997           1996           1995           1994 
                                                                -------        -------        -------        -------        -------
<S>                                                              <C>            <C>             <C>            <C>            <C>   
Non-performing Loans to Loans Receivable(1) .............            90%           .91%          1.89%          2.44%          2.39%
Non-performing Assets to Total Assets(2) ................            84%           .95%          1.77%          2.33%          2.23%
Loan Loss Allowances to Non-performing
  Loans(3) ..............................................        242.09%        193.38%         94.27%         65.62%         78.27%
General Loss Allowances to Assets
  with Loss Exposure(4) .................................          2.26%          1.86%          1.73%          1.35%          1.73%
General Loss Allowances to Total Assets with
  Loss Exposure(5) ......................................          2.51%          2.12%          1.86%          1.52%          1.82%
</TABLE>

(1)  Non-performing  loans  are net of  valuation  allowances  related  to those
     loans. Loans receivable exclude  mortgage-backed  securities and are before
     deducting  unrealized loan fees, general valuation allowances and valuation
     allowances for impaired loans.

(2)  Non-performing  assets  are net of  valuation  allowances  related to those
     assets.

(3)  The  Bank's  loan  loss  allowances,  including  valuation  allowances  for
     non-performing loans and general valuation allowances but excluding general
     valuation  allowances  for  loans  sold by the Bank  with  full or  limited
     recourse.  Non-performing  loans are before deducting valuation  allowances
     related to those loans.

(4)  The  Bank's  general  valuation  allowances,  excluding  general  valuation
     allowances for loans sold with full or limited recourse.  The Bank's assets
     with loss  exposure  include  primarily  loans and real estate  owned,  but
     exclude mortgage-backed securities.

(5)  The  Bank's  general  valuation  allowances,  including  general  valuation
     allowances for loans sold with full or limited  recourse.  Assets with loss
     exposure  include the Bank's loan  portfolio plus loans sold with recourse,
     but exclude mortgage-backed securities.


                                       36
<PAGE>

                              NON-PERFORMING ASSETS

     Non-performing  assets,  as defined by the Bank,  include loans  delinquent
over 90 days or in foreclosure, real estate acquired in settlement of loans, and
other  loans  less  than 90 days  delinquent  but for  which  collectibility  is
questionable.

     The table below  details the  amounts of  non-performing  assets by type of
collateral. Also shown is the ratio of non-performing assets to total assets.

<TABLE>
<CAPTION>
                                                                   Non-Performing Assets
                                                                        December 31,  
                          ---------------------------------------------------------------------------------------------------------
                                  1998                 1997                 1996                 1995                   1994   
                          -------------------   -------------------   ------------------   ------------------    ------------------
                              $          %          $          %          $         %          $        %            $         %  
                          --------   --------   --------   --------   --------  --------   --------  --------    --------  --------
<S>                       <C>          <C>      <C>          <C>      <C>         <C>      <C>         <C>       <C>         <C>    
                                                                      (Dollars In Thousands)
Real Estate Owned:
Single Family ..........  $  3,946      12.84%  $  5,806      14.66%  $  6,840      9.32%  $  7,252      7.50%   $  5,711      6.17%
Multi-Family ...........     1,309       4.26      4,034      10.19      7,339     10.00      9,827     10.17      10,647     11.50
Commercial .............        --         --        826       2.09        673       .92      2,544      2.63         366      0.39
Less:  General Valuation
   Allowance ...........      (500)     (1.63)      (500)     (1.26)      (521)     (.71)        --        --          --        --
Other ..................        --         --         52        .13         --        --         78      0.08          --        --
                          --------   --------   --------   --------   --------  --------   --------  --------    --------  --------
Total Real Estate
 Owned .................     4,755      15.47     10,218      25.80     14,331     19.53     19,701     20.38      16,724     18.06
                          --------   --------   --------   --------   --------  --------   --------  --------    --------  --------
Non-Performing Loans:
Single Family ..........    12,270      39.92     16,799      42.42     25,602     34.89     25,991     26.89      13,041     14.08
Multi-Family ...........    13,005      42.31     15,785      39.86     44,754     60.98     69,579     72.00      60,213     65.02
Commercial .............     4,040      13.14      1,533       3.87      2,223      3.03      3,313      3.43      20,986     22.66
Other ..................        --         --         --         --         --        --        220       .23         245      0.26
Less Valuation
 Allowances ............    (3,332)    (10.84)    (4,738)    (11.97)   (13,522)   (18.43)   (22,159)   (22.93)    (18,596)   (20.08)
                          --------   --------   --------   --------   --------  --------   --------  --------    --------  --------
Total Non-Performing
 Loans .................    25,983      84.53     29,379      74.20     59,057     80.47     76,944     79.62      75,889     81.94
                          --------   --------   --------   --------   --------  --------   --------  --------    --------  --------
Total ..................  $ 30,738     100.00%  $ 39,597     100.00%  $ 73,388    100.00%  $ 96,645    100.00%   $ 92,613    100.00%
                          ========   ========   ========   ========   ========  ========   ========  ========    ========  ========
Ratio of Non-Performing
 Assets To Total Assets:                  .84%                  .95%                1.77%                2.33%                 2.23%
                                     ========              ========             ========             ========              ========
</TABLE>

     The decrease in non-performing  loans in 1998 and 1997 is due to reductions
in delinquent loans and non-performing  loans due to improvement in the Southern
California real estate markets.

     Single  family  non-performing  loans are  primarily due to factors such as
layoffs and decreased incomes.  Multi-family and commercial non-performing loans
are  attributable  primarily to factors such as declines in occupancy  rates and
decreased  real estate  values.  The Bank  actively  monitors  the status of all
non-performing  loans.  The increase in  non-performing  commercial  real estate
loans is primarily  attributable to a small number of loans which are current as
to payment but are in default of other loan terms.

     Impaired loans totaled $17.5 million,  $25.7 million and $37.6 million, net
of related  allowances  of $7.6  million,  $9.8 million and $12.4  million as of
December 31, 1998,  December 31, 1997 and 1996,  respectively.  See  "Business -
Risk Elements" for a further discussion of impaired loans.


                                       37
<PAGE>


     The Bank's modified loans result primarily from temporary  modifications of
principal  and  interest  payments.  Under  these  arrangements,  loan terms are
typically reduced to no less than a required monthly interest payment.  Any loss
of revenues  under the modified  terms would be  immaterial  to the Bank. If the
borrower is unable to return to scheduled principal and interest payments at the
end of the modification  period,  foreclosure  procedures are initiated,  or, in
certain  circumstances,  the modification period is extended. As of December 31,
1998,  the Bank had modified  loans  totaling  $11.0  million,  net of loan loss
allowances. This compares with $16.7 million and $19.0 million net of allowances
as of December  31, 1997 and December 31,  1996,  respectively.  Modified  loans
included as impaired loan total $6.0 million, $8.1 million and $9.7 million, net
of valuation allowances,  as of December 31, 1998, 1997 and 1996,  respectively.
No modified  loans were 90 days or more  delinquent  as of December  31, 1998 or
December 31, 1997.  Modified loans 90 days or more delinquent as of December 31,
1996 were $472 thousand.

Allowances for Loan Losses

     For an analysis of the changes in the loan loss allowances, see "Business -
Risk Elements." At December 31, 1998, the general valuation  allowance was $67.6
million or 2.26% of the Bank's loans with loss exposure.  This compares to 1.86%
at the end of 1997 and  1.73% at the end of 1996.  In  addition  to the  general
valuation  allowance and the allowance for impaired loans mentioned  above,  the
Bank also maintains an allowance for loans sold with recourse.  These allowances
amounted to 6.18%,  5.97% and 3.64% of loans sold with  recourse at December 31,
1998,  1997 and 1996,  respectively.  Management  considers the current level of
loss  allowances  adequate  to cover the  Bank's  loss  exposure  at this  time.
However, there can be no assurance that future additions to loan loss allowances
will not be required.


                         CAPITAL RESOURCES AND LIQUIDITY

Liquidity Requirements

     Federal  regulations  currently require a savings institution to maintain a
monthly  average daily balance of liquid assets  (including  cash,  certain time
deposits, bankers' acceptances and specified United States government,  state or
federal  agency  obligations)  equal to at least 4% of:  (i) the  average  daily
balance of its net withdrawable  accounts and short-term  borrowings  during the
preceding  calendar  quarter or (ii) the ending balance of its net  withdrawable
accounts  as of  the  end of  the  preceding  calendar  quarter.  The  liquidity
requirement may be changed from time-to-time by the OTS to any amount within the
range of 4% to 10% of such  accounts  and  borrowings  depending  upon  economic
conditions and the deposit flows of member  institutions.  On November 24, 1997,
the OTS  reduced  this  liquidity  requirement  to 4% from 5%. The OTS also gave
institutions  the option of using a quarterly  average  calculation or an end of
quarter  calculation  of the  liquidity  base and  removed  the  requirement  of
maintaining a monthly  average  balance of short-term  liquid assets equal to at
least 1% of the average daily balance of its net withdrawable accounts and short
term  borrowings.  Monetary  penalties  may be imposed for failure to meet these
liquidity ratio  requirements.  The Bank's liquidity ratio for the quarter ended
December 31, 1998 was 5.38%, which exceeded the applicable requirements.


                                       38
<PAGE>

External Sources of Funds

     External sources of funds include savings  deposits,  loan sales,  advances
from the  FHLBSF  and  reverse  repurchase  agreements  ("reverse  repos").  For
purposes of funding asset growth, the source or sources of funds with the lowest
total cost for the desired term are generally  selected.  The incremental source
of funds  used most  often  during  1998 was  deposits  obtained  from  national
brokerage firms.

     Deposits obtained from national  brokerage firms ("brokered  deposits") are
considered a source of funds  similar to a  borrowing.  In  evaluating  brokered
deposits as a source of funds, the cost of these deposits,  including commission
fees,  is compared  to other  funding  sources.  Brokered  deposits  were $494.2
million at December 31, 1998.  This  compares to $378.1  million at December 31,
1997 and $389.4 million at December 31, 1996.

     Deposits at retail savings  offices have remained  steady at  approximately
$1.5  billion for the last three years due to the  availability  of  alternative
investments  paying  higher  returns to customers  and intense  competition  for
deposits by other financial institutions.

     The  Bank   also   solicits   deposits   through   telemarketing   efforts.
Telemarketing deposits are obtained by the Bank's employees via telephone,  from
depositors  outside of the Bank's normal service areas.  Telemarketing  deposits
increased by 16% to $115.6 million at the end of 1998.  This compares with $99.8
million at the end of 1997 and $112.6  million at the end of 1996.  The level of
telemarketing  deposits  varies  based on the  activity  of  investors,  who are
typically   professional  money  managers.  The  availability  of  telemarketing
deposits  also  varies  based  on  the  investors'   perception  of  the  Bank's
creditworthiness.

     Reverse  repurchase   agreements  are  short  term  borrowings  secured  by
mortgage-backed securities.  These borrowings decreased 18% to $471.2 million at
the end of 1998 from $577.7 million at the end of 1997 and $646.5 million at the
end of 1996.  Borrowings under reverse repurchase agreements have decreased over
the last three years due to prepayments of the underlying  collateral.  The Bank
did not securitize any mortgage loans in 1998, 1997 or 1996.

     FHLB  advances  decreased to $714.0  million at the end of 1998 compared to
$1.3  billion  at the end of 1997 and  $1.2  billion  at the end of  1996.  FHLB
Advances  decreased during 1998 due to the availability of lower cost funds from
other sources and loan prepayments,  which decreased the Bank's cash flow needs.
FHLB advances increased during 1997 and 1996 because these were often the lowest
cost source of funds available to the Bank.

     Sales of loans were $379.6 million in 1998.  This compares to $52.4 million
during 1997 and $24.1 million during 1996. Loan sales increased substantially in
1998 due to the high volume of fixed rate loans originated.

Internal Sources of Funds

     Internal sources of funds include scheduled loan principal  payments,  loan
payoffs, and positive cash flows from operations. Principal payments were $658.0
million in 1998 compared to $289.1  million in 1997 and $199.3  million in 1996.
Principal  payments include both amortization and prepayments and are a function
of real estate  activity and the general  level of interest  rates.  Prepayments
increased in 1998 due to  refinancing  activity into fixed rate loans which were
available to borrowers at favorable interest rates.




                                       39
<PAGE>

Capital Requirements

     Current  regulatory  capital  standards  require  that  the  Bank  maintain
tangible capital of at least 1.5% of total assets, core capital of 3.0% of total
assets,  and risk-based  capital of 8.0% of total assets,  risk-weighted.  Among
other  things,  failure to comply with these  capital  standards  will result in
restrictions  on asset growth and necessitate the preparation of a capital plan,
subject to regulatory  approval.  Generally,  any institution  with a risk-based
capital  ratio in  excess of 10% and a core  capital  ratio  greater  than 5% is
considered  well-capitalized for regulatory purposes.  Institutions who maintain
this capital  level can take in brokered  deposits at their  discretion,  and if
they  achieve a  sufficient  ranking  on their  regulatory  examination,  may be
assessed a lower deposit insurance rate.

     Management  presently  intends to maintain  its capital  position at levels
above those required by regulators to ensure  operating  flexibility  and growth
capacity  for the Bank.  The Bank's  capital  position is actively  monitored by
management.  The  Bank  met  the  regulatory  capital  standards  to  be  deemed
"well-capitalized"  for purposes of the various  regulatory  measures of capital
including the prompt corrective action regulations.

     To be considered "well  capitalized" for purposes of the prompt  corrective
action  requirements  the Bank must maintain the capital  ratios as set forth in
the table below:


                                                       December 31, 1998
                                                      --------------------
                                                       Amount          %   
                                                      --------       -----
                                                     (Dollars In Thousands)

     Core capital requirement .................       $184,268        5.00%
     Bank's core capital ......................        294,223        7.98
                                                      --------       -----
       Excess core capital ....................       $109,955        2.98%
                                                      ========       =====

     Tier 1 risk-based capital requirement ....       $124,722        6.00%
     Bank's tier 1 risk-based capital .........        294,223       14.15
                                                      --------       -----
       Excess tier 1 risk-based capital .......       $169,501        8.15%
                                                      ========       =====

     Risk-based capital requirement ...........       $207,871       10.00%
     Bank's risk-based capital ................        320,720       15.43
                                                      --------       -----
       Excess risk-based capital ..............       $112,849        5.43%
                                                      ========       =====


                                       40
<PAGE>


                           ASSET-LIABILITY MANAGEMENT

     The Bank's primary  objective in managing interest rate risk is to minimize
the  adverse  impact of changes  in  interest  rates on the Bank's net  interest
income  and   capital,   while,   at  the  same  time,   adjusting   the  Bank's
asset-liability mix to achieve the most favorable impact on earnings.

     The Bank's  asset-liability  management  policy is  designed to improve the
balance  between the maturities and  repricings of  interest-earning  assets and
interest-bearing  liabilities  in order to better  insulate  net  earnings  from
interest rate fluctuations.  Under this program, the Bank emphasizes the funding
of monthly  adjustable  mortgages  with short term  savings and  borrowings  and
matching the  maturities  of these assets and  liabilities.  The Bank also match
funds a limited amount of fixed rate loans with initial fixed  interest  periods
ranging from 3 to 10 years.

