UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]           ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended December 31, 2005
                                       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 Identification No.)
      incorporation or organization)


            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 if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.
Yes [X]    No [ ]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 of Section 15(d) of the Act.
Yes [ ]    No [X]

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes [X]     No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (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.
[X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a non-accelerated  filer (as defined in Rule 12b-2 of the
Act).
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ]   No [X]

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates of the registrant as of June 30, 2005 was $895,800,000,  based on
the closing sales price of the  registrant's  common stock on the New York Stock
Exchange  on such  date of $59.61  per  share.  For  purposes  of the  preceding
sentence only, all directors,  executive  officers and beneficial  owners of ten
percent or more of the common  stock,  as well as the Company's  Employee  Stock
Ownership Plan ("ESOP"), are assumed to be affiliates.


The number of shares of registrant's $0.01 par value common stock outstanding as
of February 2, 2006: 16,581,644.
                  DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement for Annual Meeting of  Stockholders  to be held
April 26, 2006 ("Proxy Statement"), (Parts II, III & IV).


<PAGE>
Disclosure Regarding Forward-looking Statements

      This  Annual  Report on Form 10-K for the year  ended  December  31,  2005
includes  certain   statements  that  may  be  deemed  to  be   "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  (the "Securities  Act") and Section 21E of the Securities and Exchange
Act of 1934,  as  amended  (the  "Exchange  Act").  All  statements,  other than
statements  of  historical  facts,  included in this Annual  Report that address
activities,  events  or  developments  that the  Company  expects,  believes  or
anticipates will or may occur in the future, including, but not limited to, such
matters as future product development, business development, competition, future
revenues,  business strategies,  xpansion and growth of the Company's operations
and assets and other such matters are forward-looking statements. These kinds of
statements are signified by words such as "believes,"  "anticipates," "expects,"
"intends," "may", "could," and other similar expressions.  However,  these words
are not the exclusive means of identifying such statements. These statements are
based on certain  assumptions  and analyses  made by the Company in light of its
experience and perception of historical  trends,  current  conditions,  expected
future  developments  and other  factors  it  believes  are  appropriate  in the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties,  including the risk factors discussed below, general economic and
business  conditions,  the business  opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in law or regulations and other
factors,  many of which are beyond the Company's control.  Specific factors that
could  cause  results  to differ  materially  from  historical  results or those
anticipated are: (1) the level of demand for adjustable rate mortgages, which is
affected  by  external  factors  such as  interest  rates,  the  strength of the
California  economy;  (2) fluctuations  between consumer  interest rates and the
cost of funds;  (3) federal and state  regulation of lending,  deposit and other
operations,  (4)  competition  for  financial  products and services  within the
Bank's market areas;  (5) operational  and  infrastructural  risks;  (6) capital
market  activities;  and  (7)  critical  accounting  estimates.   Investors  are
cautioned that any such statements are not guarantees of future  performance and
that actual results or developments  may differ  materially from those projected
in the  forward-looking  statements.  Investors  are also  referred  to the more
detailed  discussion  of risk  factors  in  "Risk  Factors"  and "  Management's
Discussion and Analysis" in this Report.


<PAGE>
<TABLE>




                            FirstFed Financial Corp.
                                      Index
<S>                                                                                          <C>
                                                                                             Page

Part I       Item 1.  Business....................................................              4
             Item 1A. Risk Factor.................................................             23
             Item 1B. Unresolved Staff Comments...................................             24
             Item 2.  Properties..................................................             24
             Item 3.  Legal Proceedings...........................................             24
             Item 4.  Submission of Matters to a Vote of Security Holders.........             24

Part II      Item 5.  Market for Registrant's Common Equity and Related...........
                      Stockholder Matters.........................................             25
             Item 6.  Selected Financial Data.....................................             26
             Item 7.  Management's Discussion and Analysis of Consolidated Balance
                      Sheets and Consolidated Statements of Income................             27
             Item 7A. Quantitative and Qualitative Disclosure About Market Risk...             39
             Item 8.  Financial Statements and Supplementary Data.................             43
                      Notes to Consolidated Financial Statements..................             47
                      Report of Independent Registered Public Accounting Firm.....             72
             Item 9.  Changes in and Disagreements with Accountants on............
                      Accounting and Financial Disclosure.........................             74
             Item 9A. Controls and Procedures.....................................             74

Part III     Item 10. Directors and Executive Officers of the Registrant..........             77
             Item 11. Executive Compensation......................................             77
             Item 12. Security Ownership of Certain Beneficial Owners and.........
                      Management..................................................             77
             Item 13. Certain Relationships and Related Transactions..............             77
             Item 14. Principal Accounting Fees and Services......................             77

Part IV      Item 15. Exhibits....................................................             78
                      Signatures..................................................             79
                      Power of Attorney...........................................             79
Exhibits
             31.1 Certification of Chief Executive Officer pursuant to Section 302
                  of the Sarbanes-Oxley Act of 2002...............................             80
             31.2 Certification of Chief Financial Officer pursuant to Section 302
                  of the Sarbanes-Oxley Act of 2002...............................             81
             32.1 Certification of Chief Executive Officer pursuant to 18 USC.....
                  Section 1350, as adopted pursuant to Section 906 of the.........
                  Sarbanes-Oxley Act of 2002......................................             82
             32.2 Certification of Chief Financial Officer pursuant to............
                  18 USC Section 1350, as adopted pursuant to Section 906.........
                  of the Sarbanes-Oxley Act of 2002...............................             83

                                        3
</TABLE>


<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   significant   independent   business   operations,
substantially  all income 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 executive  offices of the Company
are located at 401  Wilshire  Boulevard,  Santa  Monica,  California,  telephone
number (310) 319-6000.

      The Company is a savings and loan  holding  company and as such is subject
to examination and regulation by the Office of Thrift Supervision  ("OTS").  Our
deposits are insured by the Savings  Association  Insurance Fund ("SAIF") of the
Federal  Deposit  Insurance  Corporation  (the "FDIC").  We are regulated by the
Director of the OTS and the FDIC.  We are a member of the Federal Home Loan Bank
("FHLB") of San Francisco,  which is one of the 12 regional banks comprising the
Federal Home Loan Bank System. We are also subject to certain regulations of the
Board of  Governors  of the  Federal  Reserve  System  ("FRB")  with  respect to
reserves required to be maintained against deposits and certain other matters.
See "-Summary of Material Legislation and Regulations-"

      The Company's periodic and current reports are available free of charge on
its website at www.firstfedca.com  as soon as reasonably  practicable after such
material is electronically filed with, or furnished to, the SEC.

      Our principal  business is attracting  checking and savings  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,  2005,  the Company had assets  totaling  $10.5  billion,
compared to $7.5  billion at December  31, 2004 and $4.8 billion at December 31,
2003.  The Company  recorded net income of $91.7  million for 2005,  compared to
$65.8 million for 2004 and $64.5 million for 2003.

      We derive our revenues  principally from interest on loans and investments
and loan  prepayment  fee income.  Our major  items of expense  are  interest on
deposits and borrowings, and general and administrative expense.

      As of February 2, 2006 we operated 30 full-service  banking branches,  all
located in Southern California.  Permission to operate full-service  branches is
granted by the OTS. In addition to these branches,  we operate 6 lending offices
which are located in both Southern and Northern California,  a call center which
conducts  transactions  with  deposit  and loan  clients  by  telephone,  and an
internet website through which clients can open accounts,  transfer funds or pay
bills.

      Southern  California has  traditionally  been our primary lending area. In
2004 we opened a single family loan office in Northern California. Single family
loans  originated in Northern  California  comprised 47% of originations  during
2005  compared  to  38%  of  originations  during  2004.  The  majority  of  our
residential  loans are obtained from wholesale loan brokers.  Residential  loans
are also offered by all of our full-service  branches.  In addition,  we have an
income  property  lending  group  and a  commercial  banking  group  which  lend
primarily in Southern California.

      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-".

      In February of 2004, the Bank received approval to begin trust operations.
We  believe  the  wealth  management  and trust  services  offered  by the trust
division complement the other services currently offered.

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,  local  housing  demand and  affordability,  and  general  levels of
interest rates.

                                        4

<PAGE>
      California home prices have increased  dramatically  over the last several
years,  but are beginning to level off. The California  Association of Realtors,
in its  "2006  Housing  Market  Forecast"  states,  "After  four  years of steep
increases,  the rate of home price  appreciation  will  moderate  during  2006."
According to the UCLA  Anderson  Forecast for  California,  December 2005 Report
("Forecast"),  year-over-year  home prices in  California  have  already  fallen
slightly in some areas and have  flattened out in others.  The Forecast  states,
"California,  as with the rest of the nation, is beginning to feel pressure from
increased  interest  rates,  lower  construction  activity,  and a weakening job
market." However,  economists are uncertain as to the length and severity of any
potential  weakness  in the  California  economy or real  estate  markets.  UCLA
forecasters predict a slow down in construction activity over the next two years
with  accompanying  job  losses  in the  construction  sector,  but  no  overall
recession for the state.

      We continuously  monitor the sufficiency of the collateral  supporting our
real estate loan portfolio based on many factors  including  property  location,
date of loan origination, and original loan-to-value ratio.

      Business loans  collateralized  by inventory,  accounts  receivable and/or
other  assets are  monitored  on a monthly or quarterly  basis  through  reports
provided by the borrower. Site visits and collateral audits are required at loan
origination and periodically thereafter.

      We  adjust  our  general  allowance  for loan  losses  as a result  of our
evaluations  and the level of growth in the loan  portfolio.  Due to substantial
growth in the loan  portfolio,  we recorded a $19.8  million  provision for loan
losses during 2005  compared to $3.0 million  during 2004. No provision for loan
losses was recorded during 2003.

      The ratio of allowances for loan losses (general valuation  allowances and
valuation  allowances for impaired loans) to gross loans receivable was 1.00% at
the end of 2005  compared  to 1.15%  at the end of 2004 and  1.70% at the end of
2003.  The change in the ratio over the last three years is due to growth in the
loan  portfolio  and  changes  to  risk  factors  for  various  segments  of the
portfolio. See "-Business - Loan Loss Allowance-" for additional information.

      Consistent  with  the  current  real  estate  market  in  California,  our
non-performing  assets  fell to 0.05% of total  assets  at the end of 2005  from
0.07% of total assets at the end of 2004 and 0.10% of total assets at the end of
2003.

      Current Interest Rate  Environment.  The Federal Reserve Board ("FRB") has
increased  interest  rates five times during 2004,  eight times during 2005, and
once so far during  2006,  which  brought the federal  funds rate to 4.50% as of
January 31, 2006.

      Typically,  our interest rate spread decreases during increasing  interest
rate  environments  (savings and borrowing  costs respond to higher rates faster
than our loan  portfolio).  The  reverse is true  during  periods of  decreasing
interest rates. Our loan portfolio tends to grow during periods when fixed rates
are higher than adjustable  rates.  Adjustable rate loans comprised 100% of loan
originations during 2005.

      Changes in interest  rates impact our portfolio  yield due to the interest
rate adjustment  features of our loans.  There is also a time lag before changes
in  interest  rates can be  implemented  with  respect to our real  estate  loan
portfolio due to operational and regulatory  constraints.  These  constraints do
not allow us to implement monthly changes in the indices utilized for adjustable
rate loan clients for periods of sixty to ninety days.

      Our interest rate spread decreased to 2.33% in 2005 from 2.68% in 2004 and
3.22% in 2003.  The average cost of deposits and  borrowings  increased by 1.00%
during  2005  compared  to 2004  while  the  average  yield  earned  on the loan
portfolio  increased  by  only  0.59%  during  the  year.  See  "Asset-Liability
Management" and "Components of Earnings - Net Interest Income" in "-Management's
Discussion  and  Analysis  of  Consolidated   Balance  Sheets  and  Consolidated
Statements of Income-" for additional information.

      Competition.  We experience strong competition in attracting and retaining
deposits and originating real estate and business loans. We compete for deposits
with many of the nation's largest savings institutions and commercial banks that
have significant operations in Southern California.

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

      We compete  for loans  primarily  with  savings  institutions,  commercial
banks,  mortgage companies,  and insurance  companies.  Commercial banks are our
primary  competition  for business  loans.  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.

                                        5

<PAGE>
      Environmental  Concerns. In certain  circumstances,  such as when actively
participating  in the management or operation of properties  securing its loans,
we  could  have  liability  for  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.  We have
adopted environmental  underwriting  requirements when considering loans secured
by properties  which appear to have  environmentally  high-risk  characteristics
(e.g.  commercial and industrial  properties  and  construction  of all property
types,  which may contain friable  asbestos or lead paint  hazards).  We utilize
third-party  specialists to provide an assessment of  environmental  risk on all
commercial   properties  (retail,   office,   industrial)  and  on  multi-family
properties  that may be near any commercial  influence.  These  assessments  may
include the sampling of underground soils as necessary.  These  requirements are
intended to minimize the risk of environmental  hazard  liability.  Our policies
are also designed to avoid the  potential  for liability  imposed on lenders who
assume the management of a property.

      Business  Concentration.  We have no single  client  or group of  clients,
either as depositors  or  borrowers,  the loss of any one or more of which would
have a material adverse effect on our operations or earnings prospects.

      Yields Earned and Rates Paid. Net interest income,  the major component of
earnings for us,  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 Consolidated  Balance Sheets and
Consolidated  Statements  of Income - Overview  and  Components  of Income - Net
Interest Income-" for further analysis and discussion.

Lending Activities

      General.  Our 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 property owners on multi-family dwellings. The loan portfolio also
includes loans secured by commercial and industrial  properties,  consumer loans
and commercial business loans.

      For an analysis of the loan portfolio  composition  and an analysis of the
types of  loans  originated,  see  "-Management's  Discussion  and  Analysis  of
Consolidated Balance Sheets and Consolidated Statements of Income - Balance
Sheet Analysis - Loan Portfolio and Loan Composition-"

      Origination  and Sale of Loans.  We obtain  qualified loan applicants from
mortgage  brokers,  borrower  referrals,  and the  clients  of our  full-service
banking branches.

      Loan  originations  were $4.8 billion in 2005,  $3.9 billion in 2004,  and
$2.3  billion  in  2003.  Loan  origination  volume  increased  due to  borrower
preference for  adjustable  rate loans.  Also, we marketed our  adjustable  rate
loans to more loan brokers,  expanded our  geographic  area,  and introduced new
products to better compete for loans in the current environment.

      Loans sold totaled $12.8 million in 2005,  $3.3 million in 2004, and $86.1
million in 2003.  During 2005,  $15.7 million in loans were  originated for sale
compared to $2.8 million in 2004 and $84.3 million in 2003. Loans originated for
sale totaled 0.32%, 0.07%, and 3.70% of loan originations during 2005, 2004, and
2003,  respectively.  We originate 30-year and 15-year fixed rate loans only for
resale to the secondary markets.

      Loans  held-for-sale  at  December  31,  2005,  2004,  and 2003  were $2.9
million,  $0, and $492  thousand,  respectively.  Loans  originated for sale are
recorded  at the  lower  of  carrying  amount  or  fair  value.  The  time  from
origination  to sale typically  takes up to 30 days.  During this time period we
may be  exposed  to price  adjustments  as a result  of  fluctuations  in market
interest rates.

      From time to time,  mortgage-backed  securities are formed with loans from
our  loan  portfolio.  The  securities  are  used  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  ("Fannie  Mae").  Since we  originated  the  loans  underlying  our
mortgage-backed  securities,  the mortgage-backed  securities generally have the
same experience with respect to prepayment, repayment,  delinquencies, and other
factors as our loan portfolio.

      The    portfolio   of    mortgage-backed    securities,    classified   as
available-for-sale,  was recorded at fair value at December 31, 2005,  2004, and
2003. Unrealized gains of $108 thousand, $420 thousand and $965 thousand, net of
tax, were recorded in stockholders' equity at December 31, 2005, 2004, and 2003,
respectively.

                                        6

<PAGE>
      We serviced $89.1 million in loans for other  investors as of December 31,
2005, $59.9 million of which were sold under recourse arrangements. $4.6 million
of the loans sold with recourse were formed into mortgage-backed  securities and
are still owned by us as of December 31, 2005.  Due to regulatory  requirements,
we maintain  capital for loans sold with recourse as if those loans had not been
sold.  Loans sold with recourse are analyzed in determining  the adequacy of the
repurchase  liability.  The  principal  balance  of  loans  sold  with  recourse
decreased to $59.9  million at the end of 2005 from $76.3  million at the end of
2004 and $91.0 million at the end of 2003 due to loan payments and payoffs.

      In January of 2005, we completed a loan  securitization with Fannie Mae in
which $1.3 billion in  multi-family  loans from our loan  portfolio  were formed
into  mortgage-backed  securities.  Because we  retained  full  recourse  on the
securitized loans, the  mortgage-backed  securities continue to be accounted for
as part of the loan portfolio under Statement of Financial  Accounting Standards
No. 140, Accounting for and Servicing of Financial Assets and Extinguishments of
Liabilities.  These mortgage-backed  securities are being used in collateralized
borrowing arrangements.

      Interest  Rates,  Terms  and Fees.  We  originate  residential  adjustable
mortgage  loans  ("AMLs")  with 30 and 40 year terms and  interest  rates  which
adjust monthly based upon various indices. The indices used include the 12-month
average of the 3-month  certificate  of deposit  Index  ("CODI"),  the  12-month
average U.S.  Treasury  Security  rate  ("12MAT"),  the Federal Home Loan Bank's
Eleventh District Cost of Funds Index ("COFI") and the London Inter-bank Offered
Rate  ("LIBOR").  The CODI index is the monthly rate on 3-month  certificate  of
deposits as published by the Federal  Reserve Bank and is a simple average based
upon the twelve most recent  months of data.  CODI loans  comprised  76% of loan
originations   during  2005  and  69%  during   2004.   (See   "-Asset-Liability
Management-" in "-Quantitative and Qualitative Disclosures about Market Risk-".)

      There  are  varying  periods  for which  our loan  payments  may be fixed,
ranging from one year to five years. If the payment is fixed for one year, after
the first year the payment may be increased  by no more than 7.5% each year.  If
the payment is fixed for three years,  after the third year the payments for the
fourth and fifth years may be increased  by no more than 7.5% for each year.  If
the payment is fixed for five years,  after the fifth year,  the payment will be
adjusted  to provide for full  amortization,  starting  with the sixth year.  An
annual  payment  cap  of  7.5%  applies  thereafter.  Additionally,  all  loans,
including  loans with fixed payment  periods of less than five years,  will have
payments  adjusted  every five years  without  regard to the 7.5%  limitation to
provide  for full  amortization  over the  balance of the loan term.  The annual
payment cap of 7.5% applies thereafter.

      Any interest not paid by the borrower each month is accrued, recognized as
income,   and  added  to  the   principal   balance   of  the  loan   ("negative
amortization").  Payments  may revert to the fully  amortizing  payment  without
regard to the annual payment cap if the loan balance reaches either 110% or 125%
of the original loan balance.  Loans with an 80% or less loan-to-value  ratio at
origination  have  either a 110% or 125%  lifetime  balance cap and loans with a
loan-to-value  ratio over 80% at  origination  are  limited  to a 110%  lifetime
balance cap.

      Because AML  loan-to-value  ratios may increase above those established at
the time of loan  origination due to negative  amortization,  when we do lend in
excess of 80% of the  appraised  value,  additional  fees and  higher  rates are
charged or we may require mortgage  insurance which reduces our loss exposure to
below 75%.  The amount of  negative  amortization  increases  during  periods of
rising interest rates.

      At December 31, 2005, 2004, and 2003,  negative  amortization on all loans
totaled $62.6 million,  $5.5 million, and $4.0 million,  respectively.  Negative
amortization  has increased over the last year due to rising  interest rates and
an  increasing  number of single  family  loans  that  allow for fixed  payments
periods  of one to five  years.  The  portfolio  of single  family  loans with a
one-year  fixed payment was $4.6 billion at December 31, 2005,  compared to $2.9
billion  at  December  31,  2004 and $3.9  billion at  December  31,  2003.  The
portfolio of single family loans with three-to-five year fixed payments was $2.7
billion at December 31, 2005, compared to $1.6 billion at December 31, 2004, and
$1.4 million at December 31, 2003. Negative  amortization as a percentage of all
single family loans with fixed payment periods in the Bank's  portfolio  totaled
0.86% at December 31, 2005, 0.12% at December 31, 2004 and 0.17% at December 31,
2003.

      Although interest rates are adjusted  monthly,  AMLs have maximum interest
rates ranging from 400 to 750 basis points above the initial pay rate.

      Generally,  AMLs may be assumed at any time during the term, provided that
the  person  assuming  the loan  meets our credit  standards  and enters  into a
separate written agreement with us.  Additionally,  the new borrower is required
to pay assumption fees customarily charged for similar transactions.

                                        7

<PAGE>
      We generally  require that borrowers obtain private mortgage  insurance on
loans in  excess  of 80% of the  appraised  property  value.  On  certain  loans
originated  for the  portfolio,  we charge premium rates and/or fees in exchange
for waiving the insurance  requirement.  Management believes that the additional
rates and fees that we receive for these  loans  compensate  for the  additional
risk  associated  with this type of loan.  Subsequent  to the  origination  of a
portfolio loan, we may purchase private  mortgage  insurance with our own funds.
Under certain mortgage  insurance  programs we act as co-insurer and participate
with the insurer in absorbing  any future loss.  As of December 31, 2005,  2004,
and 2003,  loans with  co-insurance  totaled $334.8 million,  $202.4 million and
$52.3 million,  respectively.  Loans with initial  loan-to-value  ratios greater
than 80% with no private mortgage  insurance  totaled $495.5 million at December
31, 2005,  $519.0  million at December 31, 2004,  and $486.7 million at December
31, 2003.