     The majority of the Bank's  assets are monthly  adjustable  rate  mortgages
with  interest  rates that  fluctuate  based on  changes in the FHLBSF  Eleventh
District Cost of Funds Index ("Index").  These mortgages  constitute over 93% of
the loan portfolio at the end of 1998.  Comparisons  over the last several years
show that changes in the Bank's cost of funds generally  correlates with changes
in the  Index.  The  Bank  does  not use any  futures,  options  or swaps in its
asset-liability strategy.

     Assets and  liabilities  which are subject to repricing are considered rate
sensitive.  The  mis-match  in  the  repricing  of  rate  sensitive  assets  and
liabilities  is  referred  to as a  company's  "GAP."  The  GAP is  positive  if
rate-sensitive assets exceed rate-sensitive  liabilities.  Generally, a positive
GAP benefits a company during periods of increasing  interest rates. The reverse
is true during periods of decreasing interest rates. However,  because the Index
lags  changes  in  market  interest  rates  by three  months  while  the  Bank's
short-term  savings  and  borrowing  costs  adjust  immediately,  the Bank's net
interest income initially  decreases during periods of rising interest rates and
increases during periods of declining interest rates.

     In  order  to  minimize  the  impact  of  rate  fluctuations  on  earnings,
management's  goal is to keep the one year GAP at less than 20% of total  assets
(positive or negative).  At December 31, 1998 the  Company's  one-year GAP was a
positive  $478.0 million or 13.00% of total assets.  This compares with positive
GAP ratios of 4.14% and 5.80% of total  assets at December 31, 1997 and December
31, 1996, respectively.

     The following chart shows the interest  sensitivity of the Company's assets
and  liabilities by repricing  period at December 31, 1998 and the  consolidated
GAP position as a percentage of total assets at that time:


                                       41
<PAGE>

INTEREST-SENSITIVITY GAP

<TABLE>
<CAPTION>
                                                                  Balances          Balances          Balances          Balances
                                                                  Repricing         Repricing         Repricing        Repricing
                                                   Total           Within            Within            Within            After
                                                  Balance         0-3 Months       4-12 Months        1-5 Years          5 Years 
                                                -----------      -----------       -----------       -----------       -----------
                                                                          (Dollars In Thousands)
<S>                                             <C>              <C>               <C>               <C>               <C>        
Interest-Earning Assets:
   Repurchase Agreements ..................     $    71,000      $    71,000       $        --       $        --       $        --
   Investment Securities ..................          64,333               --            27,636               304            36,393
   Mortgage-backed Securities .............         556,679          551,933             2,139             1,487             1,120
   Loans Receivable .......................       2,892,524        2,755,863            26,402            59,924            50,335
                                                -----------      -----------       -----------       -----------       -----------
       Total Interest-Earning
         Assets ...........................     $ 3,584,536      $ 3,378,796       $    56,177       $    61,715       $    87,848
                                                ===========      ===========       ===========       ===========       ===========

Interest-Bearing Liabilities:
     Demand Accounts ......................     $   623,324      $   623,324       $        --       $        --       $        --
     Fixed Rate Term Certificate ..........       1,512,585          632,722           829,737            46,852             3,274
     Borrowings:
       FHLB Advances ......................         714,000          375,000            25,000           279,000            35,000
       Reverse Repurchase
            Agreements ....................         471,172          191,403           279,769                --                --
       Other Borrowings ...................          50,000               --                --                --            50,000
                                                -----------      -----------       -----------       -----------       -----------
           Total Interest-Bearing
             Liabilities ..................     $ 3,371,081      $ 1,822,449       $ 1,134,506       $   325,852       $    88,274
                                                ===========      ===========       ===========       ===========       ===========

Interest-Sensitivity Gap ..................     $   213,455      $ 1,556,347       $(1,078,329)      $  (264,137)      $      (426)
                                                ===========      ===========       ===========       ===========       ===========

Interest-Sensitivity Gap as a
   Percentage of Total Assets .............                            42.33%           (29.33)%           (7.18)%           (0.01)%
                                                                 ===========       ===========       ===========       ===========

Cumulative Interest-Sensitivity Gap .......                      $ 1,556,347       $   478,018       $   213,881       $   213,455
                                                                 ===========       ===========       ===========       ===========

Cumulative Interest-Sensitivity
   Gap as a Percentage of Total
     Assets ...............................                            42.33%            13.00%             5.82%             5.80%
                                                                 ===========       ===========       ===========       ===========
</TABLE>


                                       42
<PAGE>

Another measure of interest rate risk, required to be performed by OTS-regulated
institutions,   is  an  analysis   specified  by  OTS  Thrift  Bulletin  TB-13a,
"Management  of  Interest  Rate Risk,  Investment  Securities,  and  Derivatives
Activities".  Under this regulation, which became effective December 1, 1998 and
replaced TB-13, institutions are required to establish limits on the sensitivity
of their net  interest  income and net  portfolio  value to changes in  interest
rates. Such changes in interest rates are defined as instantaneous and sustained
movements in interest rates in 100 basis point increments. In addition, the Bank
monitors  the  impact of the same  changes  in  interest  rates on its  interest
income.  The following  table shows the estimated  impact of a parallel shift in
interest  rates on the Bank's net  interest  income and net  portfolio  value at
December 31, 1998:

                                                    Percentage Change in 
                                              ---------------------------------
        Change in Interest Rates              Net Interest        Net Portfolio
             (In Basis Points)                  Income(1)            Value(2)  
             -----------------                ------------        -------------

     +300 .........................               (15)%               (13)%
     +200 .........................               (10)%                (8)%
     +100 .........................                (5)%                (4)%
     --100 ........................                 5%                  1%
     --200 ........................                 9%                  2%
     --300 ........................                14%                  7%


     (1) The percentage change in this column represents the projected change in
     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 projected change in
     the net portfolio value of the Bank in a stable  interest rate  environment
     versus the net  portfolio  value in the  various  rate  scenarios.  The OTS
     defines net  portfolio  value as the present  value of expected  cash flows
     from  existing  assets minus the present  value of expected cash flows from
     existing liabilities.


                                       43
<PAGE>

The  following  table  shows the fair  value and  contract  terms of the  Bank's
interest-earning assets and interest-bearing liabilities as of December 31, 1998
categorized  by type and  expected  maturity for each of the next five years and
thereafter:

<TABLE>
<CAPTION>
                                                             Expected Maturity Date as of December 31,                
                              -----------------------------------------------------------------------------------------------------
                                                                                               There-          Total       Fair
                                 1999          2000         2001        2002        2003        after         Balance      Value 
                              ----------    ---------    ---------    --------    --------    ----------    ----------   ----------
<S>                           <C>           <C>          <C>          <C>         <C>         <C>           <C>          <C>       
Interest Earning Assets
Loans Receivable:
Adjustable Rate Loans:
 Single family .............  $  202,036    $ 177,150    $ 154,965    $135,492    $118,398    $  742,326    $1,530,367   $1,575,173
   Average interest rate ...        7.44%        7.43%        7.42%       7.42%       7.43%         7.42%         7.42%
Multi-family ...............      90,009       80,519       75,880      71,520      67,425       734,166     1,119,519    1,159,688
   Average interest rate ...        7.23%        7.23%        7.23%       7.23%       7.23%         7.22%         7.22%
Commercial  and Industrial .      15,930       13,994       13,216      12,483      11,696       111,465       178,784      188,145
   Average interest rate ...        7.59%        7.61%        7.61%       7.61%       7.62%         7.65%         7.63%
Fixed Rate Loans:
 Single family .............       4,374        1,860        1,641       1,446       1,313        11,229        21,863       21,691
   Average interest rate ...        8.03%        7.73%        7.69%       7.62%       7.56%         7.18%         7.49%
Multi-family ...............         955          886          836         787         713         3,080         7,257        7,680
   Average interest rate ...        9.07%        9.09%        9.10%       9.10%       9.16%         8.84%         8.99%
Commercial and Industrial ..         409          387          310         130          90           614         1,940        1,968
   Average interest rate ...       10.23%       10.24%       10.27%       9.55%       9.08%         8.68%         9.65%
Consumer loans .............       1,260          359           --          --          --            --         1,619        1,617
    Average interest rate ..       12.08%       18.00%          --          --          --            --         13.39%
Other loans ................         465          472          477         484         492         2,799         5,189        5,147
   Average interest rate ...        1.16%        1.24%        1.33%       1.42%       1.51%         7.81%         4.83%
Non-performing loans .......      25,986           --           --          --          --            --        25,986       25,986
Mortgage-backed
 Securities:
 Adjustable ................      55,705       55,879       71,346      60,569      51,350       257,401       552,250      551,393
   Average interest rate ...        5.91%        5.91%        5.91%       5.91%       5.91%         5.91%         5.91%
Fixed ......................       2,525          457          397         344         297         1,120         5,140        5,286
    Average interest rate ..        6.79%        8.64%        8.64%       8.64%       8.63%         8.61%         7.72%
Investments Securities .....      72,844        2,031        1,843      30,117       2,091        26,910       135,836      135,333
   Average interest rate ...        5.02%        6.26%        6.34%       5.10%       6.34%         6.11%         5.31%
Total Interest-Earning
                              ----------    ---------    ---------    --------    --------    ----------    ----------   ----------
   Assets ..................  $  472,498    $ 333,994    $ 320,911    $313,372    $253,865    $1,891,110    $3,585,750   $3,679,107
                              ==========    =========    =========    ========    ========    ==========    ==========   ==========

Interest-Bearing Liabilities
Deposits:
Checking Accounts ..........  $  238,646    $      --    $      --    $     --    $     --    $       --    $  238,646   $  238,646
   Average interest rate ...        0.51%          --           --          --          --            --          0.51%
Savings Accounts ...........     384,678           --           --          --          --            --       384,678      384,678
   Average interest rate ...        3.47%          --           --          --          --            --          3.47%
Certificate Accounts .......   1,462,459       28,134        7,108       5,018       6,592         3,274     1,512,585    1,516,809
   Average interest rate ...        5.10%        5.21%        5.17%       5.75%       5.56%         5.05%         5.11%
Borrowings:
 FHLB Advances .............     400,000      210,000       52,000          --      17,000        35,000       714,000      719,447
   Average interest rate ...        5.36%        5.57%        5.52%         --        5.34%         5.33%         5.43%
Reverse repurchase
  agreements ...............     471,172           --           --          --          --            --       471,172      472,412
   Average interest rate ...        5.37%          --           --          --          --            --          5.37%
Senior Unsecured Notes .....      50,000           --           --          --          --            --        50,000       50,000
   Average interest rate ...       11.75%          --           --          --          --            --         11.75%
Total Interest-Earning
                              ----------    ---------    ---------    --------    --------    ----------    ----------   ----------
   Liabilities .............  $3,006,955    $ 238,134    $  59,108    $  5,018    $ 23,592    $   38,274    $3,371,081   $3,381,992
                              ==========    =========    =========    ========    ========    ==========    ==========   ==========
</TABLE>


(1) Expected  maturities are contractual  maturities adjusted for prepayments of
principal.  The Bank uses  certain  assumptions  to  estimate  fair  values  and
expected maturities.  For assets, expected maturities are based upon contractual
maturity,  projected  repayments and  prepayments  of principal.  The prepayment
experience used is based on the Bank's historical experience. The Bank's average
CPR (Constant  Prepayment Rate) is 9.2% for the single family portfolio and 5.5%
for its  multi-family  and  commercial  real  estate  portfolios.  The Bank used
estimated deposit runoff based on available industry information.


                                       44
<PAGE>


                                  STOCK PRICES

     The common  stock of  FirstFed  Financial  Corp.  is traded on the New York
Stock  Exchange  under the  trading  symbol  "FED." The  quarterly  high and low
information  presented  below is based on  information  supplied by the New York
Stock Exchange.

     The Company has never declared or paid a cash dividend. The Company's Board
of Directors declared a two-for-one stock split on June 25, 1998 to stockholders
of record on July 15, 1998. The additional  shares were  distributed on July 30,
1998.

     The Company  repurchased  100,800  shares of its common  stock during 1998.
Total shares  repurchased  as of December 31, 1998 were  1,947,840 at an average
price of $6.86 per share. On October 21, 1998, the Board of Directors authorized
the repurchase of an additional 5% of the shares outstanding on that date. As of
February 12, 1999, the Company had  repurchased an additional  685,400 shares at
an average price of $16.15 per share.  Total shares  repurchased  as of February
12,  1999 were  2,633,240  at an average  price of $9.27.  Shares  eligible  for
repurchase as of February 12, 1999 were 544,035.

                           PRICE RANGE OF COMMON STOCK

<TABLE>
<CAPTION>
              First Quarter       Second Quarter      Third Quarter      Fourth Quarter
             ---------------     ---------------     ---------------     ---------------
              High      Low      High       Low      High       Low      High       Low
             -----     -----     -----     -----     -----     -----     -----     -----
<S>          <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>  
1998 .....   21.19     15.94     26.41     20.41     26.94     14.75     18.56     14.13
1997 .....   14.00     10.75     15.53     11.25     17.44     15.38     19.75     17.50
1996 .....    7.94      6.19      8.75      7.75      9.88      8.38     12.13      9.75
1995 .....    8.00      5.56      8.88      7.31      8.81      7.25      9.25      6.88
1994 .....    8.50      6.69      8.63      6.69      8.25      6.88      7.63      5.13
</TABLE>

(1) All amounts have been adjusted for the stock split declared June 25, 1998.