      Loans with 40-year terms were 77%, 27%, and 8% of loan originations during
2005, 2004, and 2003, respectively.  The increase in loans with 40-year terms is
attributable  to increased  marketing  efforts for this product as a response to
the decreased "affordability" of houses in our market areas.

      The following table shows the contractually  required payments of our loan
portfolio at December 31, 2005:
<TABLE>
                                            Loan Maturity Analysis
                                               Maturity Period
                      ---------------------------------------------------------------------------------
                         Total      1 Year     > 1 Year    > 5-10    > 10-20     > 20-30
                        Balance    or Less     to 5 Years   Years     Years       Years       > 30 Years
                      ----------  ---------   -----------  ------    -------     -------      ----------
                                                (In thousands)
<S>                   <C>          <C>         <C>        <C>       <C>         <C>         <C>

Interest rate sensitive loans:
  AMLs................$9,502,090   $145,398     $966,006  $819,892  $2,290,102  $3,192,935   $2,087,757
  Fixed rate loans....    65,330     19,318       34,229     5,864       3,935       1,984           --
  Commercial business.
   loans..............    80,186     36,242       43,944        --          --          --           --
  Construction loans..     4,910      1,454        3,456        --          --          --           --
  Consumer and other..
   loans..............    58,136     27,908       30,228        --          --          --           --
                      ----------    -------   ----------  --------   ---------   ---------   ----------
Total................ $9,710,652   $230,320   $1,077,863  $825,756  $2,294,037  $3,194,919   $2,087,757
                       =========    =======    =========   =======   =========   =========   ==========
</TABLE>
Non-accrual, Past Due, Impaired and Restructured Loans

      We establish  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  December  31, at each of the
periods indicated:
<TABLE>
                             %               %             %             %              %
                            of              of            of            of             of
                    2005   Total   2004    Total  2003   Total  2002   Total   2001   Total
                   ------  -----   -----   -----  -----  -----  -----  -----   -----  -----
                                        (Dollars in thousands)
<S>                <C>     <C>    <C>     <C>    <C>      <C>   <C>      <C>   <C>      <C>
Non-accrual
loans:
  Single famil.... $3,569    72%  $4,590    92%  $3,326    99%  $5,705    85%  $6,062    93%
  Multi-family....                   391     8       --    --    1,017    15      422     6
  Commercial......  1,364    28             --       --    --       --    --       --    --
  Consumer........     13    --        4    --       16     1       --    --       16     1
  Business........     20    --       --    --       --    --       --    --       --    --
                   ------  ----    -----  ----    -----  ----    -----  ----    -----  ----
Total
   non-accrual$
   loans.......    $4,966  100%   $4,985  100%   $3,342  100%   $6,722   100%  $6,500  100%
                    =====  ====    =====  ====    =====  ====    =====   ====   =====  ====
</TABLE>
      The allowance for delinquent  interest,  based on loans past due more than
90 days or in foreclosure,  totaled $147 thousand, $256 thousand, $227 thousand,
$372 thousand,  and $504 thousand at December 31, 2005,  2004,  2003,  2002, and
2001, respectively.

      Our modified  loans  result  primarily  from  temporary  modifications  of
principal and interest  payments or an extension of maturity dates.  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, 2005,  the Bank had modified  loans  totaling $2.0
million.  This compares  with modified  loans of $1.4 million as of December 31,
2004 and $1.5 million as of December 31, 2003. No modified loans were 90 days or
more delinquent as of December 31, 2005, 2004, or 2003.

      Statement  of  Financial  Accounting  Standards  No. 114,  "Accounting  by
Creditors for Impairment of a Loan" ("SFAS No. 114"),  requires the  measurement
of impaired  loans.  SFAS No. 114 does not apply to large groups of  homogeneous
loans that are collectively reviewed for impairment.

                                        8

<PAGE>
      We consider a loan to be impaired when management believes that we will be
unable to  collect  all  amounts  due under  the  contractual  terms of the loan
agreement.  In accordance with SFAS 114, we annually evaluate the collectibility
of  commercial  business  loans greater than or equal to $500  thousand,  single
family loans  greater than or equal to $1.0  million and income  property  loans
greater than or equal to $1.5 million for  impairment  purposes using our normal
loan review  procedures.  When a loan is determined  to be impaired,  we measure
impairment  based on either (1) the present value of expected future cash flows,
discounted at the loan's  effective  interest  rate;  (2) the loan's  observable
market  price,  or (3) the fair value of the  collateral.  Estimated  impairment
losses are included in our impairment allowances.

      Valuation  allowances  for  impaired  loans  totaled  $0  thousand,   $496
thousand, and $496 thousand at December 31, 2005, 2004, and 2003,  respectively.
The following is a summary of impaired  loans,  net of valuation  allowances for
impairment, at the dates indicated:

<TABLE>

                                              At December 31,
                                       ----------------------------
                                          2005      2004       2003
                                       --------  --------   -------
                                              (In thousands)
<S>                                 <C>        <C>       <C>
Non-accrual loans................   $    3,027 $   1,360 $    1,782
Modified loans...................           --        --      1,488
                                       --------  --------   -------
                                    $    3,027 $   1,360 $    3,270
                                       ========  ========   =======
</TABLE>


      The following is a summary of impaired loans, net of valuation  allowances
for impairment, by loan type, at the dates indicated:
<TABLE>

                                                        At December 31,
                                                -------------------------------
                                                  2005        2004       2003
                                                --------   --------     -------
                                                        (In thousands)
<S>                                          <C>           <C>         <C>
Single family....................                $1,663      $1,360      $1,782
Commercial.......................                 1,364          --          --
                                                --------     ------      ------
Total non-accrual loans..........                $3,027      $1,360      $1,782
                                                ========     ======      ======
</TABLE>


      The present value of an impaired loan's expected future cash flows changes
from one  reporting  period to the next  because of the passage of time and also
because of revised  estimates  in the amount or timing of those cash  flows.  We
record 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.  We also  record 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 our  valuation  allowance
for impaired loans during the periods indicated (in thousands):
<TABLE>
<S>                                             <C>
Balance at December 31, 2000...............     $ 1,792
  Transfer from general valuation allowance          58
                                                -------
Balance at December 31, 2001...............       1,850
  Transfer to general valuation allowance        (1,354)
                                                -------
Balance at December 31, 2002...............         496
  Net charge-offs..........................         --
                                                -------
Balance at December 31, 2003...............         496
  Net charge-offs..........................         --
                                                -------
Balance at December 31, 2004...............         496
  Provision for loan losses................       1,100
  Net charge-offs..........................      (1,596)
                                                -------
Balance at December 31, 2005...............     $   --
                                                =======
</TABLE>

      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.

                                        9

<PAGE>
      The  following  is a summary of  information  pertaining  to impaired  and
non-accrual loans:
<TABLE>

                                                                   At December 31,
                                                                ---------------------
                                                                  2005         2004
                                                               ---------    ---------
                                                                   (In thousands)
<S>                                                            <C>          <C>
Impaired loans without a valuation allowance ................  $   3,027    $   1,360
Impaired loans with a valuation allowance....................  $      --    $     496
Valuation allowance related to impaired loans................  $      --    $     496
Total non-accrual loans......................................  $   4,966    $   4,985
</TABLE>


<TABLE>
                                                                                Year Ended December 31,
                                                                         -----------------------------------
                                                                            2005         2004        2003
                                                                         ---------    ---------   ----------
                                                                                (In thousands)
<S>                                                                      <C>         <C>          <C>
Average investment in impaired loans.........................            $   2,649    $   1,467    $   4,327
Interest income recognized on impaired loans.................            $     174    $      16    $     226
Interest income recognized on a cash basis
 on impaired loans...........................................            $     166    $      22    $     215
</TABLE>


Internal Asset Review System

      We classify our assets  according to a nine-tier risk rating  system.  The
nine risk grades are segmented into three general groups: "Unclassified" (Pass 1
through 5),  "Criticized"  (Special  Mention),  and  "Classified"  (Substandard,
Doubtful and Loss).  In  determining  the  appropriate  risk grade for an asset,
consideration is given to a number of factors  affecting the timely  liquidation
of the  asset,  including  but not  limited  to: the cash flow  provided  by the
collateral;  the financial  condition of borrowers,  guarantors  and  endorsers;
collateral value; and payment history.

      For internal asset review purposes, assets are segregated into two groups:
homogeneous and non-homogeneous assets.

      Homogeneous  Assets.  These are  defined  as groups of assets  that  share
similar  risk  characteristics   that  are  collectively   evaluated  for  asset
classification  purposes.  Homogeneous  assets include single family residential
loans  with  balances  less  than $1.0  million,  multi-family  residential  and
commercial real estate loans ("income  property  loans") with balances less than
$1.5 million,  commercial  business loans with balances less than $500 thousand,
consumer loans, and high-grade investment securities.

      Non-Homogeneous   Assets.  These  are  individually   reviewed  for  asset
classification  purposes due to their relatively  higher balances or complexity.
Non-homogeneous  assets include single family residential loans with balances of
$1.0 million or greater,  income  property  loans of $1.5  million or more,  and
commercial  business  loans of $500 thousand or greater.  Other  non-homogeneous
assets  include  modified  or  restructured  loans,  real estate  owned  through
foreclosure,  investments in  subsidiaries,  and significant  off-balance  sheet
items.

Loan Loss Allowance

      We  maintain  a general  valuation  allowance  for loan  losses due to the
inherent  risks  in  the  loan  portfolio  that  have  yet  to  be  specifically
identified.  Our loan  portfolio is  stratified  based on factors  affecting the
perceived  level and  concentration  of risk,  such the type of collateral,  the
extent of borrower documentation  obtained, the borrowers credit rating, year of
origination, original loan-to-value ratio, and geographic location.

      The  appropriate  level of general  valuation  allowance is  calculated by
applying  reserve  factors  to the  balance  of  assets  on which  we have  loss
exposure.  These reserve  factors  represent the expected  likelihood of default
multiplied by the expected rate of loss.  The expected rates of loss and default
are based on our historical loss experience  adjusted for current conditions and
trends in our lending areas.

      Based on this methodology,  we recorded a $19.8 million provision for loan
losses during 2005 and a $3.0 million during 2004. We did not record a loan loss
provision during 2003.

                                       10

<PAGE>
      Loans  that  allow  for a  reduced  level  of  borrower  documentation  at
origination  are an  increasing  percentage  of loans  originated  in our market
areas.  On "Stated  Income/Stated  Asset"  (SISA) loans,  the borrower  includes
information  on  his/her  level of income  and  assets  that is not  subject  to
verification.  On "Stated  Income/Verified  Assets" ("SIVA") loans, the borrower
includes  information  on  his/her  level of  income,  but  his/her  assets  are
verified. For "No Income/No Asset" (NINA) loans, the borrower is not required to
submit  information on his/her level of income or assets.  The  underwriting  of
these  loans  is based  on the  borrower's  credit  score  and the  value of the
collateral.  Adjustments to interest  rates,  loan to values and required credit
scores  are  made on  these  types of  reduced  documentation  loans in order to
compensate  for any  additional  risks the lack of  documentation  may pose.  At
December 31, 2005,  approximately  11%,  32%, and 38% of our single  family loan
portfolio  was  comprised  of NINA,  SIVA,  or SISA  loans,  respectively.  This
compares to 8%, 29%,  and 39% of our single  family loan  portfolio  being NINA,
SIVA,  or SISA loans  respectively,  at December 31,  2004.  Our  portfolios  of
multi-family  and other real estate loans all require full  documentation by the
borrowers.

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

<TABLE>

                                                    Year Ended December 31,
                                       --------------------------------------------------
                                         2005      2004       2003       2002      2001
                                       --------  --------   --------   --------  --------
                                                         (In thousands)
<S>                                 <C>        <C>       <C>        <C>        <C>

Beginning general loan valuation
 allowances.......................  $    78,675 $  75,238 $   75,223 $   72,919 $  70,809
Provision for loan losses.........       18,650     3,000         --         --        --
General loan valuation allowances
   obtained in acquisition........           --        --         --         --     2,050
Charge-offs, net of recoveries:
   Single family..................           11       120        (52)      (372)     (322)
   Multi-family...................          189       237         14        189       286
   Commercial.....................           85        (7)        --         --        --
   Non-real estate................          (52)       87         53      1,133       154
                                       --------  --------   --------   --------  --------
Total net (charge-offs) recoveries          233       437         15        950       118
                                       --------  --------   --------   --------  --------
Transfers from (to) impaired
   valuation allowance............          --        --          --      1,354       (58)
                                       --------  --------   --------   --------  --------
Ending general loan valuation
allowances........................  $   97,558  $  78,675 $   75,238 $   75,223 $  72,919
                                       ========   =======    =======   ========   =======
</TABLE>

      We recorded  total net  charge-offs  of $1.4 million  during  2005,  which
includes  charge-offs of $1.6 million from the valuation  allowance for impaired
loans and recoveries of $233 thousand from the general valuation allowance.  The
low level of charge-offs  over the last five years is attributable to the strong
economy  and real estate  market in  California  during  those  years.  The Bank
establishes a specific reserve to charge-off  assets with identified  weaknesses
that may render all or part of the asset uncollectible.

      Any increase in charge-offs  would  adversely  impact our future loan loss
provision and net income.

The ratio of general loan loss  allowances to gross loans  receivable was 1.00%,
1.15%, 1.70%, 1.96%, and 1.83% at December 31, 2005, 2004, 2003, 2002, and 2001,
respectively.

      The following table details the general  valuation  allowance by loan type
at the dates indicated:
<TABLE>

                                                                    December 31,
                      ----------------------------------------------------------------------------------------
                                  % of            % of            % of               % of              % of
                         2005   Total    2004    Total    2003   Total       2002   Total      2001   Total
                       -------  -----   ------  ------   ------  -----      ------  -----     ------  ------

<S>                 <C>         <C>    <C>      <C>     <C>        <C>   <C>          <C>    <C>        <C>
                                               (Dollars in thousands)
Real estate loans:
  Single family.....$   68,329     70% $ 48,271     61% $ 28,775     38%  $  24,952      33% $ 30,040      41%
  Multi-family.......   20,486     21    19,570     25    24,789     33      27,037      36    23,955      33
  Commercial.........    3,221      3     5,053      6     6,185      8       9,938      13     7,860      11
  Construction.......      148     --       508      1     2,266      3       2,281       3     3,687       5
                       -------  ------   -------  -----   ------  ------     -------  ------   -------  ------
Total real estate       92,184     94    73,402     93    62,015     82      64,208      85    65,542      90
   loans.............  -------  ------   -------  -----   ------  ------     -------  ------   -------  ------

Non-real estate loans:
  Commercial.........    2,855      3    2,618       3     5,595       8      4,977       7     5,120       7
  Consumer...........    2,519      3    2,655       4     7,624      10      5,978       8     1,918       3
  Other..............       --     --       --      --         4      --         60      --       339      --
                         -----  ------   ------   -----   ------  -------    ------  ------    ------  ------
Total non-real           5,374      6    5,273       7    13,223      18     11,015      15     7,377      10
  estate loans.......    -----  ------   ------   -----   ------  -------    ------  ------    ------  ------
Total...............$   97,558    100% $ 78,675    100% $ 75,238     100%  $ 75,223     100% $ 72,919     100%
                        ======    ====   ======    ====   ======     ====    ======  ======    ======   ======
</TABLE>

                                       11

<PAGE>
      During 2005,  the exposure base of single  family loans  increased by $2.8
billion,  generating a net increase in the general valuation  allowance of $20.1
million.  There were two changes  pertaining to the  calculation  of the general
valuation  allowance for the single family portfolio:  adjusted risk factors for
loans with loan to value  ratios up to 60%;  and  re-evaluated  risk factors for
loans with less than full  documentation.  The  exposure  base for  multi-family
loans increased by $116.5 million and the general valuation  allowance increased
by $916 thousand.  The exposure base for commercial real estate  decreased $67.2
million,  generating  a decrease  in the  general  valuation  allowance  of $1.8
million. The exposure base of the construction loan portfolio decreased by $16.0
million,  while the general valuation  allowance declined by $360 thousand.  The
non-real estate commercial loan exposure base increased by $21.3 million and the
general  valuation  allowance  increased by $237  thousand.  The  consumer  loan
exposure  base  decreased  by $3.3 million and the general  valuation  allowance
decreased by $136 thousand.

      During 2004,  the exposure base of single  family loans  increased by $2.1
billion,  generating  an increase in the general  valuation  allowance  of $19.6
million.  There were three changes  pertaining to the calculation of the general
valuation  allowance for the single family  portfolio:  segregation of sub-prime
loans;  refining for the geographic  designation,  and re-evaluated risk factors
for single  family  loans made in Northern  California.  The  exposure  base for
multi-family loans increased by $279.8 million;  however,  the general valuation
allowance decreased by $5.2 million. The decrease in general valuation allowance
is attributable  to lowered risk factors for certain  geographic  locations.  We
also reduced the loss factors  associated with anticipated loss on this product.
The exposure base for commercial real estate decreased $20.2 million, generating
a decrease in the general valuation allowance of $1.1 million. The exposure base
of the construction loan portfolio decreased by $4.5 million,  while the general
valuation  allowance  declined by $1.8 million.  The non-real estate  commercial
loan exposure base increased by $47.0 million;  however,  the general  valuation
allowance  decreased by $3.0 million.  The consumer loan exposure base increased
by $29.8 million;  however,  the general valuation  allowance  decreased by $5.0
million.  The  decrease in general  valuation  allowances  for  non-real  estate
consumer and commercial loans is attributable to a decline in the expected rates
of default as we have gained  experience with these product lines. The remainder
of the change in the general  valuation  allowance for loans was attributable to
changes in miscellaneous loans.

      Depending  on the  economy  and real  estate  markets in which we operate,
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 our general valuation allowance. These
agencies may require us to establish  additional  general  valuation  allowances
based  on  their  judgment  of the  information  available  at the time of their
examination.

      See "-Management's  Discussion and Analysis of Consolidated Balance Sheets
and  Consolidated  Statements of Income - Asset Quality Ratios-" for an analysis
of our general valuation  allowances as a percentage of non-performing loans and
loans receivable.

      Potential Problem Loans. We also had $1.2 million,  $2.1 million, and $2.3
million in potential problem real estate loans as of December 31, 2005, December
31, 2004, and December 31, 2003, respectively.  These are loans that 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 us.

      Our Asset Classification  Committee meets at least quarterly to review and
monitor the condition of the loan  portfolio.  Additionally,  a special  workout
group of our  officers  meets at  least  quarterly  to  review  delinquent  loan
situations  and to insure that actions were  commenced  enforcing  our 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 Consolidated  Balance Sheets and
Consolidated Statements of Income - Non-Performing Assets-"

      Generally,  real estate loans greater than 90 days  delinquent  are placed
into  foreclosure  and a valuation  allowance is established,  if necessary.  We
acquire 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 the lower of carrying amount or fair value.

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

                                       12

<PAGE>
The following table provides information  regarding our REO and real estate held
for investment activity for the periods indicated:

<TABLE>

                                          Year Ended December 31,
                                       -----------------------------
                                         2005      2004       2003
                                       --------  --------   --------
                                               (In thousands)
<S>                                 <C>        <C>       <C>
Beginning balance................   $      986 $   1,324 $       319
  Additions......................        1,869       986       1,889
  Sales and other................       (2,855)   (1,324)       (884)
                                       --------  --------   --------
Ending balance...................   $       -- $     986 $     1,324
                                       ========  ========   ========
</TABLE>


      Other  Interest-Earning  Assets.  We  owned  no  contractually  delinquent
interest-earning assets other than loans as of December 31, 2005.

      Investment Activities.  It is our policy to maintain liquidity investments
at a modest level and to use available cash to originate mortgages that 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 fair
value by type at the end of the periods indicated:

<TABLE>

                                                       At December 31,
                                     ---------------------------------------------------
                                       2005       2004       2003       2002      2001
                                     --------   --------   --------   --------  --------
                                                    (Dollars in thousands)
<S>                               <C>        <C>        <C>        <C>        <C>
U.S. treasury securities..........$       -- $       -- $      200 $      200 $     300
U.S. agency securities............        --         --         --         --    28,199
Collateralized mortgage
   obligations ("CMO's")..........   293,453    249,781    115,992    101,802    80,013
                                     --------   --------   --------   --------  --------
                                     293,453    249,781    116,192    102,002   108,512

Unrealized gain on securities
   available- for-sale............       564        805        219      1,053     1,932
                                     --------   --------   --------   --------  --------
                                  $  294,017 $  250,586 $  116,411 $  103,055 $ 110,444
                                     ========   ========   ========   ========  ========


Weighted average yield on
   interest-earning investments
   end of period..................      4.15%      2.82%      2.92%      4.77%     6.07%
                                     ========   ========   ========   ========  ========
</TABLE>


      Our  collateralized  mortgage  obligations  all have  expected  maturities
within five years.

Sources of Funds

      General.  Our  principal  sources  of funds are  deposits,  principal  and
interest payments on loans,  loan sales,  advances from the FHLB, and securities
sold under agreements to repurchase.

      Deposits.  We obtain  deposits  through  four  different  sources:  1) our
full-service  branch  system,  2) phone  solicitations  by designated  employees
(telemarketing  deposits),  3) national  brokerage  firms,  and 4) our  internet
deposits program.

      Deposits  obtained  through  the branch  system  were $2.6  billion,  $2.5
billion,  and $2.5 billion at December 31, 2005,  2004, and 2003,  respectively.
Branch  deposits  comprised 60% of total  deposits at December 31, 2005,  67% of
total  deposits at December  31, 2004 and 99% of total  deposits at December 31,
2003.

      Deposits acquired through  telemarketing efforts are typically placed with
us by  professional  money  managers  and  represented  2%,  1%, and 1% of total
deposits  at  December  31,  2005,  2004 and  2003,  respectively.  The level of
telemarketing  deposits varies based on yields  available to depositors on other
investment instruments and the depositors' perception of our creditworthiness.