                                       45
<PAGE>

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 1998 AND 1997
                  (Dollars In Thousands, Except per Share Data)

<TABLE>
<CAPTION>
                                                           1998             1997 
                                                       -----------      -----------
<S>                                                    <C>              <C>        
ASSETS
Cash and cash equivalents ........................     $   126,280      $   163,135
Investment securities, available-for-sale
  (at  fair value) (Note 2) ......................          64,333           48,910
Mortgage-backed securities, available-for-sale
  (at fair value) (Notes 3 and 10) ...............         556,679          676,058
Loans receivable, held-for-sale (market of
  $16,602 and $40,800) (Notes 4 and 9) ...........          16,450           40,382
Loans receivable, net (Note 4) ...................       2,791,771        3,104,782
Accrued interest and dividends receivable ........          23,476           26,990
Real estate (Note 5) .............................           4,791           10,257
Office properties and equipment, net (Note 6) ....          11,819            9,868
Investment in Federal Home Loan Bank
  (FHLB) stock, at cost (Notes 7 and 9)  .........          72,700           68,592
Other assets (Note 1) ............................           8,829           11,141
                                                       -----------      -----------
                                                       $ 3,677,128      $ 4,160,115
                                                       ===========      ===========

LIABILITIES
Deposits (Note 8) ................................     $ 2,135,909      $ 1,943,647
FHLB advances and other borrowings (Notes 7 and 9)         764,000        1,364,000
Securities sold under agreements to repurchase
  (Note 10) ......................................         471,172          577,670
Accrued expenses and other liabilities ...........          49,047           52,011
                                                       -----------      -----------
                                                         3,420,128        3,937,328
                                                       -----------      -----------

COMMITMENTS AND CONTINGENT
   LIABILITIES (Notes 4, 6 and 13)

STOCKHOLDERS' EQUITY (Notes 12 and 13)
Common stock, par value $.01 per share;
  authorized 25,000,000 shares; issued 23,075,266
  and 11,511,138 shares, outstanding
  21,127,426 and 10,587,618 shares ...............             231              115
Additional paid-in capital .......................          29,965           29,628
Retained earnings - substantially restricted .....         241,694          207,065
Loan to employee stock ownership plan ............            (833)          (1,744)
Treasury stock, at cost,
  1,947,840 and 923,520 shares ...................         (13,354)         (11,885)
Accumulated other comprehensive loss,
  net of taxes ...................................            (703)            (392)
                                                       -----------      -----------
                                                           257,000          222,787
                                                       -----------      -----------
                                                       $ 3,677,128      $ 4,160,115
                                                       ===========      ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       46
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
    CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                  (Dollars In Thousands, Except per Share Data)

<TABLE>
<CAPTION>
                                                                  1998              1997             1996 
                                                              ------------      ------------     ------------
<S>                                                           <C>               <C>              <C>         
Interest income:
 Interest on loans ......................................     $    238,171      $    237,835     $    229,000
 Interest on mortgage-backed securities .................           39,462            48,652           54,825
 Interest and dividends on investments ..................           12,136            12,733           13,353
                                                              ------------      ------------     ------------
    Total interest income ...............................          289,769           299,220          297,178
                                                              ------------      ------------     ------------
Interest expense:
  Interest on deposits (Note 8) .........................           97,659            92,678          101,595
  Interest on borrowings (Note 9) .......................           88,832           111,548           96,436
                                                              ------------      ------------     ------------
    Total interest expense ..............................          186,491           204,226          198,031
                                                              ------------      ------------     ------------

Net interest income .....................................          103,278            94,994           99,147
 Provision for loan losses (Note 4) .....................            7,200            20,500           35,155
                                                              ------------      ------------     ------------
Net interest income after provision for
  loan losses ...........................................           96,078            74,494           63,992
                                                              ------------      ------------     ------------
Other income:
  Loan servicing and other fees .........................            4,152             6,233            6,402
  Gain on sale of loans .................................            4,061               652              253
  Real estate operations, net ...........................            1,182                20            1,246
  Other operating income ................................            4,262             3,313            3,014
                                                              ------------      ------------     ------------
    Total other income ..................................           13,657            10,218           10,915
                                                              ------------      ------------     ------------

Non-interest expense:
  Salaries and employee benefits (Note 13) ..............           25,811            22,740           21,928
  Occupancy (Note 6) ....................................            8,493             6,878            6,289
  Advertising ...........................................            1,959             2,795            2,362
  Federal deposit insurance .............................            1,241             1,872            5,418
  SAIF special assessment ...............................               --                --           15,007
  Other operating expense ...............................           11,420             9,866            8,171
                                                              ------------      ------------     ------------
    Total non-interest expense ..........................           48,924            44,151           59,175
                                                              ------------      ------------     ------------

Earnings before income taxes ............................           60,811            40,561           15,732
Income taxes  (Note 11) .................................           26,182            17,461            7,488
                                                              ------------      ------------     ------------
Net earnings ............................................     $     34,629      $     23,100     $      8,244
                                                              ============      ============     ============

Other comprehensive earnings (loss)
  Unrealized gain (loss) on mortgage-backed-
  securities and securities
  available-for-sale, net of taxes ......................             (311)            3,798           (8,766)
                                                              ------------      ------------     ------------
Comprehensive earnings (loss) ...........................     $     34,318      $     26,898     $       (522)
                                                              ============      ============     ============

Earnings per share  (Notes 12 and 15)(1)
     Basic ..............................................     $       1.63      $       1.09     $       0.39
                                                              ============      ============     ============
     Diluted ............................................     $       1.60      $       1.07     $       0.39
                                                              ============      ============     ============
Weighted average shares outstanding (Notes 12 and 15) (1)
     Basic ..............................................       21,181,859        21,139,544       21,103,530
                                                              ============      ============     ============
     Diluted ............................................       21,589,377        21,494,016       21,272,472
                                                              ============      ============     ============
</TABLE>

(1)  All per share amounts have been adjusted to reflect the  two-for-one  stock
     split declared June 25, 1998.

 See accompanying notes to consolidated financial statements.


                                       47
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                             (Dollars In Thousands)

<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                                                             Other
                                                                                                         Comprehensive
                                                                   Retained                                 Earnings
                                                                   Earnings                                  (Loss)
                                                                     (Sub-       Loan to                     Net of
                                                     Additional   stantially       ESOP                      Taxes
                                          Common      Paid-In     Restricted)   (Notes 12     Treasury      (Notes 3
                                          Stock       Capital      (Note 12)      and 13)       Stock         and 4)         Total 
                                         --------     --------      --------     --------      --------      --------      --------
<S>                                      <C>          <C>           <C>          <C>           <C>           <C>           <C>     
Balance, December 31, 1995 ...........   $    114     $ 28,212      $175,721     $ (2,500)     $ (9,832)     $  4,576      $196,291
Exercise of employee  stock options ..          1          465            --           --            --            --           466
Net decrease in loan to employee stock
 ownership plan ......................         --           --            --          368            --            --           368
Common stock repurchased
  (127,000 shares) ...................         --           --            --           --        (2,053)           --        (2,053)
Unrealized loss on securities
 available-for-sale, net of taxes ....         --           --            --           --            --        (8,766)       (8,766)
Net earnings 1996 ....................         --           --         8,244           --            --            --         8,244
                                         --------     --------      --------     --------      --------      --------      --------

Balance, December 31, 1996 ...........        115       28,677       183,965       (2,132)      (11,885)       (4,190)      194,550
Exercise of employee stock options ...         --          892            --           --            --            --           892
Net decrease in loan to employee stock
 ownership plan ......................         --           --            --          388            --            --           388
Unrealized gain on securities
 available-for-sale, net of taxes ....         --           --            --           --            --         3,798         3,798
Benefit from stock option tax
  adjustment .........................         --           59            --           --            --            --            59
Net earnings 1997 ....................         --           --        23,100           --            --            --        23,100
                                         --------     --------      --------     --------      --------      --------      --------

Balance, December 31, 1997 ...........        115       29,628       207,065       (1,744)      (11,885)         (392)      222,787
Exercise of employee stock options ...          1          452            --           --            --            --           453
Net decrease in loan to employee stock
 ownership plan ......................         --           --            --          911            --            --           911
Stock split in form of stock dividend
  (Note 12) ..........................        115         (115)           --           --            --            --            --
Unrealized loss on securities
 available-for-sale, net of taxes ....         --           --            --           --            --          (311)         (311)
Common stock repurchased
  (100,800) shares ...................         --           --            --           --        (1,469)           --        (1,469)
Net earnings 1998 ....................         --           --        34,629           --            --            --        34,629
                                         --------     --------      --------     --------      --------      --------      --------

Balance, December 31, 1998 ...........   $    231     $ 29,965      $241,694     $   (833)     $(13,354)     $   (703)     $257,000
                                         ========     ========      ========     ========      ========      ========      ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       48
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                             (Dollars In Thousands)

<TABLE>
<CAPTION>
                                                            1998           1997           1996 
                                                          ---------      ---------      ---------
<S>                                                       <C>            <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ........................................     $  34,629      $  23,100      $   8,244
Adjustments to reconcile net earnings to
 net cash provided by operating activities:
  Gross change in loans held-for-sale ...............        23,932        (34,187)         1,182
  Depreciation and amortization .....................         1,546          1,775          1,722
  Provision for losses on loans .....................         7,200         20,500         35,155
  Provision for losses on real estate owned .........           572          1,639            745
  Valuation adjustments on real estate sold .........        (6,591)         3,795            291
  Amortization of fees and discounts ................        (1,549)        (1,503)        (2,210)
  Decrease in deferred premium on sale of loans .....         2,059            387            588
  Change in deferred taxes ..........................        (6,988)         2,919           (102)
  Decrease in tax interest accrual ..................          (881)        (7,182)        (5,135)
  (Increase) decrease in interest and dividends
   receivable .......................................         3,514            (80)         1,710
  Increase (decrease) in interest payable ...........         2,775            633         (8,685)
  Increase in other assets ..........................        (5,158)        (1,237)        (4,049)
  Increase (decrease) in accrued expenses and
   other liabilities ................................         2,487            876         (3,947)
                                                          ---------      ---------      ---------
   Total  adjustments ...............................        22,918        (11,665)        17,265
                                                          ---------      ---------      ---------
    Net cash provided by operating activities .......        57,547         11,435         25,509
                                                          ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
 on loans ...........................................       288,360       (121,095)       (84,424)
Loans repurchased under recourse arrangements .......        (1,765)        (7,899)       (14,806)
Proceeds from sales of real estate owned ............        29,150         53,263         80,256
Proceeds from maturities and principal payments
 of investment securities available-for-sale ........        23,892         37,912         86,329
Principal reductions of mortgage-backed
 securities available-for-sale ......................       118,801         76,923         84,544
Purchases of investment securities
 available-for-sale .................................       (39,061)       (28,400)       (79,405)
Purchases of FHLB stock .............................            --         (2,186)            --
Other ...............................................         1,104         (1,288)         2,525
                                                          ---------      ---------      ---------
     Net cash provided by investing activities ......       420,481          7,230         75,019
                                                          ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits .................       192,262        (13,801)      (247,588)
Net increase (decrease) in short term borrowings ....      (706,498)        51,188        282,539
Repayment of long term borrowings ...................            --        (50,000)        (9,000)
Purchases of treasury stock .........................        (1,353)            --         (2,053)
Other ...............................................           706         (5,319)         1,098
                                                          ---------      ---------      ---------
    Net cash provided (used) by financing activities       (514,883)       (17,932)        24,996
                                                          ---------      ---------      ---------
Net increase in cash and cash
 equivalents ........................................       (36,855)           733        125,524
Cash and cash equivalents at beginning of year ......       163,135        162,402         36,878
                                                          ---------      ---------      ---------
Cash and cash equivalents at end of year ............     $ 126,280      $ 163,135      $ 162,402
                                                          =========      =========      =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       49
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies

     The  following  is a summary  of the  significant  accounting  policies  of
FirstFed  Financial Corp.  ("Company")  and its  wholly-owned  subsidiary  First
Federal Bank of California ("Bank").

     The  preparation of the Company's  financial  statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosures  of contingent  assets and  liabilities at the date of the financial
statements and the reported operations of the Company for the periods presented.
Actual results may differ from those estimates calculated by management.

Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its  subsidiary,  the  Bank.  The Bank  maintains  24  full-service  savings
branches  in  Southern  California.  The Bank's  primary  business  consists  of
attracting retail deposits from the general public and originating loans secured
by mortgages on residential real estate. All significant  inter-company balances
and  transactions  have been eliminated in  consolidation.  Certain items in the
1996 and 1997  consolidated  financial  statements  have  been  reclassified  to
conform to the 1998 presentation.

Statement of Cash Flows

     For purposes of reporting  cash flows,  cash and cash  equivalents  include
cash, overnight  investments and securities purchased under agreements to resell
with maturities within 90 days of the date of purchase.

Financial Instruments

     Statement of Financial  Accounting  Standards No. 107,  "Disclosures  about
Fair Value of Financial  Instruments" ("SFAS No. 107"),  requires the disclosure
of the fair value of financial  instruments,  whether or not  recognized  on the
statement of financial  condition,  for which it is  practicable to estimate the
value. A significant  portion of the Bank's assets and liabilities are financial
instruments  as defined  under SFAS No. 107. SFAS No. 107 requires that the Bank
disclose fair values for its financial instruments.  Fair values,  estimates and
assumptions are set forth in Note 16, Fair Value of Financial Instruments.

Risks Associated with Financial Instruments

     The credit risk of a financial  instrument is the  possibility  that a loss
may result from the failure of another party to perform in  accordance  with the
terms of the contract.  The most  significant  credit risk  associated  with the
Bank's   financial   instruments  is  concentrated  in  its  loans   receivable.
Additionally,  the Bank is  subject to credit  risk on  certain  loans sold with
recourse.  The Bank has  established a system for monitoring the level of credit
risk in its loan portfolio and for loans sold with recourse.

     The market risk of a financial  instrument is the  possibility  that future
changes  in market  prices may reduce  the value of a  financial  instrument  or
increase the  contractual  obligations  of the Bank.  The Bank's  market risk is
concentrated  in its portfolios of loans  receivable and real estate acquired by
foreclosure.  When a borrower fails to meet the contractual  requirements of his
or her loan agreement,  the Bank is subject to the market risk of the collateral
securing  the loan.  Likewise,  the Bank is  subject to the  volatility  of real
estate prices with respect to real estate acquired by


                                       50
<PAGE>
                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies (continued)

foreclosure.  The  Bank's  securities  available-for-sale  are  traded in active
markets. The value of these securities is susceptible to the fluctuations of the
market.

Interest Rate Risk

     Financial  instruments are subject to interest rate risk to the extent that
they report on a frequency, degree or basis that varies from market pricing. The
Bank is subject to interest  rate risk to the degree  that its  interest-earning
assets  reprice on a different  frequency or schedule than its  interest-bearing
liabilities.  A majority  of the Bank's  loans  receivable  and  mortgage-backed
securities reprice based on the Federal Home Loan Bank Eleventh District Cost of
Funds  Index  (the  "Index").  The  repricing  of the Index  tends to lag market
interest  rates.  The Bank  closely  monitors  the  pricing  sensitivity  of its
financial instruments.

Concentrations of Credit Risk

     Concentrations of credit risk would exist for groups of borrowers when they
have similar  economic  characteristics  that would cause their  ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.  The ability of the Bank's  borrowers to repay their  commitments is
contingent  on  several  factors,   including  the  economic  condition  in  the
borrowers'  geographic  area  and  the  individual  financial  condition  of the
borrowers.  The  Company  generally  requires  collateral  or other  security to
support  borrower  commitments  on loans  receivable . This  collateral may take
several forms.  Generally,  on the Bank's mortgage loans, the collateral will be
the underlying  mortgaged property.  The Bank's lending activities are primarily
concentrated in Southern California. The Bank does not have significant exposure
to any individual customer.

Securities Purchased under Agreements to Resell

     The Bank  invests  in  securities  purchased  under  agreements  to  resell
("repurchase  agreements").  The Bank obtains  collateral for these  agreements,
which  normally  consists  of  U.S.  treasury   securities  or   mortgage-backed
securities guaranteed by agencies of the U.S. government. The collateral is held
in the custody of a trustee, who is not a party to the transaction. The duration
of these  agreements  is  typically  1 to 30  days.  The Bank  deals  only  with
nationally  recognized  investment  banking firms as the counterparties to these
agreements.  The Bank's investment in repurchase  agreements consisted solely of
securities purchased under agreements to resell identical securities.

Investments and Mortgage-Backed Securities

     The Bank's investment in securities  principally  consists of U.S. Treasury
and  agency  securities  and  mortgage-backed   securities.   The  Bank  creates
mortgage-backed  securities  when  it  exchanges  pools  of its  own  loans  for
mortgage-backed securities.

The  Bank   classifies  its  investment  in  securities  as   "held-to-maturity"
securities,   "trading"  securities  and   "available-for-sale"   securities  as
applicable.


                                       51
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies (continued)

     The Bank classifies all of its investments and  mortgage-backed  securities
as  "available-for-sale"  based upon a determination that such securities may be
sold at a future date or that there may be foreseeable circumstances under which
the Bank would sell such securities.

     Securities  designated  as  available-for-sale  are recorded at fair value.
Changes in the fair value of debt securities  available-for-sale are included in
stockholders'    equity   as   unrealized    gains    (losses)   on   securities
available-for-sale,  net  of  taxes.  Unrealized  losses  on  available-for-sale
securities, reflecting a decline in value judged to be other than temporary, are
charged to earnings in the  Consolidated  Statements of  Operations.  Unrealized
gains or losses on  available-for-sale  securities  are  computed  on a specific
identification basis.

     The Bank did not hold any trading securities at December 31, 1998 or 1997.

Loans Held-for-Investment

     The  Bank's  loan  portfolio  is  primarily   comprised  of  single  family
residential  loans (one to four  units),  and  multi-family  loans (five or more
units).  Loans  are  generally  recorded  at the  contractual  amounts  owed  by
borrowers, less unearned interest and allowances for loan losses.

Loans Held-for-Sale

     The Bank  identifies  loans that  foreseeably may be sold prior to maturity
and classifies  them as  held-for-sale.  These loans are carried at the lower of
amortized cost or fair value on an aggregate basis by type of asset.  For loans,
fair value is calculated on an aggregate  basis as determined by current  market
investor yield requirements.

Impaired Loans

     The Bank evaluates  loans for  impairment  whenever the  collectibility  of
contractual principal and interest payments is questionable.  A loan is impaired
when,  based on current  circumstances  and events, a creditor will be unable to
collect all amounts  contractually  due under a loan agreement.  Large groups of
smaller balance homogenous loans that are collectively  evaluated for impairment
are not subject to the application of SFAS No. 114.

     Cash payments  received from impaired loans are recorded in accordance with
the contractual  terms of the loan. The principal portion of the payment is used
to reduce the  principal  balance of the loan,  whereas the interest  portion is
recognized as interest income.

Allowances for Loan Losses

     The Bank  maintains a general  valuation  allowance for loan losses for the
inherent risk in the loan portfolio which has yet to be specifically identified.
The allowance is  unallocated  to any specific loan. The allowance is maintained
at an amount that management  believes  adequate to cover estimable and probable
loan losses  based on a risk  analysis of the current  portfolio.  Additionally,
management performs periodic reviews of the loan portfolio to identify potential
problems and to  establish  impairment  allowances  if losses are expected to be
incurred.  Additions to the allowances  are charged to earnings.  The regulatory
agencies periodically review the


                                       52
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies (continued)

allowances  for loan losses and may  require  the Bank to adjust the  allowances
based on information available to them at the time of their examination.

     General  allowances are provided for all loans,  regardless of any specific
allowances provided.  The determination of the Bank's general allowance for loan
losses is based on  estimates  that are  affected by changes in the  regional or
national economy and market conditions. The Bank's management believes, based on
economic and market  conditions,  that the general  allowance for loan losses is
adequate as of December 31, 1998 and 1997. Should there be an economic or market
downturn or if market  interest  rates  increase  significantly,  the Bank could
experience a material increase in the level of loan defaults and charge-offs.

Loan Origination Fees and Costs

     Loan  origination  fees and  certain  direct  loan  origination  costs  are
deferred and recognized  over the lives of the related loans as an adjustment of
loan  yields  using the  interest  method.  When a loan is  repaid or sold,  any
unamortized net deferred fee balance is credited to income.

Gain or Loss on Sale of Loans

     The Bank primarily  sells its mortgage loans on a servicing  released basis
and recognizes cash gains or losses  immediately in its Statement of Operations.
The Bank has  previously  sold  mortgage  loans  and  loan  participations  on a
servicing  retained  basis with yield  rates to the buyer based upon the current
market rates which may differ from the contractual rate of the loans sold. Under
Statement  of  Financial  Accounting  Standards  No.  125,  servicing  assets or
liabilities  and other  retained  interests  are  required  to be recorded as an
allocation  of the  carrying  amount of the loans  sold  based on the  estimated
relative  fair  values  of the  loans  sold  and any  retained  interests,  less
liabilities incurred. Servicing assets are evaluated for impairment based on the
asset's fair value.  The Bank  estimates  fair values by  discounting  servicing
assets cash flows using  discount and prepayment  rates that it believes  market
participants would use. The Bank had no such activity in 1998, 1997 and 1996.

     Servicing  assets  arising  from the sale of loans  are  included  in other
assets  and were  $2,685,000  and  $4,744,000  at  December  31,  1998 and 1997,
respectively.  No additional  servicing  assets were recorded in 1998,  1997 and
1996.

Real Estate

     The Bank's real estate acquired in settlement of loans ("REO")  consists of
property  acquired  through  foreclosure  proceedings  or by  deed  in  lieu  of
foreclosure.  Generally,  all loans greater than 60 days  delinquent  are placed
into foreclosure and, if necessary,  a valuation  allowance is established.  The
Bank  acquires  title to the property in most  foreclosure  actions that are not
reinstated  by the  borrower.  Once real estate is acquired in  settlement  of a
loan,  the  property is recorded as REO at fair  market  value,  less  estimated
selling costs. The REO's balance is adjusted for any subsequent declines in fair
value through a valuation allowance.

     The recognition of gain on the sale of real estate is dependent on a number
of factors relating to the nature of the property, terms of sale, and any future
involvement of the Bank or its


                                       53
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies (continued)

subsidiaries  in the property sold. If a real estate  transaction  does not meet
certain down payment,  cash flow and loan amortization  requirements,  income is
deferred and recognized under an alternative method.

Depreciation and Amortization

     Depreciation  of office  properties and equipment is provided by use of the
straight-line  method over the  estimated  useful  lives of the related  assets.
Amortization of leasehold  improvements is provided by use of the  straight-line
method over the lesser of the life of the improvement or the term of the lease.

Income Taxes

     The Company files a  consolidated  federal income tax return and a combined
California  franchise  tax report with the Bank and its  subsidiaries.  The Bank
accounts for income taxes using the asset and liability method. In the asset and
liability method,  deferred tax assets and liabilities are established as of the
reporting date for the realizable  cumulative temporary  differences between the
financial  reporting and tax return bases of the Bank's assets and  liabilities.
The tax rates applied are the statutory  rates expected to be in effect when the
temporary differences are realized or settled.

Earnings Per Share

     The Company  adopted  Statement of Financial  Accounting  Standard No. 128,
Earnings Per Share ("SFAS No. 128") effective  December 31, 1997. Under SFAS No.
128, the Company  reports  both basic and diluted net earnings per share.  Basic
net  earnings  per share is  determined  by dividing net earnings by the average
number of shares of common  stock  outstanding,  while  diluted net earnings per
share is determined by dividing net earnings by the average  number of shares of
common  stock  outstanding  adjusted  for the  dilutive  effect of common  stock
equivalents.  Net earnings per share for 1996 have been restated to conform with
the provisions of the pronouncement.

Comprehensive Income

     In January of 1998, the Bank adopted SFAS No. 130, Reporting  Comprehensive
Income.  SFAS No. 130  establishes  standards for reporting and  presentation of
comprehensive  income and its components in a full set of financial  statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
securities  and is presented in the  consolidated  statements of operations  and
comprehensive income (loss) and consolidated statements of stockholders' equity.
The  Statement   requires  only  additional   disclosures  in  the  consolidated
statements;  it does not  affect  the Bank's  financial  position  or results of
operations.  Prior years financial  statements have been reclassified to conform
to the requirements of SFAS No. 130.

Recent Accounting Pronouncements

     In June of 1988, the Financial  Accounting  Standards Board ("FASB") issued
Statement of Financial  Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging



                                       54
<PAGE>
                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  Summary of Significant Accounting Policies (continued)

Activities"  ("SFAS  No.  133"),  which  establishes  accounting  and  reporting
standards for derivative  instruments  and for hedging  activities.  It requires
recognition of all  derivatives as either assets or liabilities in the statement
of financial  condition and the measurement of those  instruments at fair value.
Recognition  of changes in fair value  will be  recognized  into  income or as a
component  of  other  comprehensive  income  depending  upon  the  type  of  the
derivative  and its related  hedge,  if any.  SFAS No. 133 is effective  for all
fiscal quarters of fiscal years  beginning  after June 15, 1999.  Management has
not yet  determined the impact of  implementing  this statement on its financial
condition or results of operations.

     In October of 1998,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS No. 134".) SFAS No 134 further requires that, after the securitization of
mortgage loans, an entity engaged in mortgage  banking  activities  classify the
resulting  mortgage-backed  securities or other related  interests  based on its
ability and intent to sell or hold those investments.  SFAS No. 134 conforms the
subsequent  accounting  for  securities  retained  after the  securitization  of
mortgage loans by a mortgage banking  enterprise with the subsequent  accounting
for securities  retained after the  securitization of other types of assets by a
non-mortgage  banking enterprise.  SFAS is effective the first quarter beginning
after December 15, 1998.  Management does not expect the  implementation of this
statement  to have a material  affect on the  Company's  financial  condition or
results of operations.

(2)  Investment Securities

The  amounts  advanced  under  agreements  to  resell   securities   (repurchase
agreements)  represent short-term  investments.  During the agreement period the
securities are maintained by the dealer under a written custodial agreement that
explicitly  recognizes  the  Bank's  interest  in the  securities.  The Bank had
$71,000,000 and $115,000,000 in agreements to resell  securities at December 31,
1998 and 1997, respectively which are classified as cash and cash equivalents in
the accompanying  Statements of Financial Condition.  Securities purchased under
agreements to resell averaged $101,637,000 and $91,195,000 during 1998 and 1997,
and the maximum  amounts  outstanding at any month end during 1998 and 1997 were
$147,000,000 and $154,000,000, respectively.


                                       55
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(2)  Investment Securities (continued)

     Investment securities,  available-for-sale,  are recorded at fair value and
summarized below for the periods indicated:

                                                     1998                     
                               -------------------------------------------------
                                                           Gross          Gross
                               Historical   Unrealized   Unrealized       Fair
                                 Value        Gains        Losses         Value
                               --------     --------      --------      --------
                                            (Dollars In Thousands)
United States Government
  and federal agency
  obligations ............     $ 28,456     $      4      $   (521)     $ 27,939
Collateralized
  Mortgage Obligations ...       36,380           78           (64)       36,394
                               --------     --------      --------      --------
                               $ 64,836     $     82      $   (585)     $ 64,333
                               ========     ========      ========      ========


                                                      1997                     
                               -------------------------------------------------
                                                           Gross          Gross
                               Historical   Unrealized   Unrealized       Fair
                                 Value        Gains        Losses         Value
                               --------     --------      --------      --------
                                           (Dollars In Thousands)
United States Government
  and federal agency
  obligations ............     $ 48,442     $      1      $   (527)     $ 47,916
Collateralized
  Mortgage Obligations ...        1,009           --           (15)          994
                               --------     --------      --------      --------
                               $ 49,451     $      1      $   (542)     $ 48,910
                               ========     ========      ========      ========

     Related  maturity data for investment  securities,  available-for-sale,  is
summarized below for the period indicated:

                                                     1998                     
                               -------------------------------------------------
                                                           Gross          Gross
                               Historical   Unrealized   Unrealized       Fair
                                 Value        Gains        Losses         Value
                               --------     --------      --------      --------
                                            (Dollars In Thousands)

Maturing within 1 year ...     $     --     $     --      $     --      $     --
Maturing after 5 years ...       28,456            4          (521)       27,939
                               --------     --------      --------      --------
                               $ 28,456     $      4      $   (521)     $ 27,939
                               ========     ========      ========      ========


     Collateralized  Mortgage  Obligations  as of  December  31,  1998  all have
expected  maturities  within  five  years.  There  were no sales  of  investment
securities  during  1998,  1997 or 1996.  Accrued  interest on  investments  was
$693,000 and $940,000 at December 31, 1998 and 1997, respectively.


                                       56
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(3)  Mortgage-backed Securities

     Mortgage-backed  securities,  available-for-sale,  are due through the year
2035 and are summarized below for the periods indicated:

                                                     1998                     
                               -------------------------------------------------
                                                           Gross          Gross
                               Historical   Unrealized   Unrealized       Fair
                                 Value        Gains        Losses         Value
                               --------     --------      --------      --------
                                            (Dollars In Thousands)

FNMA .....................     $ 19,038     $     85      $     --      $ 19,123
FHLMC ....................      538,352           40          (836)      537,556
                               --------     --------      --------      --------
Total ....................     $557,390     $    125      $   (836)     $556,679
                               ========     ========      ========      ========

                                                     1997                     
                               -------------------------------------------------
                                                           Gross          Gross
                               Historical   Unrealized   Unrealized       Fair
                                 Value        Gains        Losses         Value
                               --------     --------      --------      --------
                                            (Dollars In Thousands)

FNMA .....................     $ 20,934     $     71      $   (101)     $ 20,904
FHLMC ....................      655,259           11          (116)      655,154
                               --------     --------      --------      --------
Total ....................     $676,193     $     82      $   (217)     $676,058
                               ========     ========      ========      ========


     There were no  mortgage-backed  securities created with loans originated by
the  Bank in  1998,  1997  or  1996.  There  were no  sales  of  mortgage-backed
securities during 1998, 1997 or 1996.

     Accrued  interest   receivable   related  to   mortgage-backed   securities
outstanding  at December 31, 1998 and 1997 totaled  $5,556,000  and  $6,737,000,
respectively.


                                       57
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(4)  Loans Receivable

     Loans receivable are summarized as follows:

                                                        1998             1997
                                                     ----------       ----------
                                                       (Dollars In Thousands)
Real estate loans:
First trust deed residential loans:
    One to four units ........................       $1,565,105       $1,801,608
    Five or more units .......................        1,127,228        1,217,577
                                                     ----------       ----------
    Residential loans ........................        2,692,333        3,019,185
  Other real estate loans:
    Commercial and industrial ................          181,772          196,575
    Second trust deeds .......................           15,357           15,441
    Other ....................................               --            6,303
                                                     ----------       ----------
      Real estate loans ......................        2,889,462        3,237,504
Non-real estate loans:
  Manufactured housing .......................              893            1,154
  Deposit accounts ...........................            1,002            1,644
  Consumer ...................................            1,167              185
                                                     ----------       ----------
      Loans receivable .......................        2,892,524        3,240,487
Less:
  General loan valuation allowance ...........           67,638           61,237
  Valuation allowances for impaired loans ....            7,634            9,775
  Unearned loan fees .........................            9,031           24,311
                                                     ----------       ----------
      Subtotal ...............................        2,808,221        3,145,164
                                                     ----------       ----------
Less:
  Loans held-for-sale ........................           16,450           40,382
                                                     ----------       ----------
      Loans receivable, net ..................       $2,791,771       $3,104,782
                                                     ==========       ==========

     Loans  serviced  for  others   totaled   $424,908,000,   $519,353,000   and
$572,275,000 at December 31, 1998, 1997 and 1996, respectively.