      Deposits  acquired through national  brokerage firms represented 38%, 32%,
and 0% of total deposits at December 31, 2005, 2004, and 2003, respectively. Any
fees paid to deposit  brokers are  amortized  over the term of the  deposit.  We
increased  our use of this type of  deposit in 2005 to fund our  increased  loan
growth.  We have used brokered  deposits in varying amounts since 1983. 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-".

                                       13

<PAGE>
      Deposits  acquired  through the internet are acquired by posting our rates
on internet  rate boards.  We accept  internet  deposits from every state except
California. We began this endeavor in late 2005, so these deposits only comprise
a minor amount of total deposits at December 31, 2005.

      The percentage of fixed-term certificates of deposit in our total deposits
was 63% at December 31, 2005,  47% at December 31, 2004, and 22% at December 31,
2003. The increase during 2005 is due to growth in our deposits acquired through
national  brokerage  firms and our branch  clients'  preference for fixed rate ,
fixed-term certificates of deposits versus money market accounts.  Excluding the
brokered  deposits,  fixed-term  certificates of deposit were 41% of deposits at
December 31, 2005 and 22% at December 31, 2004.

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

<TABLE>

                                       During the Year Ended December 31,
                            ------------------------------------------------------------------
                                    2005                   2004                    2003
                            ------------------    --------------------     -------------------
                             Average   Average      Average   Average       Average   Average
                             Balance    Rate        Balance    Rate         Balance     Rate
                            ---------  -------     ---------  --------     ---------  --------
                                             (Dollars in thousands)
<S>                  <C>                <C>    <C>              <C>     <C>              <C>
Passbook accounts....... $    119,421   1.01%  $    124,923      1.03%  $     118,859     1.15%
Money market
   deposit accounts.....    1,069,070   2.05      1,383,119      1.47       1,244,294     1.72
Interest-bearing
   checking accounts....      212,054   0.31        198,084      0.31         178,173     0.32
Non
   interest-bearing           401,998     --        338,692        --         285,653       --
   checking accounts....
Fixed-term certificate
   accounts.............    2,276,242   3.25        923,939      2.16         688,492     2.30
                            ---------             ---------                 ---------
                         $  4,078,785   2.40%  $  2,968,757      1.42%   $  2,515,471     1.55%
                            =========             =========                 =========
</TABLE>

                                       14

<PAGE>
      The  following  tables  set  forth  information  regarding  the  amount of
deposits in the various  types of deposit  programs  offered by us at the end of
the years indicated and the balances and average rates for those dates:

<TABLE>

                                                                 At December 31,
                                        -----------------------------------------------------------------
                                                2005                   2004                    2003
                                        -----------------       -----------------       -----------------
                                          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 2.80%,
   1.61%, and 1.43%).................   $  886,592     20      $  1,328,230   35%      $  1,373,240  54%

Interest-bearing checking accounts
   (weighted average rate of 0.22%,
   0.23%, and 0.26%).................      299,796      7          279,912     8            232,247    9

Passbook accounts (weighted average
   rate of 1.00%, 1.00%, and 1.10%)..      115,380      3          121,355     3            124,427    5

Non-interest bearing checking
accounts.............................      290,925      7          276,438     7            239,357   10
                                         ---------   ----        ----------  ----         ---------  ----
                                         1,592,693     37        2,005,935    53           1,969,271  78
                                         ---------   ----        ----------  ----         ---------  ----
Fixed-rate term certificate accounts:

Under six-month term (weighted
   average rate of 3.79%, 2.06%, and
   1.00%)............................      278,621      6          373,907    10           32,062      1

Six-month term (weighted average
   rate of 3.65%, 1.96%, and 1.06%)..    1,305,715     30          359,871    10           79,201      3

Nine-month term (weighted average
   rate of 4.00%, 2.27%, and 1.25%)..      532,271     12          526,587    14           15,126      1

One year to 18-month term (weighted
   average rate of 3.99%, 1.84%, and
   1.25%)............................      383,776      9          193,038     5          178,858      6

Two year to 30-month term (weighted
   average rate of 2.85%, 2.40%, and
   2.63%)............................       43,285      1           52,441     1           42,187      2

Over 30-month term (weighted average
   rate of 3.42%, 3.71%, and 3.88%)..       88,468      2          133,402     4          123,966      5

Negotiable certificates of $100,000
   and greater, 30 day to one year
   terms (weighted average rate of
   3.67%, 1.97%, and 1.25%)..........      146,828      3          115,984     3           97,727      4
                                         ---------   ----         --------  ----         --------   ----
                                         2,778,964     63        1,755,230    47           569,127    22
                                         ---------   ----        ---------  ----         --------   ----
Total deposits (weighted average
   rate of 3.00%, 1.65%, and 1.29%).. $  4,371,657   100%      $ 3,761,165   100%     $  2,538,398  100%
                                         =========   ====        =========  ====         ========  =====
</TABLE>

                                       15

<PAGE>
      We  consider  both  the  interest  rate  and   administrative   cost  when
determining  what source of funds to use. As the cost and interest  rate of each
source of funds  fluctuates  from time to time,  we seek funds from the  overall
lowest cost  source  until the  relative  cost  changes.  As the costs of funds,
operating  margins  and net income of the Bank  associated  with each  source of
funds  are  generally  comparable,  we do 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.

      The following table shows the maturity  distribution of jumbo certificates
of deposit ($100,000 and greater) as of December 31, 2005 (in thousands):
<TABLE>

<S>                                           <C>
Maturing in:
  1 month or less..........................   $  38,346
  Over 1 month to 3 months.................      57,793
  Over 3 months to 6 months................      27,161
  Over 6 months to 12 months...............      23,230
  Over 12 months...........................         298
                                                -------
   Total...................................   $ 146,828
                                                =======
</TABLE>

      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.

      Borrowings.  The Federal  Home Loan Bank System  functions  as a source of
credit to  financial  institutions  that are members of a regional  Federal Home
Loan Bank.  The Bank may apply for  advances  from the FHLB  secured by the FHLB
capital  stock  owned by the Bank,  certain of our  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  FHLB.  See  "Summary  of  Material  Legislation  and
Regulation - Qualified Thrift Lender Test" In granting  advances,  the FHLB also
considers a member's creditworthiness and other relevant factors.

      Total  advances  from the FHLB were $4.2 billion at December 31, 2005 at a
weighted  average rate of 4.19%.  This compares with advances of $3.0 billion at
December  31,  2004 and $1.7  billion at December  31, 2003 at weighted  average
rates of 2.59% and 2.88%,  respectively.  We have credit  availability  with the
FHLB,  which allows us to borrow up to 60% of our total assets or  approximately
$6.3 billion at December 31, 2005.

      We enter 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  Balance
Sheets.  There are certain  risks  involved  with  entering  into these types of
transactions.  In order to  minimize  these  risks,  our policy is to enter into
agreements  only with  well-known  national  brokerage  firms  that  meet  their
regulatory capital requirements.

      In January of 2005, we completed a loan  securitization with Fannie Mae in
which $1.3 billion in  multi-family  loans from our loan  portfolio  were formed
into  mortgage-backed  securities.  Because we  retained  full  recourse  on the
securitized loans, the  mortgage-backed  securities continue to be accounted for
as part of the loan portfolio under Statement of Financial  Accounting Standards
No. 140, Accounting for and Servicing of Financial Assets and Extinguishments of
Liabilities.

      Borrowings under reverse repurchase  agreements  increased to $1.2 billion
at December 31, 2005 due to the utilization of the newly-formed  mortgage-backed
securities.  The  weighted  average  rate was 4.04% at December 31, 2005 and the
borrowings  were  secured by loans with market  values  totaling  $1.1  billion,
investments   with  market  values  totaling  $108.8  million,   mortgage-backed
securities  with market values  totaling  $61.4 million and FHLB stock  totaling
$10.4 million.  Borrowings under reverse  repurchase  agreements  totaled $187.0
million at December 31, 2004 and $122.6 million at December 31, 2003 at weighted
average rates of 2.24% and 1.12%, respectively.

      Borrowings from all sources totaled $5.4 billion,  $3.2 billion,  and $1.8
billion at weighted  average  rates of 4.19%,  2.57%,  and 2.76% at December 31,
2005, 2004, and 2003,  respectively.  The increase in borrowings during 2005 and
2004 was necessary to fund asset growth.

                                       16

<PAGE>
      Our portfolio of short-term  borrowings includes FHLB advances due in less
than one year and securities sold under agreements to repurchase.  The following
schedule summarizes  short-term  borrowings for the last three years at December
31:

<TABLE>

                                                 Maximum
                                                 Month-End
                                                 Outstanding
                                                 Balance
                                                 During
                        End of Period the Period Average
                         --------------------   -----------     ----------------------
                          Outstanding   Rate                     Outstanding     Rate
                         ------------- ------                   -------------   ------
                                           (Dollars in thousands)
<S>                   <C>              <C>   <C>              <C>              <C>
2005
Short-term FHLB       $   4,035,500     4.17%  $  4,035,500     $  3,288,391     3.31%
advances.............
Securities sold
   under agreements
   to repurchase.....     1,163,684     4.04      1,231,978        1,048,524     3.34

2004
Short-term FHLB       $   2,604,600     2.30%  $  2,604,600     $  1,789,575     2.05%
advances.............
Securities sold
   under agreements
   to repurchase.....       187,000     2.24        192,000          129,192     1.52

2003
Short-term FHLB       $   1,082,000     2.16%  $  1,082,000     $    734,000     2.25%
   Advances..........
Securities sold
   under agreements
   to repurchase.....       122,622     1.12        154,021          139,568     1.27

Other Sources of Funds
</TABLE>


      See "-Management's  Discussion and Analysis of Consolidated Balance Sheets
and  Consolidated  Statements of Income - Sources of Funds-" for a discussion of
other funding sources.

Subsidiaries

      We have 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.  SMCG is an
inactive corporation.

      Revenues and operating  results of these  subsidiaries  accounted for less
than 1% of  consolidated  revenues in 2005 and no material  change is  presently
foreseen.

      Trustee Activities. Seaside acts as trustee on our deeds of trust. Trustee
fees for this activity amounted to $63 thousand,  $41 thousand, and $66 thousand
in 2005, 2004, and 2003, respectively.

      Insurance  Brokerage  Activities.  Oceanside  engages in limited insurance
agent  activities.  Income  to date  from this  source  has been  insignificant.
Oceanside  operates  as a  licensed  life  insurance  agent for the  purpose  of
receiving  commissions  on the sale of annuities  conducted in our branches by a
licensed third-party vendor, which is a registered broker-dealer. The registered
broker-dealer conducts its sales activities in our branch offices and we receive
a percentage of the  commissions on such sales through  Oceanside.  During 2005,
2004,  and 2003,  Oceanside  received  commission  income of $55 thousand,  $181
thousand,  and  $221  thousand,  respectively,  from  the  sale  of  non-insured
investment products.

Employees

      As of  December  31,  2005,  we had a total  of 629 full  time  equivalent
employees,  including  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. We provide our regular  full-time and part-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.  We consider  our  employee
relations to be excellent.

                                       17

<PAGE>
Summary of Material Legislation and Regulations

      General.  The  Company  and its  subsidiaries  are  subject  to  extensive
regulation. The regulatory framework is intended primarily for the protection of
depositors,  federal deposit insurance funds and the banking system, and not for
the protection of stockholders. The following discussion of significant elements
of the laws and  regulations  applicable  to the  Company  is  qualified  in its
entirety by reference to the full text of the statutes, regulations and policies
that are described.  These  statutes,  regulations  and policies are continually
under  review  by  legislative  bodies  and  regulatory  agencies.  A change  in
statutes,  regulations  or regulatory  policies  applicable to the Company could
have a material effect on the business of the Company.

      FFC, as a savings and loan holding company, is registered with and subject
to regulation and examination by the OTS. FFC is also under the  jurisdiction of
the SEC as well as the rules of the NYSE for listed  companies.  The Bank, which
is a federally chartered savings bank and a member of the Federal Home Loan Bank
(FHLB) System,  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.  Our deposits are
insured by the FDIC  through the SAIF.  As insurer,  the FDIC is  authorized  to
conduct  examinations  of the Bank. The OTS imposes  assessments and examination
fees on savings  institutions.  OTS assessments  were $1.1 million in 2005, $751
thousand  in 2004,  and $667  thousand in 2003.  We are 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 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 4.7% of
its  outstanding  borrowings  from the  FHLB.  We were in  compliance  with this
requirement,  with an investment of $205.7 million in FHLB stock at December 31,
2005.  During 2004,  the FHLB amended the  redemption  policy  requiring 5 years
written notice to redeem stock effective 2005.

      The FHLB  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 FHLB.  At December 31, 2005,  our  advances  from the FHLB  amounted to $4.2
billion,   or  42%  of  the  Company's  total  funding  sources   (deposits  and
borrowings).

      The FHLBs are  required  to  contribute  to  affordable  housing  programs
through  direct  loans or  interest  rate  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.  The dividend  yield earned on FHLB stock
was 4.40% during 2005 compared to 4.01% in 2004 and 4.29% in 2003.

      Financial  Services  Modernization  Legislation.   The  Gramm-Leach-Bliley
Financial  Modernization Act of 1999 (the "GLB Act") made significant changes to
the operations of financial services companies,  including  provisions affecting
affiliations among banks, securities firms and insurance companies,  the ability
of commercial entities to obtain thrift charters,  the confidential treatment of
nonpublic personal information about consumers,  and the Community  Reinvestment
Act (the "CRA", as discussed in more detail below).

      The GLB Act also  significantly  amended  the FHLB  System,  by  modifying
membership  requirements in regional FHLBs to permit  membership to be voluntary
for both thrift and bank members.  The GLB Act changed  corporate  governance of
the FHLBs by eliminating  the right of the Federal Housing Finance Board (FHFB),
the regulator of the FHLB System,  to select the  management of the local FHLBs,
and  returning  that  authority  to  the  boards  of  directors  of  the  FHLBs.
Additionally,  the  obligations  of the  FHLBs to repay  federal  borrowings  to
finance the thrift bailout have been  restructured from a fixed dollar amount to
a fixed percentage of the FHLBs' annual net income.

      There  continues to be ongoing  discussions  in Congress as to whether the
regulator of the FHLBs should be changed and if so, to which regulatory  agency.
The FHFB  has  required  the  FHLBanks  to  register  a class  of  their  equity
securities   with  the  SEC;  some  of  the  FHLBanks  have  not  yet  completed
registration  and accordingly the financial effect on borrowing cost, if any, of
such  registration  is not yet known.  Additionally,  the FHFB has indicated its
intent to issue a regulation concerning the FHLBanks "retained earnings" policy,
the purpose of which is to cause the  FHLBanks to retain more of their  earnings
versus paying dividends to members such as the Bank. Because of the level of our
borrowings  from the FHLB, the outcome of these changes could affect the cost of
borrowings and the dividends we receive on our FHLB stock.  However,  management
believes that the effect of these changes should not be material.

      Savings and Loan Holding  Company  Regulations.  The activities of savings
and loan holding companies are governed by the Home Owners' Loan Act of 1933, as
amended.   Pursuant  to  that  statute,   the  Company  is  subject  to  certain
restrictions with respect to its activities and investments.

                                       18

<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 and
maintain that association as a separate entity or if we were to fail to meet our
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  or the  holding  company  that  create  a  serious  risk  that  the
liabilities  of the holding  company 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 federally insured institutions such as the Bank
to meet certain minimum capital requirements.  See "-Management's Discussion and
Analysis of Consolidated Balance Sheets and Consolidated  Statements of Income -
Capital Resources and Liquidity - Capital  Requirements-" 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.

      The OTS has adopted rules based upon five capital tiers: well-capitalized,
adequately capitalized,  undercapitalized,  significantly undercapitalized,  and
critically   undercapitalized.   An   institution   falls   into  one  of  these
classifications  depending primarily on its capital ratios. We are considered to
be "well-capitalized" for purposes of these capital measures.

      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  that were insured by the FDIC prior to the enactment of
the  Financial  Institutions  Reform,  Recovery  and  Enforcement  Act  of  1989
("FIRREA").  The 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.  Our  deposits  are insured by the SAIF.  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.

       In February,  2006, the Budget Reconciliation Bill (S. 1932) was enacted.
The legislation contains comprehensive Deposit Insurance Reform provisions.  The
bill provides for legislative reforms to modernize the federal deposit insurance
system.  Among other things,  provisions in the legislation would merge the Bank
Insurance Fund (BIF) and the Savings Association  Insurance Fund (SAIF) into the
new Deposit  Insurance  Fund (DIF);  index the $100 thousand  deposit  insurance
limit to  inflation  beginning  in 2010 and every  succeeding  five years  while
giving the FDIC and the  National  Credit  Union  Administration  (NCUA)  boards
authority to determine whether raising the standard maximum deposit insurance is
warranted;  increase the deposit insurance limit for certain retirement accounts
to $250 thousand and index that limit to inflation;  and allow the FDIC Board to
set  assessments.  The  legislation  requires final  regulations to be issued no
later than 270 days after  enactment  with an  effective  date not later than 90
days after publication.

      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 assigned to 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.  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.

                                       19

<PAGE>
      Liquidity.  The OTS requires a savings  institution to maintain sufficient
liquidity  to ensure its safe and sound  operation.  The  determination  of what
constitutes  safe and sound  operation is left to the  discretion of management.
For several  years it has been our strategy to keep cash and liquid  investments
at a modest level due to availability of substantial credit lines. Our liquidity
policy  includes  unused  borrowing  capacity  in the  definition  of  available
liquidity. Our current liquidity policy requires that cash and cash equivalents,
short-term  investments and unused borrowing capacity be maintained at a minimum
level of 10% of our  liquidity  base  (defined as deposits  and  borrowings  due
within one year).  At December  31,  2005,  liquidity-qualifying  balances  were
19.03% of our liquidity base.

      Community   Reinvestment  Act.  The  Community  Reinvestment  Act  ("CRA")
requires each savings institution, as well as commercial banks and certain other
lenders,  to assist in meeting the credit needs of their market areas consistent
with safe and sound banking practice by, among other things, providing credit to
low- and moderate-income  individuals and communities.  The CRA requires the OTS
to periodically  assess an institution's  performance in complying with the CRA,
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.  Failure to achieve a rating
of at least  "satisfactory" may be considered by the regulators when considering
approval of a proposed transaction. We were rated "satisfactory" in our last CRA
examination,  which was  conducted in 2004. An  institution  that 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.

      Restrictions on Dividends and Other Capital Distributions. OTS regulations
require  that  savings  institutions  controlled  by  savings  and loan  holding
companies file a 30-day advance notice of a proposed capital  distribution.  The
OTS may disapprove a notice if it finds that (a) the savings association will be
undercapitalized,  significantly undercapitalized or critically undercapitalized
following the distribution,  (b) the proposed capital distribution raises safety
and soundness concerns;  or (c) the proposed distribution violates a prohibition
contained in a statute,  regulation or agreement between the savings institution
and the OTS (or FDIC) or a condition imposed by an OTS approval. The regulations
also  require  a  30-day  advance  notice  to  be  filed  for  proposed  capital
distributions  that  would  result in the  savings  institution  being less than
well-capitalized  or that  involve the  reduction or  retirement  of the savings
institution's  stock . During  2004,  the Bank paid a total of $30.0  million in
capital  distributions to the Company. No capital distributions were made to the
Company during 2005 or 2003.

      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 Fannie Mae; 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 originated  or 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  unimpaired  capital
and surplus,  plus an additional  10% if the loan is  collateralized  by certain
readily  marketable  collateral.  Our loans were within the LTOB  limitations at
December 31, 2005.

      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.  We have no impermissible
investments in our 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 and internal  audit
systems, information systems, loan documentation,  credit underwriting, interest
rate risk  exposure,  asset growth,  executive  compensation,  maximum ratios of
classified  assets to capital,  and minimum  income  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.
Our annual  management report on the effectiveness of internal control standards
and compliance  with certain  designated laws will be made available in March of
2006.

      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".

                                       20

<PAGE>
      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.   We  met  the
"well-capitalized"  standards  during 2005 and were 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. We met the QTL test at December 31, 2005, with 98.1% of
the 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.  By regulation of the OTS,  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 no 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. All of the Bank's loans to insiders are made in
compliance with these regulations.

        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,
2005 was 0 % of the first $7.8  million of such  accounts,  3% of the next $48.3
million of such accounts and 10% (subject to  adjustment by the Federal  Reserve
Board between 8% and 14%) of the balance of such accounts.  We are in compliance
with these requirements as of December 31, 2005.

      Taxation.  The Company,  the Bank and its subsidiaries file a consolidated
federal  income tax return on a calendar  year basis using the  accrual  method.
Each entity is responsible for paying its pro rata share of the consolidated tax
liability. The maximum marginal federal tax rate is currently 35%.

      We are required to use the specific  charge-off  method of accounting  for
bad debts for Federal  income tax  purposes.  Prior to 1995, we used the reserve
method of accounting for bad debts. The Consolidated  Balance Sheets at December
31, 2005 and 2004 do not include a tax liability of $5.4 million  related to the
adjusted base year bad debt reserve that was created when we were on the reserve
method. The base year reserve is subject to recapture if: (1) we fail 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. Management does not expect any of these events to occur.

      To the extent that  distributions  by the Bank to the  Company  exceed our
cumulative  income and profits (as  computed for federal  income tax  purposes),
such  distributions  would be treated for tax  purposes as being made out of our
base year reserve and would thereby constitute taxable income to ourselves in an
amount  equal to the lesser of our base year 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,
2005,  our  cumulative  income and profits (as computed  for federal  income tax
purposes) were approximately $644.8 million.