     The Bank has loss exposure on certain loans sold with recourse.  The dollar
amount of loans sold with recourse  totaled  $203,022,000  and  $218,149,000  at
December  31,  1998 and  1997,  respectively.  The  maximum  potential  recourse
liability totaled  $37,267,000 and $39,926,000 at December 31, 1998 and December
31, 1997,  respectively.  The Bank's  allowance for losses related to loans sold
with  recourse,  which is  recorded  as a  liability,  totaled  $12,546,000  and
$13,029,000 at December 31, 1998 and 1997, respectively.

     The Bank had  outstanding  commitments  to fund  $90,572,000 in real estate
loans at December 31,1998,  65% of which were adjustable rate mortgages with the
balance in fixed rate mortgages.  The Bank had  outstanding  commitments to sell
real estate loans of $42,680,000 at December 31, 1998.

     Accrued interest  receivable  related to loans  outstanding at December 31,
1998 and 1997 totaled $18,052,000 and $20,119,000, respectively.

     Loans  delinquent  greater than 90 days or in foreclosure  were $29,315,000
and  $34,117,000  at December 31, 1998 and 1997,  respectively,  and the related
allowances for delinquent interest were $1,896,000 and $1,819,000, respectively.


                                       58
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4)   Loans Receivable (continued)

     Loans  originated  upon  the  sale  of  real  estate  totaled   $9,966,000,
$31,649,000, and $54,227,000 during 1998, 1997 and 1996, respectively.

     See Note 9 for loans which were pledged as security for borrowings.

     The  following  is a summary  of the  activity  in general  loan  valuation
allowances and impaired valuation allowances for the periods indicated:

<TABLE>
<CAPTION>
                                                       General      Impaired
                                                      Valuation     Valuation
                                                      Allowance     Allowance      Total  
                                                      ---------     ---------      -----  
                                                               (Dollars In Thousands)

<S>                                                   <C>           <C>           <C>     
Balance at December 31, 1995 ....................     $ 42,876      $ 26,101      $ 68,977
Provision for loan losses .......................       23,768        11,387        35,155
Charge-offs .....................................      (16,114)      (25,138)      (41,252)
Recoveries ......................................        5,070            --         5,070
Transfer of general valuation allowance for loans
  to real estate general valuation allowance ....         (700)           --          (700)
                                                      --------      --------      --------
Balance at December 31, 1996 ....................       54,900        12,350        67,250
Provision for loan losses .......................       13,155         7,345        20,500
Charge-offs .....................................       (9,419)      (10,064)      (19,483)
Recoveries ......................................        6,835           144         6,979
Transfer of general valuation allowance for loans
  to recourse general valuation allowance .......       (4,234)           --        (4,234)
                                                      --------      --------      --------
Balance at December 31, 1997 ....................       61,237         9,775        71,012
Provision for loan losses .......................        6,560           640         7,200
Charge-offs .....................................       (3,208)       (2,781)       (5,989)
Recoveries ......................................        3,049            --         3,049
                                                      --------      --------      --------
Balance at December 31, 1998 ....................     $ 67,638      $  7,634      $ 75,272
                                                      ========      ========      ========
</TABLE>

     Additionally  the Bank  maintains a general  valuation  allowance for loans
sold with  recourse.  This  allowance is included in accrued  expenses and other
liabilities in the Consolidated Statements of Financial Condition. The following
is a summary of the activity in the allowance for the periods indicated (dollars
in thousands):

     Balance at December 31, 1995 ........................        $  9,050
     Charge-offs, net of recoveries ......................            (652)
                                                                  --------
     Balance at December 31, 1996 ........................           8,398
     Transfer from general valuation allowance ...........           4,234
     Recoveries, net of charge-offs ......................             397
                                                                  --------
     Balance at December 31, 1997 ........................          13,029
     Charge-offs, net of recoveries ......................            (483)
                                                                  --------
     Balance at December 31, 1998 ........................        $ 12,546
                                                                  ========


                                       59
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(4)  Loans Receivable (continued)

     The following is a summary of impaired loans,  net of valuation  allowances
for impairment, for the periods indicated:

                                                    1998              1997    
                                                   -------          -------
                                                    (Dollars In Thousands)

     Non-accrual loans ..................          $ 5,934          $ 8,260
     Modified loans .....................            5,976            4,186
     Other impaired loans ...............            5,613           13,239
                                                   -------          -------
                                                   $17,523          $25,685
                                                   =======          =======

     Pursuant to SFAS No.  114,  the Bank  considers a loan to be impaired  when
management  believes that it is probable that the Bank will be unable to collect
all amounts due under the contractual  terms of the loan.  Estimated  impairment
losses are included in the Bank's impairment  allowances.  At December 31, 1998,
the total recorded  amount of loans for which  impairment had been recognized in
accordance  with SFAS No. 114 was  $17,523,000  (after  deducting  $7,634,000 of
impairment   allowances   attributable  to  such  loans).  The  Bank's  impaired
non-accrual  loans consist of single family loans with an outstanding  principal
amount  greater  than or  equal  to  $500,000  and  multi-family  loans  with an
outstanding principal amount greater than or equal to $750,000.

     Impaired loans for which there were no valuation allowances established are
included in the above  summary and totaled  $2,540,000  as of December 31, 1997.
There were no impaired  loans without  valuation  allowances  established  as of
December 31, 1998.

     The average  recorded  investment in impaired  loans during the years ended
December 31, 1998,  1997 and 1996 was  $17,546,000,  $24,459,000 and $52,725,000
respectively. The amount of interest income recognized for impaired loans during
the years ended December 31, 1998, 1997 and 1996 was $1,289,000, $1,913,000, and
$2,656,000  respectively,  under the cash basis method of  accounting.  Interest
income  recognized  under the accrual basis method of  accounting  for the years
ended  December  31,  1998,  1997 and 1996 totaled  $1,287,000,  $1,900,000  and
$2,549,000,  respectively. There were no commitments to lend additional funds to
borrowers whose loan terms have been modified.

(5)  Real Estate

     Real estate consists of the following:

                                                      1998          1997   
                                                    --------      --------
                                                     (Dollars In Thousands)
         Real estate acquired by
     (or deed in lieu of) foreclosure ("REO") .     $  5,255      $ 10,718
     Real estate general valuation allowance ..         (500)         (500)
                                                    --------      --------
                                                       4,755        10,218
     Real estate held-for-investment ..........           36            39
                                                    --------      --------
       Real estate, net .......................     $  4,791      $ 10,257
                                                    ========      ========




                                       60
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Listed  below  is a  summary  of  the  activity  in the  general  valuation
allowance  for  real  estate  owned  for  the  periods  indicated   (dollars  in
thousands):


     Balance, December 31, 1995 .............................      $    --
     Provision for losses on REO ............................          745
     Net transfers from loan general valuation allowance ....          700
     Charge-offs ............................................         (924)
                                                                   -------
     Balance, December 31, 1996 .............................          521
     Provision for losses on REO ............................        1,639
     Charge-offs ............................................       (1,660)
                                                                   -------
     Balance at December 31, 1997 ...........................          500
     Provision for losses on REO ............................          572
     Charge-offs ............................................         (572)
                                                                   -------
     Balance at December 31, 1998 ...........................      $   500
                                                                   =======

     The Bank acquired  $16,934,000,  $49,150,000 and $74,886,000 of real estate
in settlement of loans during 1998, 1997 and 1995, respectively.


                                       61
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(6)  Office Properties, Equipment and Lease Commitments

     Office properties and equipment, at cost, less accumulated depreciation and
amortization, are summarized as follows:

                                                         1998         1997 
                                                        -------     -------
                                                       (Dollars In Thousands)

     Land .........................................     $ 3,061     $ 3,061
     Office buildings .............................       4,594       4,519
     Furniture, fixtures and equipment ............      15,117      12,507
     Leasehold improvements .......................       8,671       8,720
     Other ........................................          44          44
                                                        -------     -------
                                                         31,487      28,851
     Less accumulated depreciation and amortization      19,668      18,983
                                                        -------     -------
                                                        $11,819     $ 9,868
                                                        =======     =======

     The Bank is  obligated  under  noncancelable  operating  leases for periods
ranging  from five to thirty  years.  The leases  are for  certain of the Bank's
office  facilities.  Approximately  half of the  leases  for  office  facilities
contain  five  and ten year  renewal  options.  Minimum  rental  commitments  at
December  31,  1999 under all  noncancelable  leases are as follows  (dollars in
thousands):

     1999 .........................................                 $ 3,709
     2000 .........................................                   3,491
     2001 .........................................                   3,247
     2002 .........................................                   3,147
     2003 .........................................                   3,021
     Thereafter ...................................                  13,390
                                                                    -------
                                                                    $30,005
                                                                    =======

     Rent payments under these leases were $4,055,000, $4,325,000 and $4,270,000
for 1998,  1997 and 1996,  respectively.  Certain leases require the Bank to pay
property taxes and insurance.  Additionally, certain leases have rent escalation
clauses based on specified indices.

(7)  Federal Home Loan Bank Stock

     The Bank's  investment  in FHLB  stock at  December  31,  1998 and 1997 was
$72,700,000 and  $68,592,000,  respectively.  The FHLB provides a central credit
facility for member  institutions.  As a member of the FHLB system,  the Bank is
required to own  capital  stock in the FHLBSF in an amount at least equal to the
greater of 1% of the aggregate  principal amount of its unpaid home loans,  home
purchase  contracts and similar  obligations  at the end of each calendar  year,
assuming for such  purposes  that at least 30% of its assets were home  mortgage
loans,  or 5% of its  advances  (borrowings)  from the  FHLBSF.  The Bank was in
compliance with this requirement at December 31, 1998. The Bank's  investment in
FHLB stock was pledged as collateral  for advances from the FHLB at December 31,
1998 and 1997. The fair value of the Bank's FHLB stock  approximates  book value
due to the  Bank's  ability  to redeem  such  stock  with the FHLB at par value.
Accrued interest on FHLB stock totaled  $1,071,000 and $1,013,000 as of December
31, 1998 and December 31, 1997, respectively.


                                       62
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8)  Deposits

     Deposit account balances are summarized as follows:

<TABLE>
<CAPTION>
                                                              1998                           1997    
                                                   -------------------------      -------------------------
                                                     Amount           %             Amount            %  
                                                   ----------     ----------      ----------     ----------
                                                                      (Dollars In Thousands)
<S>                                                <C>                   <C>      <C>                  <C>
Variable rate non-term accounts:
  Money market deposit accounts (weighted
   average rate of 3.91% and 3.36%) ..........     $  293,159             14%     $  156,221              8%
  Interest-bearing checking accounts
   (weighted average rate of 1.06% and
   1.78%) ....................................        108,211              5         130,765              7
  Passbook accounts (weighted average
   rate of 2.01% and 2.04%) ..................         84,132              4          86,547              4
  Non-interest bearing checking accounts .....        137,822              6         112,373              6
                                                   ----------     ----------      ----------     ----------
                                                      623,324             29         485,906             25
                                                   ----------     ----------      ----------     ----------
Fixed-rate term certificate accounts:
  Under six-month term (weighted average
   rate of 4.18% and 5.07%) ..................         62,642              3         120,637              6
  Six-month term (weighted average rate of
   5.14% and 6.00%) ..........................        301,313             14         103,901              5
  Nine-month term (weighted average rate of
   5.42% and 5.64%) ..........................        438,443             21         374,259             19
  One year to 18 month term (weighted
   average rate of 5.14% and 5.53%) ..........        263,291             12         348,941             18
  Two year or 30 month term (weighted
    average rate of 5.28% and 5.23%) .........         23,015              1          30,689              2
  Over 30-month term (weighted average rate
    of 5.79% and 5.85%) ......................        103,030              5         125,971              7
  Negotiable certificates of $100,000 and
   greater, 30 day to one year terms (weighted
   average rate of 5.08% and 5.50%) ..........        320,851             15         353,343             18
                                                   ----------     ----------      ----------     ----------
                                                    1,512,585             71       1,457,741             75
                                                   ----------     ----------      ----------     ----------
   Total Deposits (weighted average rate of
     4.36% and 4.66%) ........................     $2,135,909            100%     $1,943,647            100%
                                                   ==========     ==========      ==========     ==========
</TABLE>


                                       63
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(8)  Deposits (continued)

     Certificates  of deposit,  placed  through  five major  national  brokerage
firms,  totaled  $494,224,000  and  $378,501,000  at December 31, 1998 and 1997,
respectively.

     Cash  payments  for  interest on  deposits  (including  interest  credited)
totaled  $93,793,000,  $92,152,000 and $104,269,000  during 1998, 1997 and 1996,
respectively. Accrued interest on deposits at December 31, 1998 and 1997 totaled
$11,417,000 and $7,550,000,  respectively,  and is included in accrued  expenses
and other liabilities in the accompanying  Consolidated  Statements of Financial
Condition.

     The following table indicates the maturities and weighted  average interest
rates of the Bank's deposits at December 31, 1998:

<TABLE>
<CAPTION>
                             Non-Term                                                        There-
                             Accounts        1999          2000        2001         2002      After         Total 
                             --------     ----------      -------     -------      ------    -------      ----------
                                                            (Dollars In Thousands)
<S>                           <C>         <C>             <C>         <C>          <C>       <C>          <C>
Deposits at
 December 31, 1998.......     $623,324    $1,462,460      $28,134     $ 7,108      $5,018    $ 9,865      $2,135,909
                              ========    ==========      =======     =======      ======    =======      ==========
Weighted average
 interest rates   .......         2.30%         5.21%        5.21%       5.17%       5.75%      5.40%           4.36%
</TABLE>

     Interest expense on deposits is summarized as follows:

                                               1998         1997          1996  
                                             --------     --------     ---------
                                                  (Dollars In Thousands)

     Passbook accounts .................     $  2,050     $  1,750     $  1,933
     Money market deposits and
      interest-bearing checking accounts        9,308        5,705        4,869
     Certificate accounts ..............       86,301       85,223       94,793
                                             --------     --------     --------
                                             $ 97,659     $ 92,678     $101,595
                                             ========     ========     ========


                                       64
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(9)  Federal Home Loan Bank Advances and Other Borrowings

     Federal Home Loan Bank (FHLB) advances and other borrowings  consist of the
following:

<TABLE>
<CAPTION>
                                                                  1998           1997  
                                                               ----------     ----------
                                                                 (Dollars In Thousands)
<S>                                                            <C>            <C>
     Advances from the FHLB of San Francisco with a
      weighted average interest rate of 5.43% and 5.80%,
      respectively, secured by FHLB stock and certain
      real estate loans with unpaid principal balances of
      approximately $1.7 billion at December 31, 1998,
      advances mature through 2008 .......................     $  714,000     $1,310,000
     Unsecured term funds with a weighted average interest
      rate of 5.85% for year 1997 ........................             --          4,000
     10 Year Senior Unsecured Notes with an interest
       rate of 11.75%, due 2004 ..........................         50,000         50,000
                                                               ----------     ----------
                                                               $  764,000     $1,364,000
                                                               ==========     ==========
</TABLE>

     At December 31, 1998 and 1997,  accrued  interest  payable on FHLB advances
and other borrowings totaled $2,050,000 and $1,690,000,  respectively,  which is
included  in  accrued  expenses  and  other   liabilities  in  the  accompanying
Consolidated Statements of Financial Condition.

     The Bank has a credit  facility  with the FHLB in the form of FHLB advances
and letters of credit which allow borrowings up to 40% of the Bank's assets,  as
computed for regulatory  purposes,  or approximately  $1,474,000,000 at December
31, 1998 with terms up to 30 years.

     The Company's  10-year senior  unsecured notes are governed by the terms of
an indenture dated September 28, 1994 (the "Indenture").  The Indenture contains
financial  and operating  covenants  which,  among other  things,  (i) limit the
incurrence  of debt by the Company,  (ii) limit the payment of dividends and the
making of certain  other  distributions  by the  Company  and its  subsidiaries,
including the Bank,  (iii) limit the  disposition of, and the existence of liens
on, the stock of the Company's subsidiaries, (iv) limit the existence of certain
liens on other  property  or assets of the  Company and (v) limit the ability of
the Company to enter into certain  transactions  with affiliates.  The notes are
callable  each year,  beginning  October 1,  1999,  at a premium of 5.875%.  The
premium decreases annually until October 1, 2002, when there is no call premium.


                                       65
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(9)  Federal Home Loan Bank Advances and Other Borrowings (continued)

     The  following  is a summary of borrowing  maturities  at December 31, 1998
(dollars in thousands):

     1999 .......................................                  $200,000
     2000 .......................................                   210,000
     2001 .......................................                   177,000
     2003 .......................................                    92,000
     2004 .......................................                    65,000
     2005 .......................................                    10,000
     2008 .......................................                    10,000
                                                                   --------
                                                                   $764,000
                                                                   ========

     Cash  payments for interest on  borrowings  (including  reverse  repurchase
agreements)  totaled  $101,757,000,  $110,991,000 and $107,559,000  during 1998,
1997 and 1996, respectively.

     Interest  expense on borrowings is comprised of the following for the years
indicated:

                                                Year Ended December 31,
                                        --------------------------------------
                                           1998          1997           1996
                                        ---------      ---------     ---------
                                                 (Dollars In Thousands)
      FHLB Advances .................   $  53,116      $  70,004     $  57,427
      Reverse Repurchase Agreements..      29,915         34,335        37,345
      10 Year Senior Unsecured Notes.       5,875          5,875         5,875
      Other .........................         (74)         1,334        (4,211)
                                        ---------      ---------     ---------
                                        $  88,832      $ 111,548     $  96,436
                                        =========      =========     =========

     Other  interest  expense in 1998 and 1996  includes the reversal of accrued
interest due to the IRS. See Note 11.

(10) Securities Sold Under Agreements to Repurchase

     The Bank enters into sales of  securities  under  agreements  to repurchase
(reverse  repurchase  agreements)  which  require  the  repurchase  of the  same
securities. Reverse repurchase agreements are treated as financing arrangements,
and the obligation to repurchase  securities sold is reflected as a borrowing in
the  Consolidated   Statements  of  Financial  Condition.   The  mortgage-backed
securities  underlying the agreements  were delivered to the dealer who arranged
the transactions or its trustee.

     At December 31, 1998,  $471,172,000 in reverse  repurchase  agreements were
collateralized by  mortgage-backed  securities with principal  balances totaling
$491,089,000  and fair  values  totaling  $490,354,000.  At December  31,  1997,
$577,670,000   in  reverse   repurchase   agreements  were   collateralized   by
mortgage-backed  securities with principal  balances  totaling  $603,544,000 and
fair values totaling $603,598,000.

     The weighted average interest rates for borrowings under reverse repurchase
agreements  were 5.37% and 5.66%,  respectively,  as of  December  31,  1998 and
December 31, 1997.



                                       66
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(10) Securities Sold Under Agreements to Repurchase (continued)

     Securities sold under  agreements to repurchase  averaged  $514,498,000 and
$607,479,000  during  1998  and  1997,  respectively,  and the  maximum  amounts
outstanding  at any  month-end  during  1998  and  1997  were  $576,514,000  and
$634,976,000, respectively.

     The  following is a summary of  maturities at December 31, 1998 (dollars in
thousands):

     Up to 30 days ..................................              $ 50,779
     30 to 90 days ..................................               140,624
     Over 90 to 182 days ............................               279,769
                                                                   --------
                                                                   $471,172
                                                                   ========

     Accrued interest on securities sold under agreements to repurchase which is
included  in  accrued  expenses  and  other   liabilities  in  the  accompanying
Consolidated  Statements of Financial Condition was $5,657,000 and $7,353,000 at
December 31, 1998 and 1997, respectively.

(11) Income Taxes

     Income taxes (benefit) consist of the following:

                                  1998             1997             1996 
                                --------         --------         --------
                                          (Dollars In Thousands)
     Current:
       Federal .........        $ 24,936         $ 14,311         $  6,999
       State ...........           8,234              231              591
                                --------         --------         --------
                                  33,170           14,542            7,590
                                --------         --------         --------
     Deferred:
       Federal .........          (5,812)          (1,502)          (1,560)
       State ...........          (1,176)           4,421            1,458
                                --------         --------         --------
                                  (6,988)           2,919             (102)
                                --------         --------         --------
     Total:
       Federal .........          19,124           12,809            5,439
       State ...........           7,058            4,652            2,049
                                --------         --------         --------
                                $ 26,182         $ 17,461         $  7,488
                                ========         ========         ========

     A reconciliation  of the statutory federal corporate income tax rate to the
Company's effective income tax rate follows:

                                                  1998        1997        1996 
                                                 ------      ------      ------

Statutory federal income tax rate ............     35.0%       35.0%       35.0%
Increase (reductions) in taxes resulting from:
  State franchise tax, net of federal income
   tax benefit ...............................      7.5         7.4         8.5
  Core deposit intangibles ...................      0.1         0.1         0.5
  Provision for additional taxes due to audits       --          --         3.3
  Other, net .................................      0.5         0.5         0.3
                                                 ------      ------      ------
    Effective rate ...........................     43.1%       43.0%       47.6%
                                                 ======      ======      ======


                                       67
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(11) Income Taxes (continued)

     Cash  payments  for  income  taxes  totaled  $31,762,000,  $21,310,000  and
$6,754,000 during 1998, 1997 and 1996,  respectively.  The Company received cash
refunds totaling $48,000,  $1,158,000 and $1,000,000 during 1998, 1997 and 1996,
respectively. No refunds were received during 1998.

     Current income taxes  receivable at December 31, 1998 and 1997 were $98,000
and $507,000, respectively.

     Listed below are the significant components of the net deferred tax (asset)
and liability:

                                                          1998           1997   
                                                        --------       --------
                                                        (Dollars In Thousands)
Components of the deferred tax asset:
  Bad debts ......................................      $(32,819)      $(29,952)
  Pension expense ................................        (2,802)        (2,281)
  State taxes ....................................        (3,484)        (1,276)
  IRS interest accrual ...........................          (229)          (633)
Tax effect of unrealized loss on
   securities available-for-sale .................          (510)          (284)
  Other ..........................................        (1,764)        (1,427)
                                                        --------       --------
    Total deferred tax asset .....................       (41,608)       (35,853)
                                                        --------       --------
Components of the deferred tax liability:
  Loan fees ......................................        17,171         19,526
  Loan sales .....................................         1,178          2,083
  FHLB stock dividends ...........................        14,294         12,386
  Other ..........................................           559          3,712
                                                        --------       --------
    Total deferred tax liability .................        33,202         37,707
                                                        --------       --------
Net deferred tax liability (asset) ...............      $ (8,406)      $  1,854
                                                        ========       ========
  Net state deferred tax liability (asset) .......      $ (9,399)      $  2,256
  Net federal deferred tax liability (asset) .....           993           (402)
                                                        --------       --------
Net deferred tax liability (asset) ...............      $ (8,406)      $  1,854
                                                        ========       ========

     The  Company   provides  for  recognition  and  measurement  of  deductible
temporary  differences  to the extent  that it is more  likely than not that the
deferred  tax asset  will be  realized.  The  Company  did not have a  valuation
allowance  for the deferred  tax asset at December  31, 1998 and 1997,  as it is
more likely than not that the deferred  tax asset will be realized  through loss
carrybacks and the timing of future reversals of existing temporary differences.

     During 1997, the Internal Revenue Service ("IRS") completed its examination
of the Company's consolidated federal income tax returns for tax years up to and
including  1992. The adjustments  proposed by the IRS were primarily  related to
temporary  differences  as to the  recognition  of  certain  taxable  income and
expense items. While the Company had provided for deferred taxes for federal and
state  purposes,  the change in the period of  recognition of certain income and
expense  items  resulted  in  interest  due to the IRS and  Franchise  Tax Board
("FTB"). As a result, the Company paid $7,392,000 in interest to the IRS and FTB
and accrued an additional  $210,000 in interest  during 1997.  During 1998,  the
Company  paid $598  thousand in interest  to the IRS and FTB and  reversed  $300
thousand. During 1996, the Company recorded a


                                       68
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(11) Income Taxes (continued)

$5,135,000 net reversal of accrued  interest  related to income taxes. The total
amount  of  accrued  interest  payable  for  amended  returns,  yet to be filed,
recorded as a liability in the Consolidated  Statements of Financial  Condition,
was  $500,000  and  $1,381,000  as of December  31, 1998 and  December 31, 1997,
respectively.

     As a result of legislation enacted during 1996, the Bank is required to use
the specific charge-off method of accounting for debts for all periods beginning
after  1995.  Prior to this  legislation,  the Bank used the  reserve  method of
accounting for bad debts. The Consolidated  Statements of Financial Condition at
December 31, 1998 and 1997 did not include a liability of $5,356,000  related to
the adjusted base year bad debt reserve.  This reserve was created when the Bank
was on the reserve method.

(12) Stockholders' Equity and Earnings Per Share

     The Company's stock charter authorizes 5,000,000 shares of serial preferred
stock. As of December 31, 1998 no preferred shares had been issued.

     In 1997, the Company adopted  Statement of Financial  Accounting  Standards
No. 128, "Earnings per Share" ("SFAS No. 128"), which requires the disclosure of
two new  earnings  per share  calculations,  "basic  earnings per share" and, if
applicable,  "diluted  earnings per share."  Earnings per share for  comparative
years have been restated for SFAS No. 128.  Basic earnings per share is based on
the weighted  average  shares of common stock while  diluted  earnings per share
gives  effect to all  dilutive  potential  common  shares that were  outstanding
during part or all of the year.  The  Company's  Board of  Directors  declared a
two-for-one  stock split on June 25, 1998 to  stockholders of record on July 15,
1998. The additional shares were distributed on July 30, 1998.


                                       69
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12) Stockholders' Equity and Earnings Per Share (continued)

     A  reconciliation  of basic  earnings per share with  diluted  earnings per
share  follows  (all per share  amounts have been  adjusted for the  two-for-one
stock split declared June 25, 1998):

<TABLE>
<CAPTION>
                                                    For the Year Ended December 31   
                                              ----------------------------------------
                                                                1998            
                                              ----------------------------------------
                                              Net Earnings        Shares     Per-Share
<S>                                            <C>              <C>            <C>  
Basic EPS
  Income available to common stockholders      $34,629,000      21,181,859     $1.63
                                                                               =====
Effect of Dilutive Stock Options
  Outstanding stock options ..............              --         407,518
                                               -----------     -----------
Diluted EPS
  Income applicable to common stockholders
   and assumed conversion ................     $34,629,000      21,589,377     $1.60
                                               ===========     ===========     =====

<CAPTION>
                                                    For the Year Ended December 31   
                                              ----------------------------------------
                                                                1997            
                                              ----------------------------------------
                                              Net Earnings        Shares     Per-Share
<S>                                            <C>              <C>            <C>  
Basic EPS
  Income available to common stockholders      $23,100,000      21,139,544     $1.09
                                                                               =====
Effect of Dilutive Stock Options
  Outstanding stock options ..............              --         354,472
                                               -----------     -----------
Diluted EPS
  Income applicable to common stockholders
   and assumed conversion ................     $23,100,000      21,494,016     $1.07
                                               ===========     ===========     =====

<CAPTION>
                                                    For the Year Ended December 31   
                                              ----------------------------------------
                                                                1996            
                                              ----------------------------------------
                                              Net Earnings        Shares     Per-Share
<S>                                            <C>              <C>            <C>  
Basic EPS
  Income available to common stockholders      $ 8,244,000      21,103,530     $0.39
                                                                               =====
Effect of Dilutive Stock Options
  Outstanding stock options ..............              --         168,942
                                               -----------     -----------
Diluted EPS
  Income applicable to common stockholders
   and assumed conversion ................     $ 8,244,000      21,272,472     $0.39
                                               ===========     ===========     =====
</TABLE>

Regulatory Capital

     The Bank is subject to various regulatory capital requirements administered
by the federal banking  agencies.  Failure to meet minimum capital  requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators  that, if undertaken,  could have a direct  material effect on the
Bank's  financial   statements.   Under  capital  adequacy  guidelines  and  the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital  guidelines  that involve  quantitative  measures of the Bank's  assets,
liabilities and certain  off-balance  sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and


                                       70
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12) Stockholders' Equity and Earnings Per Share (continued)

classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below) of total and Tier I  capital  (as  defined  in the  regulations)  to risk
weighted assets (as defined). Management believes, as of December 31, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.

     As of  December  31,  1998,  the  most  recent  notification  from  the OTS
indicated that the Bank was well capitalized under the regulatory  framework for
prompt corrective  action.  There are no conditions or events since December 31,
1998 that management believes have changed the Bank's category.