      We are  required  to use the  specific  charge-off  method  for  state tax
purposes for all periods  beginning after 2002. Prior to 2002, we made additions
to our state tax bad debt  reserves in amounts  necessary  to "fill up" to a tax
reserve balance  calculated using the experience  method. A change in California
tax law during 2002  eliminated  the bad debt reserve  method for California tax
purposes  and  conformed  state tax law to  federal  tax law with  regard to the
method of accounting for bad debts used by banks. After a review of our bad debt
reserves by the California  Franchise Tax Board,  we recorded a reduction in tax
expense of  approximately  $1.6  million,  or $0.09 per  diluted  share,  net of
federal income tax expense in 2003.

      At December 31, 2005, we had $67.1  million in gross  deferred tax assets.
The Company did not have a valuation  allowance  for the  deferred  tax asset at
December  31, 2005 or 2004,  as it is more likely than not that the deferred tax
asset will be realized  due to the  existence of loss  carry-backs  and expected
future  earnings.  Gross  deferred  tax  liabilities  totaled  $28.0  million at
December 31, 2005.

                                       21

<PAGE>
      We are  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  utilizing a
methodology  that 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. No alternative  minimum taxes were  applicable to the Bank
for tax years 2005, 2004 or 2003.

      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
rate for 2005, 2004, and 2003 was 10.84%.

      The  Internal   Revenue   Service   ("IRS")  has  examined  the  Company's
consolidated  federal income tax returns for tax years up to and including 2003.
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  has  provided  for  deferred  taxes for  federal  and state
purposes,  a change in the period of  recognition  of certain income and expense
items can result in interest due to the IRS and the Franchise Tax Board ("FTB").
Interest  accruals of $56 thousand and $260 thousand  were recorded  during 2005
and 2004,  respectively for interest on amended returns.  During 2005,  interest
payments totaling $207 thousand were paid in settlement of tax years 2001, 2002,
and 2003.  During 2004,  interest  payments  totaling $252 thousand were paid in
settlement of tax years 1999 and 2001. The balance of accrued  interest  payable
for amended  returns was $159 thousand and $408 thousand as of December 31, 2005
and December 31, 2004, respectively.

      Financial  Privacy.  In  accordance  with  the GLB  Act,  federal  banking
regulators  adopted  rules  that limit the  ability  of savings  banks and other
financial  institutions to disclose  non-public  information  about consumers to
nonaffiliated  third-parties.  These limitations  require  disclosure of privacy
policies to consumers  and, in some  circumstances,  allow  consumers to prevent
disclosure of certain personal information to a nonaffiliated  third-party.  The
privacy provisions of the GLB Act affect how consumer information is transmitted
through diversified financial companies and conveyed to outside vendors.

      Anti-Money  Laundering  Initiatives and the USA Patriot Act. A major focus
of governmental policy on financial  institutions in recent years has been aimed
at combating money  laundering and terrorist  financing.  The USA PATRIOT Act of
2001 (the "USA Patriot Act") substantially  broadened the scope of United States
anti-money   laundering  laws  and  regulations  by  imposing   significant  new
compliance and due diligence obligations,  creating new crimes and penalties and
expanding the  extra-territorial  jurisdiction of the United States.  The United
States Treasury Department has issued a number of implementing regulations which
apply to various  requirements of the USA Patriot Act to financial  institutions
such as the Bank. These regulations impose obligations on financial institutions
to maintain appropriate policies, procedures and controls to detect, prevent and
report money  laundering  and terrorist  financing and to verify the identity of
their  clients.  Failure of a financial  institution  to maintain and  implement
adequate  programs to combat money  laundering  and terrorist  financing,  or to
comply with all of the relevant laws or  regulations,  could subject the Bank to
penalties and cause damages to its reputation.

      Legislative  Initiatives.  From  time to  time,  various  legislative  and
regulatory  initiatives  are introduced in Congress and state  legislatures,  as
well as by regulatory agencies. Such initiatives may include proposals to expand
or contract  the powers of savings and loan  holding  companies  and  depository
institutions  or proposals to  substantially  change the  financial  institution
regulatory  system.  Such  legislation  could  change  banking  statutes and the
operating  environment of the Company in substantial and unpredictable  ways. If
enacted, such legislation could increase or decrease the cost of doing business,
limit or expand permissible  activities or affect the competitive  balance among
banks, savings  associations,  credit unions, and other financial  institutions.
The Company cannot predict whether any such legislation will be enacted, and, if
enacted, the effect that it, or any implementing regulations,  would have on the
consolidated balance sheets or consolidated statements of income of the Company.
A change in statutes,  regulations or regulatory policies applicable to the Bank
could have a material effect on the business of the Company.

      On December 29, 2005,  various bank regulatory  agencies issued a proposed
Interagency  Guidance on  Nontraditional  Mortgage  Products (the  "Proposed ARM
Guidance").  While we cannot  predict  whether or in what form the  Proposed ARM
Guidance  may be  adopted,  if  adopted in its  present  form the  Proposed  ARM
Guidance  would have an impact on the way in which  lenders  that offer  certain
kinds of adjustable rate mortgage loans ("ARMs") conduct their business. Many of
the ARMs  originated  by the Bank would be considered  "nontraditional  mortgage
products"  subject to the Proposed ARM  Guidance.  While the Bank  believes that
these  mortgage  products  will  continue  to be  offered  to and in  demand  by
consumers,  and that the Bank has taken  appropriate  measures  to  counter  the
inherent risks of such  products,  it cannot be determined at this time what, if
any,  additional  measures  will be necessary and the effect that such steps may
have on the market for such loans.

      On  January  10,  2006,  the bank  regulatory  agencies  issued a proposed
Interagency Guidance on Concentrations in Commercial Real Estate Lending,  Sound
Risk Management Practices (the "Proposed CRE Guidance"). The Bank cannot predict
whether or in what form the Proposed CRE Guidance may be adopted.  If adopted in
its present form, it is not expected that the Bank's risk  management  practices
would be significantly or adversely affected.

                                       22

<PAGE>
ITEM 1A. - RISK FACTORS

       Investment  in the  Company's  stock  involves  a  number  of  risks  and
uncertainties.  The risks  described  below  are not the only ones  faced by the
Company.  There may be additional  risks that are currently  unknown or that are
now considered immaterial, which may be material in the future. These additional
risks could also impair the Company's business or adversely affect its financial
condition  or results of  operations.  If any of the  following  risks  actually
occurs,  the Company's  business,  financial  condition or results of operations
could be adversely affected. In such case, the price or value of our stock could
decline.

General economic conditions may be less favorable than expected.

      The Company is affected by general  economic  conditions  in California as
well as, to a lesser degree, the United States in general.  An economic downturn
could negatively impact household and corporate incomes. This impact may lead to
decreased demand for the products and services offered by the Bank, and increase
the  likelihood  of defaults by borrowers on their loans.  A severe or prolonged
downturn in California's real estate market would also have an adverse effect on
the Company, as its real estate loans are secured by property in California.


The Company's portfolio consists principally of adjustable rate loans subject to
negative amortization.

      The Bank's primary  product  consists of adjustable  rate loans secured by
residential  real estate.  An increasing  portion of the Bank's  interest income
results  from  interest  accrued  in  excess  of  borrower  payments   (negative
amortization).  These loans, in large part, permit negative amortization up to a
certain  defined level,  and the payment on such loans adjusts  periodically  in
accordance  with the terms of the loan  documents.  In the event of an  economic
downturn,  which may  result in loss of income to  borrowers,  borrowers  may be
unable  to  make  higher  payments  that  may  result  from  such   adjustments.
Additionally,  a downturn  affecting the market value of the  collateral for the
Bank's loans  combined  with a larger  principal  balance that can result from a
negatively  amortizing loan, may result in a loss of adequate  security for such
loans.  The  confluence of these  economic  conditions  could have a significant
effect on the Bank's net income.

      Many of these loans are made under low-documentation loan programs.  Under
these  programs,  which are  typical in the  current  residential  loan  market,
information  about  applicants'  income  and/or assets may not be provided or if
provided,  may not be verified.  While the Bank takes steps to mitigate the risk
of unverified income and asset  information,  such as verification of collateral
value, evaluation of credit history and limitations on the loan amount, there is
a risk that the applicant may not in fact be qualified for the loan requested.

If the  Company  does not  adjust to rapid  changes  in the  financial  services
industry, its financial performance may suffer.

      In order to achieve a strong  financial  performance,  the Company must be
able to meet the  changing  needs and demands of its  customers,  and respond to
competitive pressure. The Company operates in a highly competitive  environment,
and must be able to respond  quickly to changes in  regulation,  technology  and
product delivery systems,  consolidation among financial service providers,  and
changing economic conditions.

Legislative,  regulatory or accounting changes, or significant litigation, could
adversely impact the Company.

      The  Company  is  subject  to  extensive  state  and  federal  regulation,
supervision  and  legislation.  These laws and  regulations  change from time to
time, and these changes may negatively impact the Company. Actions by regulatory
agencies or significant  litigation against the Company could cause it to devote
time and resources to defending  itself;  violations of law or  regulations  may
result in penalties that affect the Company and its shareholders.  Additionally,
accounting  standard  setters,  including  the FASB,  SEC and  other  regulatory
bodies, may change the financial  accounting and reporting standards  applicable
to the preparation of the Company's  consolidated  financial  statements.  These
changes can materially  impact how the Company records and reports its financial
condition  and  results of  operations.  In some  cases,  the  Company  could be
required  to apply a new or revised  standard  retroactively,  resulting  in the
restatement of prior period financial statements.

The Company is exposed to operational risk.

      The  Company  is  exposed  to  operational  risk,  including  risk  to its
reputation,  compliance  issues,  the risk of fraud  or  theft by  employees  or
others,  and  operational  errors,  including  errors  resulting  from faulty or
disabled computer or telecommunications systems.

      The  Company is exposed to risk to its  reputation,  which can result from
actual  or  alleged  conduct  in  a  number  of  activities,  including  lending
practices,  corporate  governance  and actions  taken in response by  government
regulators or consumer groups.  Damage to the Company's reputation can adversely
affect the Company's ability to attract and keep customers and employees.

                                       23

<PAGE>
      The Company is dependent on data processing systems, including third-party
systems,  to record and process  transactions.  This  exposes the Company to the
risk that system flaws or tampering or manipulation of those systems will result
in losses. The Company may be subject to disruptions of its systems arising from
events that are beyond its control  (such as computer  viruses or  electrical or
telecommunications outages), which may cause disruption of service and financial
losses or liability.  The Company is also exposed to the risk that its providers
of services may default on their  contractual  obligations  and to the risk that
the  Company's  or its  providers'  continuity  and data  security  systems  are
inadequate.

Changes in interest rates could affect the Company's income.

      The Company's  income depends to a great extent on the difference  between
the  interest  rates  earned  on  interest-earning  assets  such  as  loans  and
investment   securities,   and  the  interest  rates  paid  on  interest-bearing
liabilities  such as  deposits  and  borrowings.  These rates are  sensitive  to
factors  that are beyond  the  Company's  control,  including  general  economic
conditions  and the policies of various  governmental  and  regulatory  agencies
including  the Federal  Reserve  Board.  Changes in monetary  policy,  including
changes  in  interest  rates,  will  influence  the  origination  of loans,  the
prepayment of loans, and the volume of deposits. The impact of these changes may
be greater if the Company does not effectively  manage the relative  sensitivity
of its assets and liabilities to changes in market interest rates.

      To some  extent,  the  Company is reliant  on the  Federal  Home Loan Bank
("FHLB") as a funding source for the Bank's  operations.  The FHLB is subject to
regulation  and other factors  beyond the Company's  control.  These factors may
adversely affect the availability and pricing of advances to members such as the
Bank.

The  preparation  of the  Company's  financial  statements  requires  the use of
estimates that may vary from actual results.

      The  preparation of consolidated  financial  statements in conformity with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management  to make  significant  estimates  that affect the financial
statements.  One of the Company's  most  critical  estimates is the level of the
allowance for loan losses.  Due to the inherent nature of these  estimates,  the
Company  cannot  provide  absolute  assurance  that  it will  not  significantly
increase  the  allowance  for loan losses  and/or  sustain  loan losses that are
significantly higher than the provided allowance

The Company's stock price is volatile.

      The  Company's  stock  price has been  volatile  in the past,  and several
factors could cause the price to fluctuate  substantially  in the future.  These
factors  include  changes  in  earnings;  business  developments;  circumstances
affecting peer companies in the financial services  industry,  as well as trends
and concerns in the industry in general. The Company's stock price may fluctuate
significantly  in the future,  and these  fluctuations  may be  unrelated to the
Company's performance. General market price declines or market volatility in the
future could  adversely  affect the price of its common  stock,  and the current
market price may not be indicative of future market prices.

      Also see "Management's Discussion & Analysis - Risk and Uncertainties".

ITEM 1B.- UNRESOLVED STAFF COMMENTS

      None.

ITEM 2. - PROPERTIES

      At December 31,  2005,  we owned the building and the land for nine of our
branch  offices,  owned the  building  but  leased  the land for two  additional
offices,  and leased our remaining offices.  Properties leased by us include our
corporate and  executive  offices  located in an office tower in downtown  Santa
Monica,  a general  services  and banking  operations  office  building in Santa
Monica  and  a  residential  lending  operations  office  in  Los  Angeles.  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.
                                       24

<PAGE>
                                     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  Consolidated   Balance  Sheets  and  Consolidated
Statements  of Income" is a table  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 2, 2006,  16,581,644 shares of Company common
stock,  representing  approximately 616 stockholders were on record.  This 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  income,  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 capital  distribution to the Company.  No such  distribution may be made if
the Bank's net worth falls  below  regulatory  requirements.  See  "-Business  -
Summary of Material  Legislation and Regulations-" for other regulatory  capital
distributions.  The  Board  of  Directors  of the Bank  declared  and paid a $30
million  capital  distribution  to the  Company  during  2004 for the purpose of
repurchasing shares of Company common stock. No capital  distributions were made
by the Bank to the Company during 2005 or 2003.

      During 2005,  the Company  invested  $110 million in the Bank as a capital
investment in order to help finance the Bank's growth and for general  corporate
purposes.

      (d) Securities  authorized for issuance under equity  compensation  plans.
Information  appearing on page 12 of the Proxy Statement is incorporated  herein
by reference.

                                       25

<PAGE>
ITEM 6. - SELECTED FINANCIAL DATA

      Selected financial data for the Company is presented below:

<TABLE>

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

                                    2005            2004            2003            2002            2001
                                -----------     -----------      -----------     -----------     -----------
                                       (Dollars in thousands, except per share data)
<S>                             <C>             <C>             <C>             <C>             <C>
For the Year Ended December
31:
  Interest income............   $   469,657     $   262,722     $  235,881      $   263,878     $   333,932
  Interest expense............      249,190         101,190         88,342          128,419         201,754
  Net interest income.........      220,467         161,532        147,539          135,459         132,178
  Provision for loan losses...       19,750           3,000             --               --              --
  Other income................       31,215          21,296         16,741           18,074           8,919
  Non-interest expense........       73,481          66,372         55,589           58,212          53,174
  Income before income taxes..      158,451         113,456        108,691           95,321          87,923
  Income taxes................       66,753          47,614         44,216           40,149          37,621
  Net income..................       91,698          65,842         64,475           55,172          50,302
Basic earnings per share......         5.55            3.95           3.80             3.22            2.92
Dilutive earnings per share...         5.43            3.85           3.70             3.15            2.85
End of Year:
  Loans receivable, net (1)...    9,681,133       6,837,945      4,374,112        3,769,235       4,004,889
  Mortgage-backed securities,
    at fair value.............       74,254          97,059        135,176          200,585         284,079
  Investment securities, at
    fair value.................     294,017         250,586        116,411          103,055         110,444
  Total assets................   10,456,949       7,468,983      4,825,022        4,253,729       4,726,289
  Deposits....................    4,371,657       3,761,165      2,538,398        2,527,026       2,546,647
  Borrowings..................    5,419,184       3,191,600      1,816,622        1,322,273       1,808,040
  Liabilities.................    9,886,110       6,991,509      4,388,455        3,882,088       4,400,611
  Stockholders' equity........      570,839         477,474        436,567          371,641         325,678
  Book value per share........        34.46           28.94          25.61            21.95           18.88
  Tangible book value per share       34.25           28.62          25.18            21.40           18.14
Selected Ratios:
  Return on average assets....         1.01%           1.12%          1.43%            1.24%           1.10%
  Return on average equity....        17.64%          14.54%         15.97%           15.82%          16.93%
  Ratio of non-performing
     assets to total assets...         0.05%           0.07%          0.10%            0.17%           0.17%
  Effective net spread........         2.43%           2.78%          3.35%            3.09%           2.90%
   Ratio of non-interest
   expense to average assets..         0.81%           1.13%          1.24%            1.31%           1.17%
Other Data:
  Number of retail banking               30              29             29               29              29
  offices

Number of lending only offices            6               4              2                2               2
(1)  Includes loans held for sale.
</TABLE>

      Also see summarized  results of operations on a quarterly  basis for 2005,
2004, and 2003 in Note 16 of the Notes to Consolidated Financial Statements.

                                       26

<PAGE>
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIATED BALANCE SHEETS
                 AND CONSOLIDATED STATEMENTS OF INCOME

                              CRITICAL ACCOUNTING POLICIES

      The discussion and analysis of the balance sheets and statements of income
are based upon the consolidated  financial statements,  which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make  estimates  and  judgments  that affect the reported  amounts of assets and
liabilities at the date of the financial  statements.  Actual results may differ
from these estimates under different assumptions or conditions.

      Accounting  for  the  allowances  for  loan  losses  involves  significant
judgments  and  assumptions  by  management  which has a material  impact on the
carrying value of net loans receivable.  Management considers the accounting for
loan valuation  allowances to be a critical accounting policy. The judgments and
assumptions  used by  management  are based on historical  experience  and other
factors,  which are believed  reasonable under the circumstances as described in
the "Business - Loan Loss Allowance" section.

      The majority of our  residential  loans are obtained from  wholesale  loan
brokers.  Loan origination  costs for residential  loans obtained from wholesale
loan brokers will  generally  include fees paid to those  brokers,  resulting in
loan  origination  costs  exceeding  loan  fees  received.   These  excess  loan
origination  costs are  amortized  as an  adjustment  of loan yield based on the
expected  lives of the related  loans,  including an estimate of the  prepayment
speeds on the portfolio.

                             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 three main components of economic risk: credit risk,  collateral
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 "-Loss Provision-" and "-Non-performing Assets-"

      The  determination  of the  allowance for loan losses and the valuation of
real estate collateral are based on estimates that are susceptible to changes in
the economic environment and market conditions. We recorded loan loss provisions
of $19.8 million and $3.0 million  during 2005 and 2004,  respectfully.  No loan
loss provisions  were recorded in 2003. 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  above those required for
loan growth.

Collateral Risk

      Collateral  risk is the  risk  that the  collateral  securing  our  loans,
primarily  real estate,  may decline in value. A downward turn in the California
real estate market could  increase the  likelihood of losses if the loan exceeds
the value of the collateral. 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. Our market risk arises primarily from the interest rate risk
inherent  in its  lending  and deposit  taking  activities.  Should  there be an
economic or market downturn or if market interest rates increase  significantly,
we could  experience  a  material  increase  in the level of loan  defaults  and
charge-offs.

      See  "-Asset-Liability  Management-"  in  "-Quantitative  and  Qualitative
Disclosures  About Market Risk-" for additional  information  relating to market
risk.

                                 REGULATORY RISK

      Regulatory risk is the risk that regulations will change or the regulators
will  reach  different  conclusions  than  management  regarding  the  financial
position  of the  Company.  The OTS  examines  our  financial  results,  capital
adequacy  asset  quality,  and other  performance  measures  every year. The OTS
reviews the allowance for loan losses and may require us to adjust the allowance
based on  information  available at the time of their  examination.  The OTS can
also  require  that  the Bank  maintain  capital  levels  above  the  regulatory
minimums.

                                       27

<PAGE>
                                   OTHER RISKS
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  increasing  our
capital.

Pending Lawsuits

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

      Our  results of  operations  are  primarily  affected by our levels of net
interest income, provisions for loan losses,  non-interest income,  non-interest
expense, and income taxes. Our results are strongly influenced by the California
economy  in which we  operate  and the  direction  and level of  general  market
interest rates.

      Net income of $91.7  million or $5.43 per  diluted  share was  recorded in
2005, compared to net income of $65.8 million or $3.85 per diluted share in 2004
and net income of $64.5 million or $3.70 per diluted share in 2003.

      Net income  increased from 2004 to 2005 due to an increase in net interest
income,  higher loan  prepayment  fees and gains on the sale of real estate held
for  investment.  The increase in net income from 2003 to 2004 was due to higher
net interest income,  higher prepayment fees and a $5.4 million reduction in the
repurchase liability for loans sold with recourse.  Operating expenses increased
during  both  2005  and  2004  due to the  higher  costs  associated  with  loan
originations.

      Consolidated assets at the end of 2005 were $10.5 billion,  representing a
40% increase from $7.5 billion at the end of 2004 and an 119% increase from $4.8
billion  at the end of  2003.  The  growth  in  assets  during  2005 and 2004 is
attributable to increased loan origination  activity.  Loan originations totaled
$4.8  billion  in 2005,  $3.9  billion in 2004 and $2.3  billion  in 2003.  Loan
origination  volume increased  because we employed more loan agents and expanded
our geographic base from Southern California to all of California.  Additionally
the rise in  California  real  estate  values  created  a large  volume  of loan
refinances by borrowers.

      We recorded $19.8 million and $3.0 million in loan loss  provision  during
2005 and 2004. No loss provision was recorded  during 2003. We recorded net loan
charge-offs of $1.4 million  during 2005,  and net loan loss  recoveries of $437
thousand and $15 thousand during 2004 and 2003, respectively.