The  following  table  summarizes  the Bank's  regulatory  capital and  required
capital for the years indicated (dollars in thousands):

<TABLE>
<CAPTION>
                                                                      December 31, 1998                 
                                               --------------------------------------------------------------
                                                                                    Tier 1
                                                 Tangible          Core           Risk-based       Risk-based
                                                  Capital         Capital           Capital          Capital
                                               -----------      -----------      -----------      -----------
<S>                                            <C>              <C>              <C>              <C>        
Actual Capital:
    Amount ...............................     $   294,223      $   294,223      $   294,223      $   320,720
    Ratio ................................            7.98%            7.98%           14.15%           15.43%
FIRREA minimum required capital:
    Amount ...............................     $    55,280      $   110,561               --      $   166,297
    Ratio ................................            1.50%            3.00%              --             8.00%
FIDICIA well capitalized required capital:
    Amount ...............................              --      $   184,268      $   124,722      $   207,871
    Ratio ................................              --             5.00%            6.00%           10.00%

                                                                      December 31, 1997                 
                                               --------------------------------------------------------------
                                                                                    Tier 1
                                                 Tangible          Core           Risk-based       Risk-based
                                                  Capital         Capital           Capital          Capital
                                               -----------      -----------      -----------      -----------
<S>                                            <C>              <C>              <C>              <C>        
Actual Capital:
    Amount ...............................     $   261,099      $   261,099      $   261,099      $   291,106
    Ratio ................................            6.28%            6.28%           11.02%           12.29%
FIRREA minimum required capital:
    Amount ...............................     $    62,379      $   124,757               --      $   189,555
    Ratio ................................            1.50%            3.00%              --             8.00%
FIDICIA well capitalized required capital:
    Amount ...............................              --      $   207,929      $   142,166      $   236,943
    Ratio ................................              --             5.00%            6.00%           10.00%
</TABLE>

     The  payment  of  dividends  is  subject  to  certain  federal  income  tax
consequences.  Specifically,  the Bank is  capable  of paying  dividends  to the
Company in any year without  incurring tax liability  only if such  dividends do
not exceed both the tax basis current year earnings and profits and  accumulated
tax earnings and profits as of the beginning of the year.


                                       71
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12)  Stockholders' Equity and Earnings Per Share (continued)

     Thirty days' prior notice to the OTS of the intent to declare  dividends is
required for the  declaration  of such  dividends by the Bank. The OTS generally
allows  a  savings   institution   which  meets  its  fully  phased-in   capital
requirements  to  distribute  without OTS  approval  dividends up to 100% of the
institution's  net  earnings  during a calendar  year plus the amount that would
reduce the  institution's  "surplus  capital  ratio"  (the excess over its fully
phased-in capital  requirements) to one-half of its surplus capital ratio at the
beginning of the calendar year.  However,  the OTS has the authority to preclude
the  declaration  of any  dividends or adopt more  stringent  amendments  to its
capital regulations.

     The Company may loan up to $6,000,000 to the Employee Stock  Ownership Plan
("ESOP") under a line of credit loan. At December 31, 1998 and 1997, the loan to
the  ESOP  totaled  $833,000  and  $1,744,000,  respectively.  Interest  on  the
outstanding  loan balance is due each December 31.  Interest varies based on the
Bank's  monthly cost of funds.  The average rates paid during 1998 and 1997 were
5.11% and 5.27%, respectively.

     On June 25, 1998, the Company  adopted an Amended and Restated  Shareholder
Rights Plan  ("Rights  Plan")  which is designed  to protect  shareholders  from
attempts to acquire  control of the Company at an  inadequate  price.  Under the
Rights Plan, the owner of each share of Company stock received a dividend of one
right  ("Right")  to purchase one  one-thousandth  of a share of a new series of
preferred  stock for its estimated  long term value of $200.00.  In the event of
certain  acquisitions  of 15% or more of the voting  stock or a tender offer for
15% or more of the  voting  stock of the  Company,  each  holder  of a Right who
exercises  such Right will  receive  shares of the Company  with a market  value
equal to two  times  the  exercise  price of the  Right.  Also,  in the event of
certain business combination  transactions following the acquisition by a person
of 15% or more of the Company  stock,  each Rights holder will have the right to
receive upon exercise of the Right common stock of the surviving company in such
transaction  having a market value of two times the exercise price of the Right.
The  Company  may redeem the  Rights at any time  prior to such  acquisition  or
tender  offer  should  the  Board  of  Directors  deem  redemption  to be in its
stockholders' best interests.  The Amended and Restated  Shareholder Rights Plan
replaces the previous  Shareholder  Rights Plan which, by its terms,  expired on
November 15, 1998.

(13) Employee Benefit Plans

     Until August 31, 1996, the Bank maintained a pension plan ("Pension  Plan")
covering substantially all employees who are employed on either a full time or a
part time basis.  The  benefits  were based on an  employee's  years of credited
service,  average annual salary and primary social security benefit,  as defined
in the Pension Plan.

     Effective  August 31, 1996, the Pension Plan was  discontinued and benefits
accrued to participants  under the Pension Plan were distributed to participants
in accordance  with their  instructions  during 1997.  The Pension Plan's assets
exceeded its  liabilities  by $106,000,  which reverted back to the Bank and are
included in the Company's 1997 Consolidated Statement of Operations.

     Effective  January 1, 1997,  the Bank made  available  to its  employees  a
qualified  defined  contribution  plan established  under Section 401 (k) of the
Internal Revenue Code, as amended


                                       72
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13) Employee Benefit Plans (continued)

(the 401(k)  Plan").  Participants  are  permitted  to make  contributions  on a
pre-tax  basis,  a portion  of which is matched  by the Bank.  The  401(k)  Plan
expense was $235,000 and $392,000 for 1998 and 1997, respectively.

     The Bank has a  Supplementary  Executive  Retirement  Plan  ("SERP")  which
covers any  individual  employed by the Bank as its Chief  Executive  Officer or
Chief Operating Officer. The pension expense for the SERP was $794,000, $628,000
and $506,000 in 1998, 1997 and 1996, respectively. The SERP is unfunded.

     The discount rate and rate of increase in future  compensation  levels used
in determining  the actuarial value of benefit  obligations  were 6.5% and 5.0%,
respectively, as of December 31, 1998. The discount rate and rate of increase in
future compensation levels used in determining the pension cost for the SERP was
5.0% as of December  31, 1998 and 1997.  The plan had no assets at December  31,
1998.

     The following table sets forth the funded status and amounts  recognized in
the  Company's  Statements  of  Financial  Condition  for the SERP for the years
indicated:

                                                             1998         1997  
                                                           -------      -------
                                                          (Dollars In Thousands)
Actuarial present value of benefits obligations:
  Accumulated benefits obligation ....................     $ 4,052      $ 3,544
                                                           =======      =======
   Vested benefit obligation .........................     $ 4,569      $ 3,928
                                                           =======      =======
Projected benefit obligation for service
 rendered to date ....................................       6,472        5,548
                                                           -------      -------
Shortage of plan assets over the projected
 benefit obligation ..................................      (6,472)      (5,548)
Unrecognized net loss (gain) from past ex-
 perience different from that assumed ................       1,410          797
Prior service cost not yet recognized in
 net periodic SERP cost ..............................         822          957
Unrecognized net (asset) obligation at transition ....         188          250
                                                           -------      -------
Accrued SERP liability ...............................     $(4,052)     $(3,544)
                                                           =======      =======
Net SERP cost for the year ended December
 31, 1998 and 1997 included the following
 components:
  Service cost-benefits earned during the period .....     $   219      $   152
  Interest cost on projected benefit obligation ......         378          316
Net amortization .....................................         197          160
                                                           -------      -------
Net period SERP cost .................................     $   794      $   628
                                                           =======      =======


                                       73
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13) Employee Benefit Plans (continued)

     The Bank has a profit sharing plan (the "ESOP") for all salaried  employees
and officers who have completed one year of continuous  service. At December 31,
1998,  the ESOP held 4.43% of outstanding  stock of the Company.  Profit sharing
expense for the years ended  December  31, 1998,  1997 and 1996 was  $1,000,000,
$501,000 and $500,000,  respectively. The amount of the contribution made by the
Bank is determined each year by the Board of Directors, but is not to exceed 15%
of the  participants'  aggregated  compensation.  The Bank does not  offer  post
retirement benefits under this plan.

Stock Compensation Plans

     At  December  31,  1998,  the  Company  had  two  stock-based  compensation
programs,  which are  described  below.  The Company  applies APB Opinion 25 and
related   interpretations   in  accounting  for  its  plans.   Accordingly,   no
compensation cost has been recognized for its stock compensation plans.

Stock Option Programs

     The Company has an employee  stock option program which is comprised of two
plans. One of these plans, the 1983 Stock Option and Stock  Appreciation  Rights
Plan (the "1983  Plan"),  expired in 1993 but some grants issued under that plan
are still  outstanding and exercisable.  The 1983 Plan provided for the issuance
of up to 3,142,000  shares of common  stock to employees of the Bank.  Under the
1994 Stock  Option and Stock  Appreciation  Rights Plan (the "1994  Plan"),  the
Company may grant options to employees of the Bank for up to 3,000,000 shares of
common stock,  subject to limitations set forth under the 1994 Plan.  Under both
the 1983 Plan and the 1994 Plan,  the exercise  price of each option  equals the
market value of the  Company's  stock on the date of the grant,  and an option's
maximum  term is 10  years.  Options  typically  begin  to  vest  on the  second
anniversary date of the grant under both plans.

     The Company  also has a stock option plan for outside  directors,  the 1997
Non-employee  Directors Stock Incentive Plan (the "Directors  Stock Plan").  The
Directors Stock Plan provides for the issuance of up to 400,000 shares of common
stock to  non-employee  directors  of the Company.  The  exercise  price of each
option equals the market value of the Company's  stock on the date of the grant,
and an option's maximum term is 10 years plus one month.  Options typically vest
100% on the one year anniversary date of the grant.

     The fair value of each option  grant is  estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions  used for grants in 1998, 1997 and 1996,  respectively:  no dividend
yield in any year;  expected  volatility of 35%, 35% and 36%; risk free interest
rates of 4.7%,  6.5% and 5.8%; and expected  average lives of 6, 6 and 10 years.
The  weighted-average  grant date fair value of options  granted during the year
are $7.85,  $5.15 and $4.25 for 1998, 1997 and 1996,  respectively.  The Company
has elected to recognize forfeitures in the year they occur.


                                       74
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13) Employee Benefit Plans (continued)

     Had  compensation  cost  for  the  Company's   stock-option  programs  been
determined  based on the fair value at the grant  dates for awards  under  those
plans  consistent  with the method of Statement of Financial  Standards No. 123,
"Accounting  for Stock Based  Compensation,"  the  Company's  net  earnings  and
earnings  per share would have been reduced to the pro forma  amounts  indicated
below (all per share amounts have been adjusted for the two-for-one  stock split
declared June 25, 1998):

                                       1998           1997           1996   
                                       ----           ----           ----   
                                 (Dollars in thousands except per share amounts)

     Net earnings:
      As reported .............     $   34,629     $   23,100     $    8,244
      Pro forma ...............     $   34,354     $   22,910     $    8,143

     Earnings per share:

     Basic:
       As reported ............     $     1.63     $     1.09     $     0.39
       Pro forma ..............     $     1.62     $     1.08     $     0.39

     Diluted:
       As reported ............     $     1.60     $     1.07     $     0.39
       Pro forma ..............     $     1.59     $     1.06     $     0.38


     Pro forma net earnings and earnings per share reflect only options  granted
in 1998, 1997 and 1996. Therefore,  the full impact of calculating  compensation
cost for stock  options under SFAS No. 123 is not reflected in the pro forma net
earnings  per  share  amounts  presented  above  because  compensation  cost  is
reflected  over the options'  vesting period and  compensation  cost for options
granted prior to January 1, 1995 is not considered.


                                       75
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(13)  Employee Benefit Plans (continued)

     Information with respect to stock options follows:

                                                 1998        1997        1996
                                               --------    --------    --------
                                                          (In Shares)
Options Outstanding
 (Weighted Average option prices)
Beginning of year ($7.85, $6.86 and $7.02)      707,914     639,062     694,844
Granted ($17.25, $10.88 and $7.14) .......      168,790     226,700      68,266
Exercised ($8.55, $7.72 and $5.34) .......      (52,990)   (115,538)    (84,894)
Canceled ($8.99, $9.01 and $8.09) ........     (110,214)    (42,310)    (32,460)
Re-issued grants ($6.44) .................           --          --      60,256
Cancellation of grants re-issued ($10.08)            --          --     (66,950)
                                               --------    --------    --------
End of Year ($9.84, $7.85 and $6.83) .....      713,500     707,914     639,062
                                               ========    ========    ========
Shares exercisable at December 31
  ($5.69, $5.89 and $6.35) ...............      291,560     227,200     320,914
                                               ========    ========    ========

Restricted Stock Plan

     The Company also has a  restricted  stock plan.  Under the 1991  Restricted
Stock Plan (the  "Restricted  Stock  Plan"),  the  Company  may issue  shares of
restricted  stock to  employees of the Company and its  subsidiaries,  including
officers  and  directors.  A total of  1,000,000  shares have been  reserved for
issuance  under the  Restricted  Stock Plan.  As of December  31, 1998 and 1997,
880,540 shares and 877,450 shares are available for grant. All per share amounts
have been adjusted for the  two-for-one  stock split declared June 25, 1998. The
shares consist of previously issued shares reacquired by the Company. The shares
typically  vest  in  increments  of  25%  per  year,  beginning  on  the  fourth
anniversary  of the  grant  date.  As  shares  vest,  they are  released  to the
recipient,  at which time the recipient will recognize  ordinary income equal to
the fair  market  value  of the  restricted  stock at the time the  restrictions
lapse.  In 1998,  1,000  shares were issued under this  program.  No shares were
issued in 1997 or 1996.  Compensation  costs related to shares granted under the
Restricted Stock Plan have been recorded in previous periods.


                                       76
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(14) Parent Company Financial Information

     The following condensed parent company financial information should be read
in conjunction with the other Notes to the Consolidated Financial Statements.