      Certain key financial ratios for the Company are presented below:

<TABLE>
                                         Year Ended December 31,
                                      -----------------------------
                                      Return    Return     Average
                                      on        on         Equity to
                                      Average   Average    Average
                                      Assets    Equity     Assets
                                      --------  --------  ---------
<S>                                     <C>      <C>        <C>
2005..............................       1.01%    17.64%     5.72%
2004..............................       1.12     14.54      7.69
2003..............................       1.43     15.97      8.98
2002..............................       1.24     15.82      7.83
2001..............................       1.10     16.93      6.52
</TABLE>

      Non-performing  assets (primarily loans 90 days past due or in foreclosure
plus  foreclosed  real  estate)  were $5.0  million  or .05% of total  assets at
December  31, 2005  compared to $5.0 million or .07% of total assets at December
31, 2004 and $4.7 million or 0.10% of total assets at December 31, 2003. The low
level of  non-performing  assets over the last several years is  attributable to
and the strength of the California real estate market resulting in lower balance
of delinquent loans. See -"Non-Performing Assets-"

      As of February 2, 2006,  1,472,079  shares remain  eligible for repurchase
under the  Company's  authorized  repurchase  program.  The Company  repurchased
common shares  totaling  696,900 and 33,800 during 2004 and 2003.  There were no
repurchases during 2005.

      At December 31, 2005 our  regulatory risk-based  capital  ratio was 13.10%
and our  tangible  and core  capital  ratios were 6.23%.  We met the  regulatory
capital  standards  necessary  to be deemed "well-capitalized"  at December  31,
2005.  See -"Capital Requirements"-

                                       28

<PAGE>
                              COMPONENTS OF INCOME

Net Interest Income

      Net  interest  income is the primary  component  of our income.  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 $293.1 million in 2005, $292.3 million in 2004,
and $262.9 million in 2003.

      Our net  interest  income is impacted by a time lag before  changes in the
cost of funds can be  passed  along to  monthly  adjustable  rate loan  clients.
Savings and borrowing costs adjust to market rates quickly while it takes two to
three months for loan yields to adjust. This time lag decreases our net interest
income  during  periods of rising  interest  rates.  The  reverse is true during
periods of declining  interest  rates.  See  "-Asset-Liability  Management-"  in
"-Quantitative  and  Qualitative  Disclosures  About  Market  Risk-" 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>
                                                                Year Ended December 31,
                                                        ----------------------------------------
                                                        2005            2004            2003
                                                        --------        ---------       --------
                                                                (Dollars in thousands)
<S>                                                     <C>             <C>             <C>
Average loans and mortgage-backed securities (1).....   $ 8,592,880     $ 5,325,910     $ 4,194,404
Average investment securities........................       231,331         252,708         113,624
                                                          ---------       ---------       ---------
Average interest-earning assets......................     8,824,211       5,578,618       4,308,028
                                                          ---------       ---------       ---------
Average deposits.....................................     4,078,785       2,968,757       2,515,471
Average borrowings...................................     4,452,325       2,317,518       1,529,630
                                                          ---------       ---------       ---------
Average interest-bearing liabilities.................     8,531,110       5,286,275       4,045,101
                                                          ---------       ---------       ---------
Excess of interest-earning assets over
 interest-bearing liabilities........................   $   293,101      $  292,343       $ 262,927
                                                           ========        ========       =========

Yields earned on average interest-earning assets.....          5.24%           4.59%           5.40%
Rates paid on average interest-bearing liabilities...          2.91            1.91            2.18
Interest rate spread.................................          2.33            2.68            3.22
Effective net spread.................................          2.43            2.78            3.35
Total interest income (2)............................   $   462,389      $  256,059       $ 232,634
Total interest expense (3)...........................       248,255         100,968          88,183
                                                           --------        ---------       --------
                                                            214,134         155,091         144,451
Total other income (4)...............................         6,333           6,441           3,088
                                                           --------        ---------       --------
Net interest income..................................   $   220,467      $  161,532       $ 147,539
                                                           ========        =========       ========
</TABLE>
    (1)  Non-accrual  loans are included in the average  dollar  amount of loans
    outstanding;  however,  no income is included  for the period that each such
    loan was on non-accrual status.
    (2) Does  not  include  dividends  on FHLB  stock  and  other  miscellaneous
    interest income.
    (3) Does not include  other  miscellaneous  interest  expense.  (4) Includes
    dividends on FHLB stock and other miscellaneous interest income
        and expense.

      Our interest rate spread  decreased by 35 basis points in 2005 compared to
2004 as the yield on earning assets  increased by 65 basis points while the cost
of funds increased by 100 basis points. Both the yield on the loan portfolio and
the cost of funds were impacted by increased interest rates.  However,  the cost
of funds  increased to a greater  extent  because the rates paid on deposits and
borrowings  respond faster to market interest rate changes than the yield on the
adjustable  rate loans.  There is a two-to-three  month time lag before interest
rate changes can be passed on to adjustable rate loan clients.

      Our interest rate spread  decreased by 54 basis points in 2004 compared to
2003 as the yield on earning  assets  declined by 81 basis points while the cost
of funds fell by only 27 basis points.  The yield on the loan  portfolio  during
2004 was impacted by lower  interest  rates from 2003 and early 2004.  The rates
paid on savings and borrowings also decreased in 2004 compared to 2003, but they
decreased to a lesser extent  because they were impacted by increasing  interest
rates throughout most of 2004.

                                       29

<PAGE>
      The table below sets forth certain  information  regarding  changes in our
interest  income  and  interest  expense  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>

                                                  Year Ended December 31, 2005         Year Ended December 31, 2004
                                                             Versus                                Versus
                                                       December 31, 2004                      December 31, 2003
                                               ------------------------------------   -----------------------------------
                                                           Change Due To                       Change Due To
                                               ------------------------------------   -----------------------------------
                                                  Volume      Rate         Total        Volume       Rate        Total
                                               -----------  ---------   -----------   ----------   -----------   --------
                                                                             (In thousands)
<S>                                            <C>          <C>         <C>         <C>          <C>           <C>
Interest Income:
  Loans and mortgage-backed
    securities..........................       $  169,290   $  34,791   $  204,081   $   56,132   $  (37,250)   $ 18,882
  Investments...........................             (640)      2,629        1,989        3,728          815       4,543
                                                  --------   --------     ---------     -------      --------    -------
    Total interest income...............          168,650      37,420      206,070       59,860      (36,435)     23,425
                                                  --------   --------     ---------     -------      --------    -------

Interest Expense:
  Deposits..............................           19,548      36,081       55,629        6,647       (3,446)      3,201
  Borrowings............................           67,182      24,216       91,398       21,531      (11,947)      9,584
                                                  --------    --------    ---------     -------      --------    -------
    Total interest expense..............           86,730      60,297      147,027       28,178      (15,393)     12,785
                                                  --------    --------    ---------     -------      --------    -------

    Change in net interest
  income................................       $   81,920   $  (22,877)     59,043       31,682      (21,042)     10,640
                                                  ========     ========   =========     =======      ========    =======

Change in other items (1)...............                                      (108)                                3,353

Total change in net interest
  Income including other items..........                                $   58,935                              $ 13,993
</TABLE>
 (1) Includes dividends on FHLB stock and other miscellaneous items.


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.

<TABLE>

                                                Interest Rate Spreads and Effective Net Spreads
                                                           Year Ended December 31,
                                -----------------------------------------------------------------------------
                                     2005            2004           2003           2002             2001
                                -------------   --------------  -------------   -------------   -------------
                                During  End of  During  End of  During  End of  During  End     During  End
                                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.............       5.27%   6.56%   4.68%   4.98%   5.49%   5.09%   6.18%   5.98%   7.61%   6.57%
Weighted average
  yield on investment
  portfolio (1)..........       3.91    4.11    2.79    2.62    2.20    2.64    3.65    4.41    5.16    3.52
Weighted average
  yield on all
  interest-earning
  assets.................       5.24    5.80    4.59    4.89    5.40    5.02    6.08    5.94    7.50    6.40
Weighted average
  rate paid on
  deposits...............       2.40    3.00    1.42    1.65    1.55    1.29    2.42    1.98    4.08    3.02
Weighted average
  rate paid on
  borrowings and
  FHLB advances..........       3.37    4.19    2.53    2.57    3.21    2.76    4.39    3.63    5.67    4.74
Weighted average
  rate paid on all
  interest-bearing
  liabilities............       2.91    3.50    1.91    2.07    2.18    2.12    3.16    2.54    4.79    3.73
Interest rate
  spread (2).............       2.33    2.30    2.68    2.82    3.22    2.90    2.92    3.40    2.71    2.67
Effective net
  spread (3).............       2.43            2.78            3.35            3.09            2.90
</TABLE>

(1) Dividends  on  FHLB  stock  and  miscellaneous   interest  income  were  not
    considered in this analysis.
(2) Weighted average yield on all interest-earning  assets less weighted average
    rate paid on all interest-bearing liabilities.
(3) Net  interest   income   (excluding   dividends  on  FHLB  stock  and  other
    miscellaneous items) divided by average interest-earning assets.

                                       30

<PAGE>
Loss Provision

      The Company  recorded $19.8 million in loan loss provision during 2005 and
$3.0 million during 2004 due to growth in the loan  portfolio.  No provision was
recorded  during  2003  because,  based on  analysis  performed  by  management,
existing  allowances  were sufficient to cover credit risks inherent in the loan
portfolio. Non-performing assets were $5.0 million at December 31, 2005 compared
to $5.0 million at December  31, 2004 and $4.7 million at December 31, 2003.  We
have a policy of providing for general valuation allowances,  unallocated to any
specific  loan,  but  available  to offset any loan  losses.  The  allowance  is
maintained at an amount that management believes adequate to cover estimable and
probable  loan  losses.  The Company also  maintains  valuation  allowances  for
impaired  loans and loans sold with recourse when needed.  See "-Business - Loan
Loss  Allowance-"  Management  performs  regular  risk  assessments  of our loan
portfolio to maintain  appropriate  valuation  allowances.  Additional loan loss
provisions may be required to the extent that  charge-offs are recorded  against
the valuation allowance for impaired loans, the general valuation allowance,  or
losses arising from the Bank's obligation on loans sold with recourse.

      The Company  recorded net loan charge-offs of $1.4 million during 2005 and
net loan  recoveries of $437 thousand during 2004 and recoveries of $15 thousand
during 2003.  The  charge-offs  during 2005  primarily  resulted  from losses on
business loans. The recoveries  during 2004 and 2003 resulted from cash payments
by borrowers on loans that had been previously charged-off.

Non-interest Income

      Loan  servicing and other fees were $22.8 million in 2005 compared to $9.5
million in 2004 and $8.0  million in 2003.  The  increase  in fees  during  2005
compared to 2004 was primarily due to an increase in loan prepayment  fees. Loan
prepayment  fees grew to $20.5  million in 2005 compared to $8.0 million in 2004
and $6.0 million in 2003 because a greater number of loans subject to prepayment
fees were paid off by borrowers.  Loans with prepayment fees represented  94.8%,
86.6%, and 59.9% of loans  originated  during December 31, 2005, 2004, and 2003,
respectively.

      Gain on sale of loans was $125 thousand in 2005,  $5.4 million in 2004 and
$2.4  million in 2003.  Actual loan sales were $12.8  million,  $3.3 million and
$86.1 million  during 2005,  2004 and 2003,  respectively.  The gain realized on
cash loan sales was $125 thousand,  $34 thousand and $944 thousand  during 2005,
2004 and 2003,  respectively.  Cash  gains  fluctuate  due to  changes in market
pricing  based on  interest  rate  trends.  Also,  the  dollar  amount  of loans
originated for sale varies based on the  availability  of attractive  fixed rate
loan programs to borrowers  compared to our adjustable  rate loan  programs.  In
addition  to cash  gains,  gain on sale of loans  for  2004  and  2003  includes
adjustments  to prior years' sales related to loans sold with  recourse.  During
2004, we eliminated  the  repurchase  liability for loans sold with recourse and
recorded an adjustment of $5.4 million into gain on sale of loans.  During 2003,
we revised the estimate of the required repurchase liability for loans sold with
recourse  from $6.9 million to $5.4 million and recorded an  adjustment  of $1.5
million into gain on sale of loans. The elimination of the repurchase  liability
for loans sold with recourse  reflects the fact that the portfolio of loans sold
with recourse has been  experiencing  significant  pay-offs,  and has had better
credit  experience  than  previously  estimated.  We do not  expect to incur any
future losses on loans sold with recourse.

      Real estate operations  resulted in net gains of $2.0 million during 2005,
$308 thousand in 2004, and $780 thousand in 2003. The gains recorded during 2005
and 2004 result from the sale of properties acquired in settlement of judgments.
Real estate  operations also include gain on sale of foreclosed  properties,  if
any, operational income and expense during the holding period, and recoveries of
prior losses on real estate sold.

Non-interest Expense

      The ratio of  non-interest  expense to average  total assets was 0.81% for
2005,  1.13% for 2004 and 1.24% for 2003. The ratios  decreased  during 2005 and
2004 due to increases in average  total  assets for those  years.  However,  the
dollar  amount of  non-interest  expense  increased  during 2004 and 2005 due to
additional costs associated with loan originations. 2004 expenses include higher
legal costs compared to 2005 and 2003.

      Salary and benefit costs  increased 10% in 2005 compared to 2004 primarily
due to higher  compensation and incentive costs  attributable to our significant
loan growth.  These higher costs were offset by lower profit  sharing costs as a
result of a decreased  contribution to our Employee Stock Ownership Plan. Salary
and benefit costs increased 22% in 2004 compared to 2003 primarily due to higher
compensation  and incentive  costs  attributed to loan growth and the additional
staffing of our business banking unit.

      Occupancy  expense  increased  12% in 2005  compared  to  2004  due to the
continued  expansion of our loan  divisions in Southern and Northern  California
and the opening of one new retail branch. Occupancy expense increased 6% in 2004
compared  to  2003  due to  the  expansion  of our  loan  division  in  Northern
California.

      Other operating costs increased 12% in 2005 compared to 2004 due to higher
operating  losses at the retail  branches,  higher OTS assessments and increased
audit fees.  Other  operating  costs  increased in 2004  compared to 2003 due to
higher costs (delivery, telephone and supplies) associated with the expansion of
our loan divisions.

                                       31

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

<TABLE>
                                                  Non-Interest Expense
                                                 Year Ended December 31,
                                  ------------------------------------------------------
                                    2005       2004       2003        2002        2001
                                  --------   --------   ---------   ---------  ---------
                                                   (Dollars in thousands)
<S>                             <C>       <C>        <C>         <C>         <C>
Salaries and Employee Benefits:
     Salaries...................$ 27,850  $  25,992  $  21,565   $  20,984   $  18,119
     Incentive compensation......  6,719      4,217      3,480       3,122       2,472
     Payroll taxes...............  2,660      2,334      1,883       1,827       1,652
     Employee benefit insurance..  1,817      1,629      1,016       1,386       1,203
     Bonus compensation..........  2,057      1,500      1,275       1,500       1,500
     Profit sharing..............  1,545      2,530      2,030       2,024       2,020
     SERP........................  1,476      1,381      1,287       1,161         970
     401(k)......................    416        500        540         310         356
     Other salaries and benefits.    521        824        408         313       1,390
                                  -------  --------  ---------   ---------    --------
                                  45,061     40,907     33,484      32,627      29,682
                                  -------  --------  ---------   ---------    --------
Occupancy:
     Rent........................  5,148      4,836      4,690       4,673       4,439
     Equipment...................  2,184      1,826      1,378       1,836       1,971
     Maintenance costs...........    912        861        904         879         914
     Other occupancy.............  1,482      1,168      1,199       1,169         978
                                  -------  --------  ---------   ---------    --------
                                   9,726      8,691      8,171       8,557       8,302
                                  -------  --------  ---------   ---------    --------
Other Operating Expense:
     Insurance...................    896        746        648         690         582
     Amortization of core
       deposit intangible........  1,995      1,995      1,995       1,962       1,564
     Data processing.............  2,596      2,587      2,905       2,838       2,490
     Contributions...............    492        502        409         363         450
     Professional services.......    660        292        201         195         207
     Legal expenses..............  1,381      1,686      1,103       2,888       1,393
     OTS assessments.............  1,125        751        667         708         653
     Federal deposit insurance
        premiums.................    504        388        394         438         418
     Telephone...................    844        775        569         582         532
     Office supplies.............    936        833        839         700         717
     Postage.....................    965        677        335         376         399
     Subscriptions...............    281        229        194         188         181
     Delivery....................    638        565        480         420         374
     Other contracted services...  1,052        820        583         514         336
     Uninsured losses............  1,111        651        185         368         342
     Other operating costs.......  2,464      2,572      2,112       2,420       2,752
                                  -------   -------   --------    --------    --------
                                  17,940     16,069     13,619      15,650      13,390
                                  -------   -------   --------    --------    --------

Advertising......................    754        705        315       1,378       1,800
                                  -------   --------   --------   ---------   --------
  Total.........................$ 73,481  $  66,372  $  55,589   $  58,212   $  53,174
                                  =======   ========   ========   =========   ========

Non-interest expense as
    % of average assets..........    0.81%     1.13%      1.24%       1.31%      1.17%
                                  ========   ========  ========   =========   ========
</TABLE>

                             BALANCE SHEET ANALYSIS

      Consolidated assets at the end of 2005 were $10.5 billion,  representing a
40% increase from $7.5 billion at the end of 2004 and an 119% increase from $4.8
billion at the end of 2003.  The increase in assets during 2005 is  attributable
to increased loan origination  activity.  Loan originations totaled $4.8 billion
in 2005, $3.9 billion in 2004 and $2.3 billion in 2003.  Principal repayments on
loans  totaled $2.0  billion  during 2005,  $1.4 billion  during 2004,  and $1.7
billion during 2003.

Real Estate Loan Portfolio

      At the end of 2005, 58% of our loans had  adjustable  interest rates based
on monthly  changes in the CODI,  16% were based on the 12MAT Index and 16% were
based on the COFI Index. As part of our asset-liability  management strategy, we
have  maintained  a high level of  adjustable  rate loans in our  portfolio  for
several years.  During 2004 and 2005, we focused on marketing  adjustable  loans
based on the CODI.  At December 31, 2005,  CODI loans  comprised 76% of the loan
originations.  Management  believes  that the  high  level  of  adjustable  rate
mortgages  will  help  insulate  us  from   fluctuations   in  interest   rates,
notwithstanding  the two to three month time lag between a change in its monthly
cost of funds and a  corresponding  change  in its loan  yields.  See  "-Asset -
Liability Management-".

                                       32

<PAGE>
      There  are  varying  periods  for which  our loan  payments  may be fixed,
ranging from one year to five years. If the payment is fixed for one year, after
the first year the payment may be increased  by no more than 7.5% each year.  If
the payment is fixed for three years,  after the third year the payments for the
fourth and fifth years may be increased  by no more than 7.5% for each year.  If
the payment is fixed for five years,  after the fifth year,  the payment will be
adjusted  to provide for full  amortization,  starting  with the sixth year.  An
annual  payment  cap  of  7.5%  applies  thereafter.  Additionally,  all  loans,
including  loans with fixed payment  periods of less than five years,  will have
payments  adjusted  every five years  without  regard to the 7.5%  limitation to
provide  for full  amortization  over the  balance of the loan term.  The annual
payment cap of 7.5%  applies  thereafter.  Any interest not paid by the borrower
each  month  is  added  to  the  principal   balance  of  the  loan   ("negative
amortization").  Payments  may revert to the fully  amortizing  payment  without
regard to the annual payment cap if the loan balance reaches either 110% or 125%
of the original loan balance.  Loans with an 80% or less loan-to-value  ratio at
origination  have  either a 110% or 125%  lifetime  balance cap and loans with a
loan-to-value  ratio over 80% at  origination  are  limited  to a 110%  lifetime
balance cap.

      Because AML  loan-to-value  ratios may increase above those established at
the time of loan  origination due to negative  amortization,  when we do lend in
excess of 80% of the  appraised  value,  additional  fees and  higher  rates are
charged or we may require mortgage  insurance which reduces our loss exposure to
below 75%.  The amount of  negative  amortization  increases  during  periods of
rising interest rates. See "-Business - Interest Rates, Terms and Fees."

      At December 31, 2005,  2004 and 2003,  negative  amortization on all loans
totaled $62.6  million,  $5.5 million and $4.0 million,  respectively.  Negative
amortization  has increased over the last year due to rising  interest rates and
an  increasing  number of single  family  loans  that  allow for fixed  payments
periods  of one to five  years.  The  portfolio  of single  family  loans with a
one-year  fixed payment was $4.6 billion at December 31, 2005,  compared to $2.9
billion  at  December  31,  2004 and $3.9  billion at  December  31,  2003.  The
portfolio of single family loans with a  three-to-five  year fixed  payments was
$2.7  billion at December  31,  2005,  compared to $1.6  billion at December 31,
2004,  and $1.4  million  at  December  31,  2003.  Negative  amortization  as a
percentage of all single  family loans with fixed payment  periods in the Bank's
portfolio  totaled 0.86% at December 31, 2005,  0.12% at December 31, 2004,  and
0.17% at December 31, 2003. Single family loans comprised of 90% of originations
during 2005  compared  to 80% of  originations  in 2004 and 75% of  originations
during 2003.

The following table summarizes loan  originations and purchases by loan type for
the periods indicated:

<TABLE>

                                                            Loan Originations and
                                                            Purchases by Loan Type
                             Year ended December 31,
                                                 -----------------------------------------
                                                   2005             2004           2003
                                                 ---------      -----------     ----------
                                                                  (In thousands)
<S>                                            <C>              <C>             <C>
    Adjustable:
     12MAT.....................................$   672,230      $   988,123     $  817,217
     CODI......................................  3,666,643        2,678,739        745,507
     COFI......................................    443,259          109,331        158,868
     LIBOR.....................................         --            9,832          2,350
     Prime.....................................     40,341           70,691         53,154
                                                 ---------        ---------     ----------
                                                 4,822,473        3,856,716      1,777,096

     Fixed.....................................      1,510           19,609         64,120
     Hybrid....................................         --            4,484        434,314
                                                 ---------        ---------     ----------
        Total..................................$ 4,823,983      $ 3,880,809     $2,275,530
                                                 =========        =========      =========
</TABLE>
      The  following  table  details  loan  originations  and loan  purchases by
property type for the periods indicated:
<TABLE>
                                                        Loan Originations and Purchases by Property Type
                                                                Year Ended December 31,
                                                -----------------------------------------------------------------------------
                                                    2005            2004            2003            2002              2001
                                                -----------      -----------    -----------     ------------       ----------
                                                                                (In thousands)
<S>                                             <C>             <C>             <C>               <C>              <C>
Single family (one-to-four units).......        $ 4,329,439     $  3,095,010     $ 1,712,584      $  728,309       $  912,974
Multi-family............................            409,201          647,326         470,426         441,407          407,458
Commercial real estate..................             45,001           66,010          35,237          84,050          150,735
Commercial business loans...............             36,197           43,226          31,581          17,572           16,172
Other...................................              4,145           29,237          25,702          17,434           14,996
                                                  ---------        ---------       ---------        ---------        --------
Total...................................        $ 4,823,983      $ 3,880,809     $ 2,275,530      $ 1,288,772     $ 1,502,335
                                                  =========        =========       =========        =========       =========
</TABLE>

                                       33

<PAGE>
      No loans were  originated  upon the sale of real estate  owned during 2005
and 2004.


Loan Composition

      Loans  based on the  security  of single  family  properties  (one-to-four
units) comprise the largest  category of our loan portfolio.  The loan portfolio
also includes  loans  secured by  multi-family  and  commercial  and  industrial
properties.  At December 31, 2005, 76% of the loan portfolio  consisted of first
liens on single family  properties while first liens on multi-family  properties
were 20% of the portfolio,  and first liens on commercial properties represented
3% of the portfolio.  Commercial business loans,  construction  loans,  consumer
loans and other  loans  comprised  the  remaining  1% of the loan  portfolio  at
December 31, 2005.

      The following  table sets forth the  composition of our portfolio of loans
and mortgage-backed securities at the dates indicated:

<TABLE>
                                                                      December 31,
                                      ----------------------------------------------------------------------------
                                          2005            2004            2003            2002            2001
                                      -----------     -----------      ----------     -----------      -----------
                                                                     (In thousands)
<S>                                   <C>            <C>             <C>              <C>             <C>
REAL ESTATE LOANS
 First trust deed residential loans:
   One-to-four units...............   $ 7,361,476     $ 4,585,962     $ 2,456,971      $ 1,723,690     $ 2,121,899
   Five or more units..............     1,942,021       1,825,564       1,547,771        1,646,430       1,525,749
                                      -----------      -----------     -----------      -----------     -----------
       Residential loans...........     9,303,497       6,411,526       4,004,742        3,370,120       3,647,648

OTHER REAL ESTATE LOANS
   Commercial and industrial.......       257,560         324,805         345,273          419,273         358,159
   Construction....................         4,910          20,902           9,053            6,927          38,060
   Land............................            --              --              --              203           1,481
   Second trust deeds..............         6,505           5,466           7,281            5,965           9,472
                                       -----------     -----------     -----------      -----------      ---------
   Real estate loans...............     9,572,472       6,762,699       4,366,349        3,802,488       4,054,820

 NON-REAL ESTATE LOANS
   Manufactured housing.............           --              --              --               --              --
   Deposit accounts.................          595             491             649            1,185           1,267
   Commercial business loans........       80,186          58,869          34,424           19,582          18,882
   Consumer loans...................       57,399          60,677          49,738           35,395          19,546
                                       -----------     -----------     -----------      -----------       ---------
   Loans receivable.................    9,710,652       6,882,736       4,451,160        3,858,650       4,094,515

LESS:
   General valuation allowance             97,558          78,675          75,238           75,223          72,919
   Impaired loan valuation
     allowance......................           --             496             496              496           1,850
   Deferred loan origination
     (costs) fees...................      (68,039)        (34,380)          1,314           13,696          14,857
                                       -----------     -----------     -----------      -----------       ---------
   Net loans receivable (1).........    9,681,133       6,837,945       4,374,112        3,769,235       4,004,889

FHLMC AND FANNIE MAE MORTGAGE-BACKED SECURITES
(at fair value):
   Secured by single family dwellings      69,581          91,308         128,465          192,395         272,419
   Secured by multi-family
     dwellings.....................         4,673           5,751           6,711            8,190          11,660
                                        ----------     -----------     -----------        --------        ---------
       Mortgage-backed securities..        74,254          97,059         135,176          200,585         284,079
                                        ----------     -----------     -----------        --------        ---------
           TOTAL                      $ 9,755,387     $ 6,935,004     $ 4,509,288      $ 3,969,820     $  4,288,968
                                       ===========     ===========     ===========      ==========        =========
</TABLE>

(1) Includes loans held-for-sale.

      Net deferred  loan  origination  costs were $68.0  million at December 31,
2005 and $34.4 million at December 31, 2004. Net deferred loan  origination fees
were $1.3 million at December 31, 2003.  The net deferred loan costs in 2005 and
2004 result from the high volume of  wholesale  loans  originated  during  those
years.  Wholesale  single family loans typically have loan deferred  origination
costs in excess of deferred loan  origination  income due to commissions paid to
mortgage loan brokers.

Loans Sold with Recourse

      Loans sold with  recourse  totaled  $59.9 million as of December 31, 2005,
$76.3 million as of December 31, 2004 and $91.0 million as of December 31, 2003.
Loans sold with  recourse  are  primarily  secured by  multi-family  properties.
Although no longer  owned by us, these loans are  evaluated  for the purposes of
measuring risk exposure for regulatory capital.

                                       34

<PAGE>
      We also have full recourse on $1.3 billion in multi-family loans that were
sold to Fannie Mae in exchange for  mortgage-backed  securities during 2005. Due
to  the  recourse  provisions  of the  sale,  these  mortgage-backed  securities
continue to be accounted for as part of our loan portfolio pursuant to Statement
of Financial  Accounting  Standards  No. 140,  Accounting  for and  Servicing of
Financial Assets and Extinguishments of Liabilities.

                                  ASSET QUALITY

 Asset Quality Ratios

      The following  table sets forth certain asset quality  ratios at the dates
indicated:

<TABLE>
                                                                                   December 31,
                                                                -----------------------------------------------
                                                                  2005     2004      2003      2002      2001
                                                                -------   -------   -------   -------   -------
<S>                                                              <C>      <C>       <C>       <C>       <C>
Non-performing loans to
   gross loans receivable (1)..............................       0.05%     0.07%     0.08%     0.17%     0.16%
Non-performing assets to total assets (2)..................       0.05%     0.07%     0.10%     0.17%     0.17%
Loan loss allowances to non-performing loans(3)............      1,965%    1,588%    2,266%    1,126%    1,151%
General loss allowances to gross loans receivable (4)......       1.00%     1.15%     1.70%     1.96%     1.83%
</TABLE>

(1) Loans  receivable  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) Our  loan  loss  allowances,  including  general  valuation  allowances  and
    valuation allowances for impaired loans.

(4) Our general valuation  allowances plus the allowance for impaired loans as a
    percentage  of loans  receivable  before  deducting  unrealized  loan  fees,
    general valuation allowances and valuation allowances for impaired loans.

                              NON-PERFORMING ASSETS

      We define  non-performing  assets to 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.

                                       35

<PAGE>
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>
                                                                   Non-Performing Assets
                                                                        December 31,
                                   --------------------------------------------------------------------------------
                                        2005             2004           2003             2002             2001
                                   ------------     ------------    -------------   --------------   --------------
                                      $     %         $      %         $      %       $        %        $       %
                                   -----  -----     -----  -----    ------  -----   ------  ------   -------  -----
                                                                   (Dollars in thousands)
<S>                             <C>       <C>   <C>        <C>   <C>        <C>   <C>        <C>    <C>        <C>
Real estate owned:
Single family..........         $     --     --% $     --     --% $  1,324    28% $   519       7% $  1,671     21%
Multi-family...........               --     --        --     --        --    --       --      --       164      2
Less: general
  valuation allowance..               --     --        --     --        --    --     (200)     (2)     (350)    (4)
                                   -----  -----     -----  -----    ------  -----  -------  ------   ------- -----
Total real estate owned               --     --        --     --     1,324    28      319       5     1,485    19
Non-performing loans:
Single family..........            3,569     72     4,590     92     3,326    71    5,705      81     6,062    75
Multi-family...........              391      8        --     --     1,017    14      422      5
Commercial and
  industrial...........            1,364     27        --     --        --    --       --     --         --    --
Other..................               33      1         4     --        16     1       --     --         16     1
                                   -----  -----     -----  -----     -----  -----   ------   -----     -----  -----
Total non-perfroming
  loans................            4,966    100     4,985    100     3,342    72    6,722     95      6,500    81
                                   -----  -----     -----  -----    ------  -----  -------   -----     -----  -----
Total..................         $  4,966    100% $  4,985    100%  $ 4,666   100% $ 7,041    100%  $  7,985   100%
                                   =====   =====    =====   =====   ======  =====   =====   =====    ======  =====
Ratio of
  non-performing
  assets to total
  assets...............                    0.05%            0.07%           0.10%           0.17%            0.17%
                                           =====            =====           =====           =====            =====
</TABLE>

The low  levels of  non-performing  loans and real  estate  owned  over the last
several  years is due to the strong  California  real estate market during those
years.

Single  family  non-performing  loans  are  primarily  due to  factors  such  as
unemployment  and  declining   personal  income.   Multi-family  and  commercial
non-performing  loans are attributable  primarily to factors such as declines in
occupancy  rates,  employment  rates and rental rates.  We actively  monitor the
status of all non-performing loans.

Impaired  loans totaled $3.0 million,  $1.4  million,  and $3.3 million,  net of
related  allowances of $0, $496  thousand,  and $496 thousand as of December 31,
2005,  2004, and 2003,  respectively.  See  "-Business - Non-accrual,  Past Due,
Impaired and Restructured Loans-" for further discussion of impaired loans.

      Our modified  loans  result  primarily  from  temporary  modifications  of
principal and interest  payments or an extension of maturity dates.  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 us. 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, 2005, we had modified loans totaling $2.0 million.
This  compares  with $1.4  million and $1.5  million as of December 31, 2004 and
December  31,  2003,  respectively.  No  modified  loans  were  90  days or more
delinquent as of December 31, 2005, 2004 or 2003.

                         CAPITAL RESOURCES AND LIQUIDITY
Liquidity Requirements

      As  permitted  by the OTS,  management  determines  the level of liquidity
required for safe and sound  operation.  Our strategy is to keep cash and liquid
investments  at a modest level due to the  availability  of credit lines.  These
credit  lines are  considered  in our  definition  of available  liquidity.  Our
liquidity policy requires that cash and cash equivalents, short-term investments
and unused  borrowing  capacity be  maintained  at a minimum level of 10% of our
liquidity base (defined as deposits and  borrowings due within one year).  As of
December 31, 2005,  liquidity-qualifying  balances were 19.03 % of our liquidity
base.

 External Sources of Funds

      External sources of funds include deposits,  loan sales, advances from the
FHLB 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 the last three years was FHLB advances.

      Deposits  are  accepted  from  full-service  banking  branches,   internet
banking,  national  deposit  brokers  ("brokered  deposits")  and  telemarketing
sources. The cost of funds, operating margins and our net income associated with
brokered and  telemarketing  deposits are  generally  comparable  to the cost of
funds,  operating  margins and our net income  associated with branch  deposits,
FHLB borrowings and repurchase  agreements.  As the cost of each source of funds
fluctuates  from time to time,  based on market rates of interest  offered by us
and other depository  institutions,  we select funds from the lowest cost source
until the relative costs change. As the cost of funds, operating margins and net
income associated with each source of funds are generally comparable,  we do not
deem the  impact  of its use of any one of the  specific  sources  of funds at a
given time to be material.

                                       36

<PAGE>
      Deposits at  full-service  banking  branches were $2.6 billion at December
31,  2005,  $2.5  billion at December  31, 2004 and $2.5 billion at December 31,
2003.

      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.  We had $1.7  billion in brokered
deposits at December 31, 2005 and $1.2 billion at December 31, 2004.  There were
no broker  deposits at  December  31,  2003.  Utilization  of brokered  deposits
increased during 2005 and 2004 to help fund loan originations.

      Telemarketing  deposits  were  $78.0  million  at the end of  2005,  $45.1
million at the end of 2004 and $15.6 million at the end of 2003.  These deposits
are  normally  large  deposits  from  pension  plans,  managed  trusts and other
financial institutions.  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 rates offered
and the investors' perception of our creditworthiness.

      Deposits  acquired  through the internet are acquired by posting our rates
on internet  rate boards.  We accept  internet  deposits from every state except
California.  We began this endeavor in late 2005, so these deposits totaled only
$2.4 million at December 31, 2005.

      Loan sales  were $12.8  million in 2005.  This  compares  to $3.3  million
during 2004 and $86.1 million during 2003. Loan sales increased  during 2005 due
to the  origination  and  sale of  adjustable  rate  loans  that do not meet the
requirements for our loan portfolio.  Loan sales varied in prior years depending
on our  origination of 30-year fixed rate loans when borrowers  preferred  these
products.

      FHLB  advances  were $4.2 billion at the end of 2005,  $3.0 billion at the
end of 2004  and  $1.7  billion  at the end of  2003.  Borrowings  from the FHLB
increased during 2005 and 2004 in order to fund loan originations.

      Reverse repurchase  agreements are short-term borrowings secured by loans,
and investment securities. These borrowings increased to $1.2 billion at the end
of 2005 from $187.0  million at the end of 2004 and $122.6 million at the end of
2003 due to the loans securitized with Fannie Mae.

        During 2005 the Company  completed  the  placement of $100.0  million in
unsecured  fixed/floating  rate  senior  debentures.  The  first  $50.0  million
transaction  was  completed in June of 2005 and is due in 2015.  The  debentures
have a  fixed  rate of  5.65%  for  the  first  five  years  and are  adjustable
afterwards based on a rate of 1.55% over the three-month LIBOR. The second $50.0
million  transaction  was completed in December of 2005 and is due in 2016.  The
debentures  have a fixed  rate  of  6.23%  for  the  first  five  years  and are
adjustable  afterwards  based on a rate of 1.55%  over  the  three-month  LIBOR.
Negative  covenants  contained in the  indentures  governing  the terms of these
debentures generally prohibit the Company from selling or otherwise disposing of
shares of voting stock of the Bank or permitting  liens on such Bank stock other
than certain  permitted  liens.  The indentures also impose certain  affirmative
covenants on the Company,  none of which is believed to have a material  adverse
effect on the Company's ability to operate its business.

      We believe that we have  sufficient  funds  available to fund current loan
origination  activity.  The Company has a credit  facility  with the FHLB in the
form of advances and lines of credit which allow  borrowings of up to 60% of our
assets as computed for regulatory purposes.  At December 31, 2005, the Company's
borrowing capacity at the FHLB was approximately  $6.3 billion.  At December 31,
2005 the Company had $4.2 billion in advances  from the FHLB and another  $221.0
million in borrowings  under reverse  repurchase  agreements  with the FHLB. The
Company's other sources of liquidity  include principal and interest payments on
loans, proceeds from loan sales and other borrowings, such as reverse repurchase
transactions.  Historically,  the Company has retained a significant  portion of
maturing deposits.  While management  anticipates that there may be some outflow
of these deposits upon maturity due to the current competitive rate environment,
they are not  expected  to have a  material  impact on the  long-term  liquidity
position of the Company.

      The  table  below  details  the  amounts  of  the  Company's   contractual
obligations by maturity at December 31, 2005.
<TABLE>
                                                           Payments due by period
                                ---------------------------------------------------------------------------
                                                  Less than         1 - 3          3 - 5         More than
                                    Total           1 year          years          years          5 years
                                ------------      ----------     ----------      ----------      ----------
                                                                  (In thousands)
<S>                             <C>             <C>             <C>             <C>             <C>
Fixed-rate term certificates.... $ 2,778,964     $ 2,693,855     $   71,501      $   11,932     $    1,676
FHLB advances...................   4,155,500       4,035,500         95,000          25,000             --
Reverse repurchase agreements...   1,163,684       1,163,684             --              --             --
Operating lease obligations.....      27,033           4,781          7,529           1,104         13,619
                                  ----------      ----------       ---------       ---------      ---------
Total.....................       $ 8,125,181     $ 7,897,820     $  174,030      $   38,036     $   15,295
                                  ==========      ==========       =========       =========      =========
</TABLE>

                                       37
<PAGE>
Internal Sources of Funds

      Internal sources of funds include loan principal  payments,  loan payoffs,
and positive cash flows from operations. Principal payments were $2.0 billion in
2005  compared  to $1.4  billion  in 2004 and $1.7  billion  in 2003.  Principal
payments include both scheduled  principal pay downs and prepayments which are a
function of real estate activity and the general level of interest rates.

Capital Requirements

      Current OTS regulatory capital standards require that we maintain tangible
capital of at least 1.5% of total assets,  core capital of 4.0% of total assets,
and  risk-based  capital  of 8.0% of total  risk-weighted  assets.  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  utilize  brokered   deposits  at  their   discretion.
Additionally,   if  they  achieve  a  sufficient  ranking  on  their  regulatory
examination, they may be assessed lower deposit insurance premiums.

      Management  presently  intends to maintain its capital  position at levels
above those required by regulators to ensure  operating  flexibility  and growth
capacity  for  ourselves.   Our  capital  position  is  actively   monitored  by
management.   We  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.

      The   following    table    summarizes   the   capital   ratios   of   the
"well-capitalized"  category and our regulatory capital position at December 31,
2005 as compared to such ratios.  As indicated in the table,  our capital levels
exceeded the three minimum capital ratios of the 'well-capitalized" category:

<TABLE>
                                           December 31, 2005
                                          Amount           %
                                         --------       -------
                                         (Dollars in thousands)
<S>                                     <C>             <C>
Bank's core capital..................    $651,447        6.23%
Core capital requirement.............     522,573        5.00%
                                         --------       -------
   Excess core capital...............    $128,874        1.23%
                                         ========       =======

Bank's tier 1 risk-based capital.....    $651,447       11.84%
Tier 1 risk-based capital requirement     330,159        6.00%
                                         --------       -------
   Excess core capital...............    $321,288        5.84%
                                         ========       =======

Risk-based capital...................    $720,585       13.10%
Risk-based capital requirement.......     550,266       10.00%
                                         --------       -------
   Excess core capital...............    $170,319        3.10%
                                         ========       =======
</TABLE>
Recent Accounting Pronouncements

      In May 2005,  Statement of Financial  Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections was issued. This Statement replaces APB
Opinion  No.  20,  Accounting  Changes,  and FASB  Statement  No.  3,  Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting  principle.  This
Statement  applies to all  voluntary  changes in accounting  principle.  It also
applies  to changes  required  by an  accounting  pronouncement  in the  unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition  provisions,  those provisions
should be followed.  The Company currently does not have any accounting  changes
and error corrections that would require the adoption SFAS No. 154.

      In December 2004,  Statement of Financial  Accounting Standards (SFAS) No.
123 (revised),  Share-Based Payment ("FAS 123R"), was issued and then amended in
April of 2005.  SFAS  123R  requires  a public  entity  to  measure  the cost of
employee services received in exchange for an award of equity  instruments based
on the grant-date fair value of the award (with limited  exceptions).  That cost
will be  recognized  over the period  which an  employee  is required to provide
service in exchange for the award,  the requisite  service  period  (usually the
vesting period).  No compensation cost is recognized for equity  instruments for
which  employees do not render the requisite  service.  Employee  share purchase
plans will not result in recognition of compensation cost if certain  conditions
are met; those  conditions  are much the same as the related  conditions in SFAS
123R.

                                       38

<PAGE>
      A public  entity will  initially  measure  the cost of  employee  services
received in  exchange  for an award of equity  instruments  based on the award's
current  fair  value;   the  fair  value  of  that  award  will  be  re-measured
subsequently at each reporting date through the settlement date. Changes in fair
value during the requisite  service  period will be  recognized as  compensation
cost over that period.  The grant-date  fair value of employee share options and
similar instruments will be estimated using  option-pricing  models adjusted for
the unique  characteristics  of those  instruments  (unless)  observable  market
prices for the same or similar instruments are available). If an equity award is
modified after the grant date, incremental  compensation cost will be recognized
in an amount  equal to the excess of the fair value of the  modified  award over
the fair value of the original award immediately  before the  modification.  The
statement is in effect for the Company on January 1, 2006.  The Company  expects
the implementation of FAS 123R to be immaterial to its financial statements.

      SFAS Statement No. 150, Accounting for Certain Financial  Instruments with
Characteristics  of both  Liabilities  and Equity,  was issued in May 2003.  The
effective  date  has been  deferred  indefinitely  for  certain  other  types of
mandatorily  redeemable  financial  instruments.  The Company currently does not
have any financial instruments that are within the scope of this Statement.

ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                        ASSET-LIABILITY MANAGEMENT

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

      Our  asset-liability  management policy is designed to improve the balance
between  the   maturities   and   repricing  of   interest-earning   assets  and
interest-bearing  liabilities  in order  to  better  insulate  net  income  from
interest  rate  fluctuations.  Under this  program,  we emphasize the funding of
monthly  adjustable  mortgages with short-term  savings and borrowings and match
the re-pricing of these assets and liabilities.  By policy, we will either match
the fixed rate period of these loans with  borrowings  for the same term or will
hold  unmatched  fixed rate loans in our portfolio in an amount not to exceed 5%
of total assets

      At the end of 2005, 58% of our loans had  adjustable  interest rates based
on monthly  changes in the CODI,  16% were based on the 12MAT Index and 16% were
based on the COFI.  Comparisons over the last several years show that changes in
our cost of funds generally  correlate with changes in these indices.  We do not
use any futures, options or swaps in our asset-liability strategy.