CONDENSED STATEMENTS OF FINANCIAL CONDITION
                                                           December 31, 1998    
                                                        ------------------------
                                                          1998            1997  
                                                        --------        --------
                                                         (Dollars In Thousands)
Assets:
  Cash .........................................        $ 12,466        $ 10,600
  Other assets .................................           1,333           1,567
  Investment in subsidiary .....................         294,819         262,572
                                                        --------        --------
                                                        $308,618        $274,739
                                                        ========        ========
Liabilities and Stockholders' Equity:
  Notes payable ................................        $ 50,000        $ 50,000
  Other liabilities ............................           1,618           1,952
  Stockholders' equity .........................         257,000         222,787
                                                        --------        --------
                                                        $308,618        $274,739
                                                        ========        ========

                                                Years Ended December 31,       
                                         --------------------------------------
                                           1998           1997           1996  
                                         --------       --------       --------
CONDENSED STATEMENTS OF OPERATIONS AND            (Dollars In Thousands)
             COMPREHENSIVE EARNINGS    

Dividends received from Bank ......      $  5,875       $  5,875       $  5,875
Equity in undistributed net
 earnings of subsidiary ...........        32,558         20,987          6,029
Other expense, net ................        (3,804)        (3,762)        (3,660)
                                         --------       --------       --------
Net earnings ......................      $ 34,629       $ 23,100       $  8,244
                                         ========       ========       ========

<TABLE>
<CAPTION>
                                                                Years Ended December 31, 
                                                         ------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS                         1998          1997          1996  
                                                         --------      --------      --------
                                                                (Dollars In Thousands)
<S>                                                      <C>           <C>           <C>     
Net Cash Flows from Operating Activities:
  Net earnings .....................................     $ 34,629      $ 23,100      $  8,244
  Adjustments to reconcile net earnings to
   net cash provided by operating
    activities:
  Equity in undistributed net earnings of subsidiary      (32,558)      (20,987)       (6,029)
  Other ............................................         (129)          577         2,838
                                                         --------      --------      --------
  Net cash provided by operating activities ........        1,942         2,690         5,053
                                                         --------      --------      --------
Cash Flows from Investing Activities:
  Decrease in ESOP loan ............................          911           388           368
  Purchase of  treasury stock ......................       (1,469)           --        (2,053)
                                                         --------      --------      --------
  Net cash (used)  provided by investing
   Activities ......................................         (558)          388        (1,685)
                                                         --------      --------      --------
Cash Flows from Financing Activities:
Other ..............................................          482           952           465
                                                         --------      --------      --------
Net cash provided  by financing activities .........          482           952           465
                                                         --------      --------      --------
Net increase  in cash ..............................        1,866         4,030         3,833
Cash at beginning of period ........................       10,600         6,570         2,737
                                                         --------      --------      --------
Cash at end of period ..............................     $ 12,466      $ 10,600      $  6,570
                                                         ========      ========      ========
</TABLE>


                                       77
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(15) Quarterly Results of Operations: (unaudited)

     Summarized  below are the  Company's  results of  operations on a quarterly
basis for 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                                                Basic      Diluted
                                                           Provision                   Non-         Net       Earnings    Earnings
                                 Interest     Interest     For Loan       Other      Interest     Earnings     (Loss)      (Loss)
                                  Income       Expense      Losses       Income      Expense       (Loss)     Per Share   Per Share
                                  ------       -------      ------       ------      -------       ------     ---------   ---------
                                                              (Dollars In Thousands, Except Per Share Data)
<S>                               <C>          <C>          <C>          <C>          <C>          <C>           <C>        <C>  
First quarter
  1998 ......................     $ 75,955     $ 49,504     $  2,500     $  2,255     $ 11,990     $  8,143      $0.38      $0.37
  1997 ......................       73,685       49,653        6,000        2,902       11,911        5,168       0.25       0.24
  1996 ......................       76,097       52,952        9,000        3,273       11,466        3,368       0.16       0.16
Second quarter
  1998 ......................     $ 73,587     $ 47,673     $  2,100     $  3,974     $ 12,684     $  8,637      $0.41      $0.40
  1997 ......................       73,946       50,917        5,500        2,890       10,996        5,348       0.25       0.25
  1996 ......................       73,753       50,278        9,000        2,823       11,287        3,400       0.16       0.16
Third quarter
  1998 ......................     $ 71,212     $ 46,402     $  1,600     $  3,868     $ 11,698     $  8,830      $0.42      $0.41
  1997 ......................       75,551       51,862        5,000        2,564       10,784        5,971       0.28       0.28
  1996 ......................       73,540       50,280        8,700        2,143       25,561       (5,169)     (0.25)     (0.24)
Fourth quarter
  1998 ......................     $ 69,015     $ 42,912     $  1,000     $  3,560     $ 12,552     $  9,019      $0.43      $0.42
  1997 ......................       76,038       51,794        4,000        1,862       10,460        6,613       0.31       0.31
  1996 ......................       73,788       44,521        8,455        2,676       10,861        6,645       0.32       0.31
Total year
  1998 ......................     $289,769     $186,491     $  7,200     $ 13,657     $ 48,924     $ 34,629      $1.63      $1.60
  1997 ......................      299,220      204,226       20,500       10,218       44,151       23,100       1.09       1.07
  1996 ......................      297,178      198,031       35,155       10,915       59,175        8,244       0.39       0.39
</TABLE>


(16) Fair Value of Financial Instruments

     Statement of Financial  Accounting  Standards No. 107,  "Disclosures  About
Fair Value of Financial Instruments" ("SFAS No. 107"), requires that the Company
disclose the estimated  fair value for its financial  instruments as of December
31, 1998 and 1997.  The  following  table  presents fair value  information  for
financial  instruments  for which a market  exists.  The fair  values  for these
financial  instruments  were estimated based upon prices  published in financial
newspapers or quotations received from national securities dealers.

<TABLE>
<CAPTION>
                                                             1998                               1997           
                                                  --------------------------        ---------------------------
                                                  Historical                        Historical
                                                    Value         Fair Value          Value          Fair Value
                                                  ----------      ----------        ----------       ----------
                                                                      (Dollars In Thousands)
<S>                                               <C>              <C>               <C>              <C>     
Mortgage-backed Securities .................      $557,390         $556,679          $676,193         $676,058
US Government Securities ...................        28,456           27,939            48,442           47,916
Collateralized Mortgage Obligations ........        36,380           36,394             1,009              994
Loans Held-for-Sale ........................        16,450           16,602            40,382           40,800
</TABLE>


                                       78
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(16) Fair Value of Financial Instruments (continued)

     The  following   table  presents  fair  value   information  for  financial
instruments  shown  in  the  Company's  Consolidated   Statements  of  Financial
Condition for which there is no readily  available  market.  The fair values for
these financial  instruments were calculated by discounting expected cash flows.
Because these  financial  instruments  have not been evaluated for possible sale
and because management does not intend to sell these financial instruments,  the
Company does not know whether the fair values  shown below  represent  values at
which the respective financial instruments could be sold.

<TABLE>
<CAPTION>
                                                           1998                                1997   
                                                 --------------------------         --------------------------
                                                                 Calculated                         Calculated
                                                 Carrying        Fair Value         Carrying        Fair Value
                                                   Value           Amount             Value           Amount  
                                                 ---------        ---------         ---------        ---------
                                                                     (Dollars In Thousands)
<S>                                             <C>              <C>               <C>              <C>       
Adjustable Loans:
  Single Family ......................          $1,530,367       $1,575,173        $1,763,587       $1,818,629
  Multi-Family .......................           1,119,519        1,159,688         1,204,696        1,235,614
  Commercial  ........................             178,784          188,145           201,558          211,752
Fixed Rate Loans:
  Single Family ......................              21,863           21,691            28,557           28,924
  Multi-Family .......................               7,257            7,680             6,969            7,394
  Commercial .........................               1,940            1,968             1,232            1,274
Other Real Estate Loans ..............               5,189            5,147             5,771            5,506
Consumer Loans........................               1,619            1,617             2,099            2,097
Non-Performing Loans .................              25,986           25,986            29,379           29,379
Fixed-Term Certificate Accounts ......           1,512,585        1,516,809         1,457,741        1,458,317
Non-Term Deposit Accounts ............             623,324          623,324           485,906          485,906
Borrowings ...........................           1,235,172        1,241,859         1,941,670        1,942,427
</TABLE>

     SFAS No. 107 specifies  that fair values should be calculated  based on the
value of one  unit.  The  estimates  do not  necessarily  reflect  the price the
Company  might  receive  if it were to sell the entire  holding of a  particular
financial instrument at one time.

     Fair value  estimates are based on the following  methods and  assumptions,
some  of  which  are  subjective  in  nature.   Changes  in  assumptions   could
significantly affect the estimates.

Cash and Cash Equivalents

     The carrying amounts  reported in the Consolidated  Statements of Financial
Condition for this item approximate fair value.

Investment Securities and Mortgage-Backed Securities

     Fair values are based on bid prices  published in financial  newspapers  or
bid quotations received from national securities dealers.


                                       79
<PAGE>


                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(16) Fair Value of Financial Instruments (continued)

Loans Receivable

     The  portfolio  is  segregated  into those loans with  adjustable  rates of
interest  and those  with  fixed  rates of  interest.  Fair  values are based on
discounting  future cash flows by the current  rate  offered for such loans with
similar remaining maturities and credit risk. The amounts so determined for each
loan category are reduced by the Bank's allowance for loans losses which thereby
takes into  consideration  changes in credit risk. As of December 31, 1998,  the
Bank had outstanding  commitments to fund $90,572,000 in real estate loans which
were substantially at fair value.

Non-performing Assets

     The carrying amounts  reported in the Consolidated  Statements of Financial
Condition for this item approximate fair value.

Deposits

     The fair value of deposits  with no stated term,  such as regular  passbook
accounts,  money market accounts and checking  accounts,  is defined by SFAS No.
107 as the carrying amounts reported in the Consolidated Statements of Financial
Condition.  The  fair  value  of  deposits  with  a  stated  maturity,  such  as
certificates  of  deposit,  is based on  discounting  future  cash  flows by the
current rate 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 value is based on carrying values. For fixed
rate  borrowings,  fair value is based on discounting  future  contractual  cash
flows  by the  current  interest  rate  paid on  such  borrowings  with  similar
remaining maturities.


                                       80
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
FirstFed Financial Corp.

     We have  audited the  accompanying  consolidated  statements  of  financial
condition of FirstFed Financial Corp. and subsidiary  ("Company") as of December
31, 1998 and 1997,  and the related  consolidated  statements of operations  and
comprehensive  earnings (loss),  stockholders' equity and cash flows for each of
the years in the three-year  period ended December 31, 1998. These  consolidated
financial  statements are the  responsibility of the Company'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  generally  accepted  auditing
standards.  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 FirstFed
Financial Corp. and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.




                                                                   KPMG LLP


Los Angeles, California
January 27, 1999





                                       81
<PAGE>

ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                    PART III

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding directors and executive officers appearing on pages 3
through 7 of the Proxy  Statement for the Annual Meeting of  Stockholders  dated
April 21, 1999 is incorporated herein by reference.

ITEM 11--EXECUTIVE COMPENSATION

     Information regarding executive  compensation  appearing on pages 8 through
14 of the Proxy Statement for the Annual Meeting of Stockholders dated April 21,
1999 is incorporated herein by reference.

ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  regarding  security ownership of certain beneficial owners and
management  appearing  on pages 2 and 3 of the Proxy  Statement  for the  Annual
Meeting  of  Stockholders  dated  April  21,  1999  is  incorporated  herein  by
reference.

ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (a)  Certain Relationships: None.

     (b)  Information  regarding certain related transactions  appearing on page
          11 of the Proxy Statement for the Annual Meeting of Stockholders dated
          April 21, 1999 is incorporated herein by reference.

                                     PART IV

ITEM 14--EXHIBITS,  CONSOLIDATED  FINANCIAL STATEMENT SCHEDULES,  AND REPORTS ON
FORM 8K

     (a)  1.   Consolidated Financial Statements

     The consolidated  financial  statements  included in this Report are listed
under Item 8.

          2.   Consolidated Financial Statement Schedules

               Schedules  have been omitted  because they are not  applicable or
               the  required   information  is  presented  in  the  consolidated
               financial statements or notes thereto.


                                       82
<PAGE>

                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY

 EXHIBIT
 NUMBER
 -------------

(1)     Underwriting Agreement filed as Exhibit 1 to Amendment No. 2 to Form S-3
        dated September 7, 1994 and incorporated by reference.

(3.1)   Restated Certificate of Incorporation

(3.2)   By-Laws  filed as  Exhibit  (1)(a) to Form 8-A  dated  June  4,1987  and
        incorporated by reference.

(4.1)   Amended and Restated Rights  Agreement dated as of June 25, 1998,  filed
        as Exhibit 4.1 to Form 8-A/A,  dated June 25, 1998 and  incorporated  by
        reference.

(4.2)   Indenture  filed as  Exhibit  4 to  Amendment  No.  3 to Form S-3  dated
        September 20, 1994 and incorporated by reference.

(10.1)  Deferred  Compensation  Plan filed as Exhibit  10.3 to Form 10-K for the
        fiscal year ended December 31, 1983 and incorporated by reference.

(10.2)  Bonus Plan filed as Exhibit  10(iii)(A)(2)  to Form 10 dated November 2,
        1993 and incorporated by reference.

(10.3)  Supplemental  Executive  Retirement Plan dated January 16, 1986 filed as
        Exhibit  10.5 to Form 10-K for the fiscal year ended  December  31, 1992
        and incorporated by reference.

(10.4)  Change of  Control  Agreement  effective  September  26,  1996  filed as
        Exhibit 10.4 to Form 10-Q for the Quarter  ended  September 30, 1996 and
        incorporated by reference.

(10.5)  1997  Non-employee  Directors Stock Incentive Plan filed as Exhibit 1 to
        Form S-8 dated August 12, 1997 and incorporated by reference.

(21)    Registrant's  sole  subsidiary  is First Federal Bank of  California,  a
        federal savings bank.

(24)    Power of Attorney (included at page 86).

     This 1998 Annual Report on Form 10-K and the Proxy Statement for the Annual
Meeting of Stockholders dated April 21, 1999 have already been furnished to each
stockholder of record who is entitled to receive copies thereof. Copies of these
items  will  be  furnished  without  charge  upon  request  in  writing  by  any
stockholder of record on March 5, 1999 and any beneficial owner of Company stock
on such date who has not previously received such material and who so represents
in good faith and in writing to:

                                            Corporate Secretary
                                            FirstFed Financial Corp.
                                            401 Wilshire Boulevard
                                            Santa Monica, California 90401

     Other  exhibits will be supplied to any such  stockholder at a charge equal
to the Company's cost of copying, postage, and handling.

(b) Reports on Form 8-K

     The  Company  filed a current  report on Form 8-K dated  October  22,  1998
which, among other things, announced a new stock repurchase program.


                                       83
<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.

                                        FIRSTFED FINANCIAL CORP.,
                                        a Delaware corporation

                                        By:     /s/ Babette E. Heimbuch    
                                                -----------------------------
                                                Babette E. Heimbuch
                                                President and
                                                Chief Executive Officer

Date:   February 25, 1999


                                       84
<PAGE>

                                POWER OF ATTORNEY

     Each person whose  signature  appears  below hereby  authorizes  Babette E.
Heimbuch  and  Douglas  J.  Goddard,  and each of them or  either  of  them,  as
attorney-in-fact  to sign on his or her  behalf  as an  individual  and in every
capacity stated below, and to file all amendments to the Registrant's Form 10-K,
and the Registrant hereby confers like authority to sign and file in its behalf.

     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 indicated on the 25th day of February, 1999.

         SIGNATURE                                       TITLE

       /s/ Babette E. Heimbuch              Chief Executive Officer (Principal
--------------------------------------      Executive Officer)
         Babette E. Heimbuch          

         /s/ Douglas J. Goddard             Executive Vice President and
--------------------------------------      Chief Financial Officer (Principal
           Douglas  J. Goddard              Financial Officer)                
                                            

         /s/ Brenda J. Battey               Senior Vice President and Controller
--------------------------------------      (Principal Accounting Officer) 
           Brenda J. Battey                 

     /s/ Christopher M. Harding             Director
--------------------------------------       
       Christopher M. Harding

        /s/ James L. Hesburgh               Director
--------------------------------------       
          James L. Hesburgh

       /s/ William S. Mortensen             Chairman of the Board
--------------------------------------       
         William S. Mortensen

       /s/  William G. Ouchi                Director
--------------------------------------       
         William G. Ouchi

      /s/ William P. Rutledge               Director
--------------------------------------       
         William P. Rutledge

        /s/ Charles F. Smith                Director
--------------------------------------       
          Charles F. Smith

       /s/ Steven L. Soboroff              Director
--------------------------------------       
         Steven L. Soboroff

        /s/ John R. Woodhull                Director
--------------------------------------       
          John R. Woodhull




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