      Assets and  liabilities  that 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  for  any  specified
repricing term.  Generally,  a positive GAP benefits a company during periods of
increasing  interest  rates.  The reverse is true during  periods of  decreasing
interest rates.  The indices we use lag changes in market interest rates from 60
to 90 days while prime-based business loans re-price  immediately.  However, our
short-term  savings and  borrowing  costs  adjust  quickly  causing net interest
income  to  initially  decrease  during  periods  of rising  interest  rates and
increase during periods of declining  interest  rates.  The movement of interest
rates,  whether  up or down,  cannot be  accurately  predicted  and could have a
negative impact on our income.

                                       39

<PAGE>
      The  following  table  shows the  interest  sensitivity  of our assets and
liabilities by repricing  period at December 31, 2005 and the  consolidated  GAP
position as a percentage of total assets at that time:

<TABLE>

                                                                   INTEREST-SENSITIVITY GAP
                                                ---------------------------------------------------------------
                                                                                Balances    Balances   Balances
                                                                  Balance      Repricing   Repricing   Repricing
                                                    Total        Repricing     Within 1-3  Within 4-10  After
                                                   Balance     Within 1 Year    Years       Years     10 Years
                                                ------------   -------------   ---------   ---------  ---------
                                                                     (Dollars in thousands)
<S>                                             <C>             <C>            <C>       <C>       <C>
Interest-earning assets:
  FHLB overnight deposits .............         $     42,607    $    42,607    $     --   $      -- $      --
  Investment securities, at fair value.              294,017        143,373       6,590     144,054        --
  Mortgage-backed securities, at
   fair value.........................                74,254         74,228          26          --        --
  Loans receivable....................             9,681,133      9,458,872     166,082      47,707     8,472
                                                 ------------    ----------     --------   --------  ---------
   Total interest-earning assets......          $ 10,092,011    $ 9,719,080    $ 172,698  $ 191,761 $   8,472
                                                 ============    ==========     ========   ========  =========

Interest-bearing liabilities:
  Demand accounts.....................          $  1,592,693    $ 1,592,693    $     --  $       -- $      --
  Fixed rate term certificates........             2,778,964      2,693,855      71,501      13,047       561
   FHLB advances......................             4,155,500      4,035,500      95,000      25,000        --
  Reverse repurchase agreements.......             1,163,684      1,163,684          --          --        --
  Senior debt                                        100,000             --          --      50,000    50,000
                                                 ------------    ----------     --------   --------   --------
   Total interest-bearing
   liabilities........................          $  9,790,841    $ 9,485,732    $ 166,501  $  88,047 $  50,561
                                                 ============    ===========    ========   ========   ========
Interest-sensitivity GAP..............          $    301,170    $   233,348    $   6,197  $ 103,714 $ (42,089)
                                                 ============    ===========    ========   ========   ========
Interest-sensitivity GAP as a
   percentage of total assets.........                               2.23%          0.06%     0.99%    (0.40)%
                                                                 ===========   ==========  ========   ========
Cumulative interest-sensitivity GAP...                                         $ 239,545  $ 343,259 $ 301,170
                                                                               ==========  ========  =========
Cumulative interest-sensitivity GAP as
   a percentage of total assets.......                                              2.29%     3.28%      2.88%
                                                                               ==========  ========  =========
</TABLE>

      In  order  to  minimize  the  impact  of  rate   fluctuations  on  income,
management's  goal is to keep the  one-year GAP at less than 20% of total assets
(positive  or  negative).  At December  31,  2005,  our one-year GAP ratio was a
positive  $233 million or 2.23% of total  assets.  This compares with a positive
GAP ratio of 8.75% of total assets at December 31, 2004 and a positive GAP ratio
of 13.8% of total  assets at December 31,  2003.  The  positive  one-year GAP at
December 31, 2005  decreased  from December 31, 2004 because we funded one month
adjustable rate loans with borrowings due in one year or less.

      Another  measure of interest rate risk,  which is 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  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.

      The  following  table shows the  estimated  impact of a parallel  shift in
interest rates on our net portfolio  value at December 31, 2005 and December 31,
2004:
<TABLE>

                                                     Percentage
            Change in Interest Rates       Change in Net Portfolio Value(1)
             (In Basis Points)                  2005           2004
                                           ------------      ----------
                   <S>                          <C>            <C>
                   +300................         (3)%           (5)%
                   +200................         (2)%           (4)%
                   +100................         (1)%           (3)%
                   --100...............        (10)%           (1)%
                   --200...............        (14)%(2)         --%(2)
                   --300...............        (13)%(2)         --%(2)
</TABLE>

(1)   The percentage change 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.

(2)   A downward shift in interest rates of 200 basis points or 300 basis points
      for both  December  31, 2005 and  December 31, 2004 levels would result in
      negative interest rates in many cases.  Therefore,  modeling the impact of
      such  declines  as of  December  31,  2005 and  December  31,  2004 is not
      meaningful or practical.

                                       40

<PAGE>
The   following   table  shows  the  contract   terms  and  fair  value  of  our
interest-earning assets and interest-bearing liabilities as of December 31, 2005
categorized  by type and  expected  maturity for each of the next five years and
thereafter:

<TABLE>
                                                            Expected Maturity Date as of December 31, (1)
                                  -------------------------------------------------------------------------------------------
                                                                                                          Total       Fair
                                     2006         2007       2008          2009     2010    Thereafter    Balance     Value
                                  ----------  ----------  ----------    --------  --------  ----------  ----------  ---------
                                                                       (Dollars in thousands)
<S>                               <C>         <C>         <C>           <C>       <C>       <C>       <C>         <C>
Interest-earning
    assets:
  Loans receivable:
    Adjustable rate loans:
     Single family..............  $2,158,633 $2,189,303   $1,452,160    $755,057  $388,301  $410,785  $7,354,239  $7,515,594
    Average interest rate               6.65%      6.78%        6.80%       6.81%     6.81%     6.82%       6.78%
     Multi-family                    612,947    497,783      327,434     215,761   137,357   147,706   1,938,988   1,949,306
    Average interest rate               5.88%      5.84%        5.83%       5.85%     5.81%     5.80%       5.84%
     Commercial and
       industrial...............      65,621     50,892       33,401      20,744    12,884    19,582     203,124     208,778
    Average interest rate               6.38%      6.37%        6.32%       6.35%     6.33%     6.33%       6.35%
    Fixed rate loans:
     Single family..............       4,718      1,755          556         152        41        15       7,237       7,290
    Average interest rate               6.89%      6.52%        6.63%       6.32%     6.31%     6.30%       6.45%
     Multi-family...............       1,141        772          539         379       141        61       3,033       3,130
    Average interest rate               8.04%      7.62%        7.38%       7.51%     7.20%     7.16%       7.45%
     Commercial and
       industrial...............      34,327     10,512        6,552       2,663       198       184      54,436      56,373
    Average interest rate               7.61%      7.77%        7.75%       7.83%     8.12%     8.09%       7.86%
     Other Loans................       4,744      1,706          623          27        --        --       7,100       7,100
    Average interest rate               3.57%      4.01%        4.01%       4.01%     0.00%     0.00%       3.90%
    Non-mortgage loans:
     Commercial business
      loans.....................      36,242     25,082       17,640       1,222        --        --      80,186      85,444
    Average interest rate               5.62%      5.68%        5.77%       5.83%     0.00%     0.00%       5.72%
    Construction                       1,454      1,583        1,723         150        --        --       4,910       5,179
     loans......................
    Average interest rate               8.50%      8.50%        8.50%       8.50%     0.00%     0.00%       8.50%
     Consumer loans.............      27,554     17,840       11,287         718        --        --      57,399      56,096
    Average interest rate               5.50%      5.50%        5.49%       5.49%     5.49%     0.00%       5.49%
  Mortgage-backed securities:
      Adjustable:                     30,832     18,047       10,597       6,203     3,618     4,919      74,216      74,215
    Average interest rate               2.81%      2.81%        2.81%       2.81%     2.81%     2.81%       2.81%
      Fixed:                              23         11            4          --        --        --          38          39
    Average interest rate               8.00%      8.00%        8.00%       0.00%     0.00%     0.00%       8.00%
  Investment securities:
     Collateralized
      mortgage obligations......      42,106      5,218        5,474       7,070     6,029   228,120    294, 017     294,017
    Average interest rate               0.57%      4.81%        4.82%       4.82%     4.83%     4.79%       4.11%
                                  ----------   ---------   ----------  ---------  --------  --------  -----------   ----------
    Total interest-earning
    assets......................  $3,020,342 $2,820,504   $1,867,990  $1,010,146  $548,569  $811,372  $10,078,923  $10,262,561
                                  ==========   =========   ==========  =========  ========  ========  ===========   ==========
Interest-bearing
    liabilities:
  Deposits:
     Checking accounts..........     595,790          --          --          --        --        --      595,790      595,790
     Average interest rate              0.11%       0.00%       0.00%       0.00%     0.00%     0.00%        0.11%
     Savings accounts...........     996,903          --          --          --        --        --      996,903      996,903
     Average interest rate              1.68%       0.00%       0.00%       0.00%     0.00%     0.00%        1.68%
     Certificate accounts.......   2,693,785      48,502      23,058       6,083     5,669     1,867    2,778,964    2,768,236
     Average interest rate              3.76%       3.69%       3.69%       3.69%     3.69%     3.69%        3.70%
  Borrowings:
     FHLB advances..............   4,035,500      85,000      10,000       5,000     20,000       --    4,155,500    4,150,597
     Average interest rate              4.17%       4.56%       5.43%       5.49%      6.20%    0.00%        5.17%
     Reverse repurchase
      agreements................   1,163,684          --          --          --        --        --    1,163,684    1,160,859
     Average interest rate              4.04%       0.00%       0.00%       0.00%     0.00%     0.00%        4.04%
     Senior debentures..........     100,000          --          --          --        --        --      100,000      103,909
     Average interest rate              5.94%       0.00%       0.00%       0.00%     0.00%     0.00%        5.94%
                                   ---------     -------      -------    --------  --------  ---------  ----------   ----------
    Total interest-bearing
    liabilities..                 $9,585,662    $133,502     $33,058     $11,083   $25,669    $1,867   $9,790,841   $9,776,294
                                  ==========     =======     ========    ========  ========   ========  ==========   ==========
</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 48% for
       the  adjustable  single  family  portfolio  and 36%  for  its  adjustable
       multi-family and commercial real estate portfolios. For fixed rate loans,
       the  Bank's  average  CPR is 72%  and 48%  respectively.  The  Bank  used
       estimated deposit runoff based on available industry information.

                                       41

<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  to  its
stockholders.

      As of  February  2, 2006,  there  remain  1,472,079  shares  eligible  for
repurchase under the Company's stock repurchase program. The Company repurchased
696,900 and 33,800  shares of its common  stock at average  per share  prices of
$40.25 and $28.53 during 2004 and 2003, respectively. No shares were repurchased
during 2005.

<TABLE>

                           PRICE RANGE OF COMMON STOCK

       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>
2005  $55.25    $49.60    $60.35    $47.84    $65.32    $52.26    $57.44    $49.05
2004   46.38    40.40      46.15     38.16     49.16     41.23     54.30     48.50
2003   31.30    26.41      35.57     29.86     41.50     34.77     49.05     39.93
2002   27.00    24.58      29.90     26.26     28.89     23.89     29.15     23.92
2001   32.06    26.25      31.00     28.00     36.30     24.00     25.95     21.90
</TABLE>
                                       42

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

                        FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                    (Dollars in thousands, except share data)

<TABLE>
                                                        December 31,     December 31,
                                                           2005              2004
                                                       ------------      ------------
<S>                                                    <C>            <C>
ASSETS

Cash and cash equivalents............................  $      93,192  $        68,343
Investment securities, available-for-sale (at
  fair value)(Notes 2 and 10)........................        294,017          250,586
Mortgage-backed securities, available-for-sale
  (at fair value) (Note 3  and 10)...................         74,254           97,059
Loans receivable, held-for-sale (fair value of.......
  $2,893)  (Note 4)..................................          2,873               --
Loans receivable, net of allowance for loan
  losses of $97,558 and $79,171 (Notes 4, 9, and 10).      9,678,260        6,837,945
Accrued interest and dividends receivable............         48,973           24,115
Real estate held for investment (Note 5).............              -              986
Office properties and equipment, net (Note 6)........         15,759           15,881
Investment in Federal Home Loan Bank (FHLB)
  stock, at cost (Notes 7, 9, and 10)................        205,696          143,425
Other assets.........................................         43,925           30,643
                                                         ------------    -------------
                                                       $  10,456,949  $     7,468,983
                                                         ============    =============

LIABILITIES

Deposits (Note 8)....................................  $   4,371,657  $     3,761,165
FHLB advances (Notes 7 and 9) .......................      4,155,500        3,004,600
Securities sold under agreements to repurchase
  (Note 10)..........................................      1,163,684          187,000
Senior debentures (Note 11)..........................        100,000               --
Accrued expenses and other liabilities...............         95,269           38,744
                                                        ------------    -------------
                                                           9,886,110        6,991,509
                                                        ------------    -------------

COMMITMENTS AND CONTINGENT LIABILITIES
 (Notes 1, 4, 6 and 14)

STOCKHOLDERS' EQUITY (Notes 13 and 14)

Common stock, par value $.01 per share;  Authorized  100,000,000 shares;  issued
  23,761,825 and 23,693,350 shares, outstanding
  16,567,229 and  16,498,754 shares..............                238              237
Additional paid-in capital.......................             44,147           40,977
Retained earnings................................            640,900          549,202
Unreleased shares to employee stock
  ownership plan ................................             (1,104)             (53)
Treasury stock, at cost, 7,194,596 shares........           (113,776)        (113,776)
Accumulated other comprehensive income, net of
  taxes..........................................                434              887
                                                        ------------     ------------
                                                             570,839          477,474
                                                        ------------     ------------
                                                       $  10,456,949  $     7,468,983
                                                        ============     ============


   The accompanying notes are in integral part of these  consolidated  financial
statements.
</TABLE>
                                       43


<PAGE>
                     FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                         CONSOLIDATED STATEMENTS OF INCOME
                    YEAR ENDED DECEMBER 31, 2005, 2004 AND 2003
                (Dollars in thousands, except per share data)
<TABLE>

                                                            2005         2004         2003
                                                        -----------   ----------   ----------
<S>                                                     <C>          <C>         <C>
Interest and dividend income:
   Interest on loans................................    $    450,276 $   247,892 $    224,779
   Interest on mortgage-backed securities...........           2,825       3,312        5,328
   Interest and dividends on investments............          16,556      11,518        5,774
                                                          -----------  ----------   ---------
      Total interest income.........................         469,657     262,722      235,881
                                                          -----------  ----------   ---------
Interest expense:
   Interest on deposits (Note 8)....................          97,857      42,159       39,104
   Interest on borrowings (Notes 9 and 10)..........         151,333      59,031       49,238
                                                          -----------  ----------   ---------
      Total interest expense........................         249,190     101,190       88,342
                                                          -----------  ----------   ---------

Net interest income.................................         220,467     161,532      147,539
   Provision for loan losses (Note 4)...............          19,750       3,000            -
                                                          -----------  ----------   ---------
Net interest income after provision for loan losses.         200,717     158,532      147,539
                                                          -----------  ----------   ---------

Non-interest income:
   Loan servicing and other fees....................          22,774       9,545        7,990
   Banking service fees.............................           5,804       5,639        5,095
   Gain on sale of loans............................             125       5,434        2,444
   Real estate operations, net (Note 5).............           2,013         308          780
   Other operating income...........................             499         370          432
                                                          -----------  ----------   ---------
      Total other income............................          31,215      21,296       16,741
                                                          -----------  ----------   ---------

Non-interest expense:
   Salaries and employee benefits (Note 14).........          45,061      40,907       33,484
   Occupancy (Note 6)...............................           9,726       8,691        8,171
   Advertising......................................             754         705          315
   Amortization of core deposit intangible                     1,995       1,995        1,995
   Federal deposit insurance........................             504         388          394
   Legal............................................           1,381       1,686        1,103
   Other operating expense..........................          14,060      12,000       10,127
                                                         -----------  ----------   ----------
      Total non-interest expense....................          73,481      66,372       55,589
                                                         -----------  ----------   ----------

Income before income taxes..........................         158,451     113,456      108,691
Income taxes (Note 12)..............................          66,753      47,614       44,216
                                                         -----------  ----------   ----------
Net income..........................................    $     91,698 $    65,842 $     64,475
                                                         ===========  ==========   ==========

Earnings per share: (Notes 13 and 16)
   Basic............................................    $       5.55 $      3.95 $       3.80
                                                         ===========  ==========   ==========
   Diluted..........................................    $       5.43 $      3.85 $       3.70
                                                         ===========  ==========   ==========

Weighted average shares outstanding:
   Basic............................................     16,518,300   16,679,927   16,986,725
                                                         ===========  ==========   ==========
   Diluted..........................................     16,887,951   17,090,227   17,407,459
                                                         ===========  ==========   ==========


  The accompanying  notes are in integral part of these  consolidated  financial
statements.
</TABLE>
                                       44

<PAGE>
<TABLE>

                                                       FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                                             CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                    YEARS  ENDED   DECEMBER  31,
                                                     2005,    2004    AND   2003
                                                     (Dollars   in    thousands,
                                                     except share data)




                                                                                              Accumulated
                                                      Retained      Unreleased                   Other
                                                      Earnings       Shares to               Comprehensive
                                        Additional  (Substantially     ESOP                  Income, Net of
                            Common        Paid-In     Restricted)    (Notes 13    Treasury   Taxes (Notes 2
                            Stock         Capital     (Note 13)       and 14)      Stock         and 3)         Total
                           ---------    ----------   ------------   ----------   ----------    -----------   ---------
<S>                        <C>          <C>          <C>            <C>          <C>           <C>           <C>
Balance, December
31,  2002................  $     234    $  35,680    $   418,885    $   (597)    $ (84,762)    $    2,201    $ 371,641
Comprehensive income:
  Net income.............         --           --         64,475          --            --             --       64,475
   Change in net
     unrealized gain
     on securities
     available for
     sale, net of
     reclassification
     adjustment and
     tax effect..........         --           --             --          --            --         (1,110)      (1,110)
                                                                                                                -------
     Total
       comprehensive
       income............                                                                                       63,365
Exercise of employee
   stock options.........          1        1,828             --          --            --            --         1,829
Net decrease in
   unreleased shares
   to the ESOP...........         --           --             --         472            --            --           472
Benefit from stock
   option tax adjustment.         --          225             --          --            --            --           225
Common stock repurchased
  (33,800 shares)........         --           --             --          --          (965)           --          (965)
                             --------     -------       ---------    --------      --------    ---------        -------
Balance, December
31,  2003................        235       37,733        483,360        (125)      (85,727)       1,091        436,567
Comprehensive income:
  Net income.............         --           --         65,842          --            --           --         65,842
   Change in net
     unrealized gain
     on securities
     available for
     sale, net of
     reclassification
     adjustment and
     tax effect..........         --           --            --           --            --         (204)          (204)
                                                                                                                -------
     Total
       comprehensive
       income............                                                                                       65,638
Exercise of employee
   stock options.........          2         1,979           --            --           --           --          1,981
Net decrease in
   unreleased shares
   to the ESOP...........         --           (52)          --            72           --           --             20
Benefit from stock
   option tax
   adjustment............         --         1,317           --            --           --           --          1,317
Common stock repurchased
  (696,900 shares).......         --            --           --            --      (28,049)          --        (28,049)
                             -------      --------     ---------      --------     -------     ---------       --------
Balance, December
31,  2004................        237        40,977      549,202           (53)    (113,776)         887        477,474
Comprehensive income:
   Net income............         --            --       91,698            --           --           --         91,698
   Change in net
     unrealized gain
     on securities
     available for
     sale, net of
     reclassification
     adjustment and
     tax effect..........         --            --          --             --           --         (453)         (453)
                                                                                                                -------
     Total
       comprehensive
       income............         --            --          --             --           --            --         91,245
Exercise of employee
   stock options.........          1         1,193          --             --           --            --          1,194
Net increase in
   unreleased shares
   to the ESOP...........         --           146          --         (1,051)          --            --           (905)
Benefit from stock
   option tax
   adjustment............         --         1,831          --             --           --            --          1,831
                             --------      --------   ---------       --------     --------     ---------        -------
Balance, December
31, 2005.................  $     238     $  44,147  $   640,900      $ (1,104)    $ (113,77)    $     434     $ 570,839
                             =======      ========   ==========       ========      =======      =========      ========


   The accompanying notes are in integral part of these  consolidated  financial
statements.
</TABLE>
                                       45

<PAGE>
                    FIRSTFED FINANCIAL CORP.  AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                                 (In thousands)

<TABLE>
                                                     2005       2004       2003
                                                  ---------   --------   ---------
  <S>                                          <C>         <C>         <C>
   CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income..................................$    91,698 $    65,842 $    64,475
   Adjustments to reconcile net  income to
    net cash provided by operating activities:
     Net change in loans held-for-sale.......       (2,873)        492       1,801
     Depreciation and amortization...........        1,879       1,335       1,371
     Provision for loan losses...............       19,750       3,000          --
      Amortization of fees and
      premiums/discounts.....................       46,593      14,215       2,009
     (Increase) decrease in interest income
     accrued in excess
       of borrower payments..................      (57,136)     (1,545)      3,861
     Gain on real estate held for investment.       (2,245)         --         (68)
     Gain on sale of loans...................         (125)     (5,434)     (2,444)
     Decrease in servicing asset.............           20         105         240
     FHLB stock dividends....................       (6,555)     (3,863)     (3,260)
     Change in deferred taxes................      (14,148)     (8,430)     (1,762)
     Increase (decrease) in interest and
      dividends receivable...................      (24,858)     (7,174)        811
     Increase (decrease) in interest payable.       45,275       7,356      (3,298)
     Amortization of core deposit intangible
      asset..................................        1,995       1,995       1,995
     (Increase) decrease in other assets.....       13,082       8,932        (945)
     Increase (decrease) in accrued expenses
      and other liabilities..................        6,133      (6,817)      4,942
                                                  ---------   --------    ---------
      Total adjustments......................       26,787       4,167       5,253
                                                  ---------   --------    ---------
      Net cash provided by operating activities    118,485      70,009      69,728
                                                  ---------   --------    ---------

   CASH FLOWS FROM INVESTING ACTIVITIES:
     Loans made to clients and principal
      collections on loans ..................   (2,780,889) (2,428,998)   (593,766)
     Loans purchased.........................         (132)       (422)       (500)
     Net change in unearned loan fees........      (79,651)    (49,314)    (13,758)
     Proceeds from sales of real estate owned        2,887       1,324         884
     Purchase of real estate held for
      investment.............................       (1,869)       (986)     (1,889)
     Proceeds from maturities and principal
      reductions on investment securities,
      available-for-sale.....................      123,843      64,379     134,037
     Principal reductions on mortgage-backed
      securities, available-for-sale.........       22,266      37,178      64,330
     Purchases of investment securities,
      available-for-sale.....................     (167,930)   (198,494)   (148,847)
     Redemptions purchases of FHLB stock, net      (55,716)    (51,787)     (5,787)
     Purchases of premises and equipment.....       (1,757)     (6,648)     (1,597)
                                                  ---------   --------    ---------
      Net cash used in investing activities..   (2,938,948) (2,633,768)   (566,893)
                                                  ---------   --------    ---------

   CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase in deposits................       610,492   1,222,767     11,372
     Net increase in short term borrowings...     2,407,584   1,586,978    622,349
     Net decrease in long term borrowings....      (180,000)   (212,000)  (128,000)
     Purchases of treasury stock.............             -     (28,049)      (965)
     Net increase in advance payments by
      borrowers for taxes and insurance......        2,474        3,254        802
     Other...................................        4,762        4,834        726
                                                  ---------  ----------   ---------
      Net cash provided by financing activities   2,845,312   2,577,784    506,284
                                                  ---------  ----------   ---------

     Net increase in cash and cash equivalents      24,849       14,025      9,119
      Cash and cash equivalents at beginning of
      period.................................       68,343       54,318     45,199
                                                  ---------  ----------   ---------
     Cash and cash equivalents at end of period$    93,192 $     68,343   $  54,318
                                                  =========  ==========    ========


   The accompanying notes are in integral part of these  consolidated  financial
statements.
</TABLE>
                                       46

<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").

Uses of Estimates

      In  preparing   consolidated   financial  statements  in  conformity  with
generally  accepted  accounting  principles,  management  is  required  to  make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities as of the date of the balance sheet and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.  Material estimates that are particularly  susceptible to significant
change in the near term relate to the  determination  of the  allowance for loan
losses,  the  determination  of the expected lives of residential  loans used to
amortize deferred origination costs and the valuation of deferred tax assets.

 Principles of Consolidation and Nature of Operations

      The consolidated  financial statements include the accounts of the Company
and its  subsidiary,  the Bank. The Bank maintains 30 retail banking  offices in
Southern  California  and 6  lending  offices  in  both  Southern  and  Northern
California.  The Bank's  primary  business  consists of attracting  deposits and
wholesale  borrowings  and using  those  funds to  originate  loans  secured  by
mortgages on real estate,  consumer loans and business loans. All  inter-company
balances and transactions have been eliminated in  consolidation.  Certain items
in the 2003 and 2004 consolidated financial statements have been reclassified to
conform to the 2005 presentation.

Cash and Cash Equivalents

      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

      GAAP requires the  disclosure of the fair value of financial  instruments,
whether or not  recognized on the Balance  Sheet,  whenever it is practicable to
estimate the value.  A  significant  portion of our assets and  liabilities  are
financial  instruments  as  defined  under  GAAP.  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 the 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.  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   foreclosure.   The  Bank's   securities   classified  as
available-for-sale  are traded in active markets.  The value of these securities
is susceptible to the fluctuations of the market.

                                       47

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies (continued)

 Interest Rate Risk

      Financial instruments are subject to interest rate risk to the extent that
they re-price on a frequency,  degree or basis that varies from market  pricing.
Interest rate risk occurs to the degree that interest-earning assets re-price on
a different frequency or schedule than  interest-bearing  liabilities.  The loan
portfolio  tends to lag market interest rates by 60 to 90 days. The Bank closely
monitors the pricing sensitivity of our 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 our mortgage  loans,  the collateral  will be the
underlying mortgaged property. The Bank's lending activities are concentrated in
California.  The Bank  does  not have  significant  exposure  to any  individual
client.

      The Bank's primary  product  consists of adjustable  rate loans secured by
residential  real estate.  An increasing  portion of the Bank's  interest income
results  from  interest  accrued  in  excess  of  borrower  payments   (negative
amortization).  These loans, in large part, permit negative amortization up to a
certain  defined level,  and the payment on such loans adjusts  periodically  in
accordance  with the terms of the loan  documents.  In the event of an  economic
downturn,  which may  result in loss of income to  borrowers,  borrowers  may be
unable  to  make  higher  payments  that  may  result  from  such   adjustments.
Additionally,  a downturn  affecting the market value of the  collateral for the
Bank's loans  combined  with a larger  principal  balance that can result from a
negatively  amortizing loan, may result in a loss of adequate  security for such
loans.  The  confluence of these  economic  conditions  could have a significant
effect on the Bank's net income.

 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 Company's investment in repurchase agreements consists solely of
securities purchased under agreements to resell identical securities.

 Investments and Mortgage-Backed Securities

      Investment  securities  principally  consist of U.S.  Treasury  and agency
securities,  collateralized mortgage obligations and mortgage-backed securities.
Mortgage-backed  securities are created when the Bank exchanges pools of our own
loans for mortgage-backed securities.

      The Bank classifies all of its investments and mortgage-backed  securities
as "available-for-sale" based upon a determination that such securities might 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 such 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 income in the Consolidated Statements of Income.  Unrealized gains or
losses  on   available-for-sale   securities   are   computed   on  a   specific
identification  basis. Premiums and discounts on investment securities available
for sale are amortized  utilizing the interest method over the contractual  term
of the assets.  Interest income on securities is accrued on the unpaid principal
balance.

      The Bank did not hold any trading securities at December 31, 2005 or 2004.

                                       48

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies (continued)

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  loan fees and  allowances  for loan losses.  Interest
income on loans is accrued on the unpaid principal balance.

Loans Held-for-Sale

      Loans that may  foresee-ably  be sold prior to maturity are  classified as
held-for-sale.  These loans are  carried at the lower of carrying  value 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 evaluation of impairment on an individual basis.

      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 our recorded  investment  in the loan over its
measured value.

      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.

Non-Accrual 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. Loans are returned to accrual status only when
the ultimate collectibility of current interest is no longer in doubt.

Allowances for Loan Losses

      The Bank  maintains a general  valuation  allowance for loan losses due to
the  inherent  risks  in the loan  portfolio  that  have yet to be  specifically
identified.  The Bank's loan portfolio is stratified based on factors  affecting
the perceived level and concentration of risk, such as type of collateral, level
of loan  documentation,  the  borrowers  credit  rating,  year  of  origination,
original loan-to-value ratio, geographic location, trends and delinquencies.

      The  appropriate  level of general  valuation  allowance is  calculated by
applying  reserve  factors  to the  balance of assets on which the Bank has loss
exposure.  These reserve  factors  represent the expected  likelihood of default
multiplied by the expected rate of loss.  The expected rates of loss and default
are based on the Bank's  historical  loss  experience  and  adjusted for current
conditions and trends in the Bank's lending areas.

      Based on this methodology, the Bank recorded $19,750,000 and $3,000,000 in
provision for loan losses during 2005 and 2004,  respectively.  The Bank did not
record a loan loss provision during 2003.

      Loans that require a reduced level of  documentation at origination are an
increasing  percentage of the Bank's loan  portfolio.  On "Stated  Income/Stated
Asset"  (SISA)  loans,  the borrower  includes  information  on his/her level of
income and assets that is not subject to  verification  by the Bank.  On "Stated
Income/Verified  Assets"  ("SIVA") loans, the borrower  includes  information on
his/her  level of income,  but his/her  assets are  verified.  For "No Income/No
Asset"  (NINA)  loans,  the  borrower is not required to submit  information  on
his/her level of income or assets.  The Bank's  portfolios of  multi-family  and
other real estate loans all require full documentation by the borrowers.

                                       49

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies (continued)

      The  Bank  attempts  to  mitigate  the  inherent  risk of  making  reduced
documentation loans by evaluating the other credit characteristics of the loans,
such as the  creditworthiness  of the borrower and the loan to value ratio based
on the collateral's  appraised value at the origination date. One measure of the
creditworthiness  of the borrower is the  borrower's  FICO score, a standardized
credit scoring system developed by Fair Isaac Corporation.

      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.  Management believes,  based on economic
and market conditions, that the general allowance for loan losses is adequate as
of December 31, 2005 and 2004. Should there be an economic or market downturn or
if market  interest rates  increase  significantly,  a material  increase in the
level of loan defaults and charge-offs could result.

      The  Bank  establishes  a  specific  reserve  to  charge-off  assets  with
identified weaknesses that render all or part of the asset uncollectible.

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.  Loan  origination  costs for residential
loans obtained from  wholesale loan brokers will generally  include fees paid to
those brokers, resulting in loan origination costs exceeding loan fees received.
These excess loan origination costs are amortized as an adjustment of loan yield
based on the expected lives of the related  loans,  including an estimate of the
prepayment  speeds  on the  portfolio.  When a  loan  is  repaid  or  sold,  any
unamortized net deferred fee balance is included in the statement of income.

 Gain or Loss on Sale of Loans

      Mortgage loans are primarily  sold on a servicing  released basis and cash
gains or losses are recognized immediately in the Statements of Income. 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 earned on the loans sold. Under GAAP,
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 the Bank
believes market  participants  would use. Servicing assets arising from the sale
of loans are included in other assets and were $172,000 and $192,000 at December
31, 2005 and 2004, respectively.  No additional servicing assets were originated
in 2005, 2004 or 2003.  There was no impairment of the Bank's  servicing  assets
during 2005, 2004, and 2003.

Core Deposit Intangible

      Loans,  deposits and other assets and  liabilities  assumed in  connection
with  acquisitions  are accounted for under the purchase  method of  accounting.
Assets and  liabilities  are recorded at their fair values as of the date of the
acquisition  and the excess cost over fair values of the assets and  liabilities
is  classified  as a  core  deposit  intangible  asset.  The  Company  amortizes
intangible  assets on a straight-line  basis over their estimated  useful lives,
which is seven  years.  The balance of core deposit  intangible  at December 31,
2005 was  $3,338,000.  There was no  impairment  of the  Company's  core deposit
intangible at December 31, 2005.

<TABLE>
      The  following  is a  projection  of  estimated  amortization  of the core
deposit intangible for the years ended December 31, (in thousands):
                        <S>                        <C>
                        2006.......................$   2,005
                        2007........................     889
                        2008........................     444
                                                     --------
                                                   $   3,338
                                                     ========
</TABLE>

Real Estate

      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 the  lower of  carrying  value or fair  market  value,  less
estimated  selling costs.  Fair value is determined by an appraisal  obtained at
foreclosure.  The REO balance is adjusted  for any  subsequent  declines in fair
value  through a valuation  allowance.  The Bank may also acquire real estate in
settlement  of  judgments.  These  properties  are also recorded at the lower of
carrying value or fair value.

                                       50

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies (continued)

      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 Company or its subsidiaries in the property sold. If a
real estate  transaction does not meet certain down payment,  cash flow and loan
amortization  requirements,  any gain would be 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.

Securities Sold Under Agreements to Repurchase

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

 Income Taxes

      The Company files a consolidated  Federal income tax return and a combined
California  franchise  tax  report  with  its  subsidiaries.  Income  taxes  are
accounted for 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 basis of the Company'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.

Stock Option Plans

      The  Company  applies  the  intrinsic-value-based   method  of  accounting
prescribed by Accounting  Principles Board (APB) Opinion No. 25,  Accounting for
Stock  Issued  to  Employees,   and  related   interpretations   including  SFAS
Interpretation  No. 44,  Accounting  for Certain  Transactions  involving  Stock
Compensation,  an interpretation of APB Opinion No. 25, issued in March 2000, to
account  for its  fixed-plan  stock  options.  Under this  method,  compensation
expense is recorded on the date of grant only if the current market price of the
underlying  stock  exceeded  the exercise  price.  SFAS No. 123  Accounting  for
Stock-Based  Compensation,  established  accounting and disclosure  requirements
using  a  fair-value-based   method  of  accounting  for  stock-based   employee
compensation  plans.  As allowed by SFAS No.  123,  the  Company  has elected to
continue  to apply  the  intrinsic-value-based  method of  accounting  described
above, and has adopted only the disclosure requirements of SFAS No. 123.

      SFAS No. 123R,  Share-Based  Payment,  requires a public entity to measure
the cost of  employee  services  received  in  exchange  for an award of  equity
instruments  based on the  grant-date  fair  value of the  award  (with  limited
exceptions).  That cost will be recognized  over the period which an employee is
required to provide  service in exchange for the award,  the  requisite  service
period  (usually the vesting  period).  No  compensation  cost is recognized for
equity  instruments  for which  employees do not render the  requisite  service.
Employee share  purchase  plans will not result in  recognition of  compensation
cost if certain  conditions are met;  those  conditions are much the same as the
related  conditions in SFAS 123R.  The statement is in effect for the Company on
January  1, 2006.  The  Company  expects  the  implementation  of FAS 123R to be
immaterial to the financial statements.

It is our policy that shares issued upon the exercise of stock options come from
authorized, but previously un-issued shares.

                                       51

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies (continued)

      The  following  table   illustrates  the  effect  on  net  income  if  the
fair-value-based  method had been applied to all outstanding and unvested awards
in each period:
<TABLE>
                                             Year Ended December 31,
                                         ---------------------------------
                                            2005        2004        2003
                                         ---------   ---------   ---------
                                        (In thousands, except per share
                                                     data)
<S>                                   <C>         <C>         <C>
  Net income as reported...........   $   91,698  $   65,842  $   64,475

  Deduction:
    Total stock-based compensation
   expense determined under the
   fair-value-based method for all        (1,137)       (740)       (606)
   rewards, net of tax.............
                                         ---------   ---------   ---------
    Pro forma net income...........   $   90,561  $   65,102  $   63,869
                                         =========   =========   =========

  Earnings per share:
  Basic:
    As reported....................   $     5.55  $     3.95  $     3.80
    Pro forma......................   $     5.48  $     3.90  $     3.76

  Diluted:
    As reported....................   $     5.43  $     3.85  $     3.70
    Pro forma......................   $     5.38  $     3.82  $     3.68
</TABLE>

      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 2005, 2004 and 2003,  respectively:  no dividend
yield in any year;  expected  volatility of 31%, 32% and 34%; risk free interest
rates of 4.2%,  4.2% and 3.8%; and expected  average lives of 5.5 years for 2005
and 5.5 years for 2004 and 6 years for 2003. The weighted-average fair values of
options granted during the year are $19.48,  $15.82,  and $11.31 for 2005, 2004,
and 2003, respectively.  The Company has elected to recognize forfeitures in the
year they occur.

Earnings Per Share

      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.

Earnings per common share have been computed based on the following:
<TABLE>
                                             Year Ended December 31,
                                         ---------------------------------
                                            2005        2004        2003
                                         ---------   ---------   ---------
                                       (In thousands, except share data)
<S>                                   <C>         <C>         <C>
  Net income.......................   $    91,698 $    65,842 $    64,475
                                         =========   =========   =========

  Average number of common shares
   outstanding.....................    16,518,300  16,679,927  16,986,725
  Effect of dilutive options.......       369,651     410,300     420,734
                                        ---------   ---------   ---------
   Average number of common shares
   outstanding used to calculate
   diluted earnings per common share   16,887,951  17,090,227  17,407,459
                                       ==========  ==========  ==========
</TABLE>
      There were no  anti-dilutive  shares  excluded  from the weighted  average
shares outstanding calculation during 2005, 2004 or 2003.

Comprehensive Income

      Accounting  principles  generally  require  that the  recognized  revenue,
expenses,  gains and losses be included in net income.  Although certain changes
in  assets   and   liabilities,   such  as   unrealized   gains  and  losses  on
available-for-sale  securities,  are  reported  as a separate  component  of the
equity section of the consolidated  balance sheets,  such items,  along with net
income, are components of comprehensive income.

                                       52

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies (continued)

Segment Information and Disclosures

      GAAP establishes  standards to report information about operating segments
in annual financial  statements and requires  reporting of selected  information
about operating segments in interim reports to stockholders. It also establishes
standards for related disclosures about products and services,  geographic areas
and major clients. The Company manages its business as one segment.

Derivative Instruments

      The Company  accounts for derivative  instruments in accordance  with SFAS
No.  133,  Accounting  for  Derivative  Instruments  and Hedging  Activities  as
amended.  A derivative is considered either an asset or liability in the balance
sheets and measured at fair value.  If a derivative  is  designated as a hedging
instrument the changes in fair value of the derivative are either (a) recognized
in income in the period of change  together with the offsetting  gain or loss on
the hedged item or (b) reported as a component of other comprehensive income and
subsequently reclassified into income when the hedged risk affects income. For a
derivative  not  designated as a hedging  instrument,  changes in fair value are
recognized  in income in the period of change.  As of  December  31,  2005,  the
Company had no  commitments  to originate  loans held for sale,  and had no loan
sale commitments that would qualify as derivatives under SFAS No. 133.

Litigation

      The Company is engaged in various legal actions  incident to the nature of
its business. Management is of the opinion that none of the litigation will have
a material effect on the Company's Consolidated Balance Sheets and Statements of
Income.

Recent Accounting Pronouncements

      In May  2005,  SFAS  Statement  No.  154,  Accounting  Changes  and  Error
Corrections,  was issued.  This statement replaces APB Opinion No. 20 Accounting
Changes,  and SFAS  Statement  No. 3  Reporting  Changes  in  Interim  Financial
Statements,  and changes the requirement for the accounting for and reporting of
a change in  accounting  principle.  This  statement  applies  to all  voluntary
changes in  accounting  principle.  It also  applies to changes  required  by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition  provisions.  When a pronouncement includes specific
transitions provisions, those provisions should be followed.

      In April 2005,  the effective  date for  compliance for SFAS Statement No.
123 (revised) was amended, so that each registrant will have to be in compliance
on the first interim or annual period after December 15, 2005.

      In December 2004,  Statement of Financial  Accounting Standards (SFAS) No.
123 (revised),  Share-Based Payment ("FAS 123R"), was issued and then amended in
April of 2005.  SFAS  123R  requires  a public  entity  to  measure  the cost of
employee services received in exchange for an award of equity  instruments based
on the grant-date fair value of the award (with limited  exceptions).  That cost
will be  recognized  over the period  which an  employee  is required to provide
service in exchange for the award,  the requisite  service  period  (usually the
vesting period).  No compensation cost is recognized for equity  instruments for
which  employees do not render the requisite  service.  Employee  share purchase
plans will not result in recognition of compensation cost if certain  conditions
are met; those  conditions  are much the same as the related  conditions in SFAS
123R.

      A public  entity will  initially  measure  the cost of  employee  services
received in exchange for an award of liability  instruments based on its current
fair value;  the fair value of that award will be  re-measured  subsequently  at
each reporting date through the  settlement  date.  Changes in fair value during
the requisite  service period will be recognized as compensation  cost over that
period.  The  grant-date  fair  value of  employee  share  options  and  similar
instruments  will be  estimated  using  option-pricing  models  adjusted for the
unique  characteristics of those instruments  (unless)  observable market prices
for the same or  similar  instruments  are  available).  If an  equity  award is
modified after the grant date, incremental  compensation cost will be recognized
in an amount  equal to the excess of the fair value of the  modified  award over
the fair value of the original award immediately  before the  modification.  The
statement is in effect for the Company on January 1, 2006.  The Company  expects
the implementation of FAS 123R to be immaterial to the financial statements.

      SFAS Statement No. 150, Accounting for Certain Financial  Instruments with
Characteristics  of both  Liabilities  and Equity,  was issued in May 2003.  The
effective  date  has been  deferred  indefinitely  for  certain  other  types of
mandatorily  redeemable  financial  instruments.  The Company currently does not
have any financial instruments that are within the scope of this Statement.

                                       53

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2) Investment Securities

      There were no agreements  to resell  securities as of December 31, 2005 or
December 31, 2004.

Investment  securities,  available-for-sale,  are  recorded  at fair  value  and
summarized below for the periods indicated:
<TABLE>
                                          At December 31, 2005
                                 ----------------------------------------
                                              Gross     Gross
                                 Historical Unrealized Unrealized  Fair
                                     Cost     Gains     Losses     Value
                                  --------  --------  ---------  --------
                                                (In thousands)
<S>                              <C>       <C>       <C>        <C>
Collateralized Mortgage          $ 293,453 $     846 $    (282) $ 294,017
Obligations...................... ========  ========  =========  ========
</TABLE>

<TABLE>
                                           At December 31, 2004
                                  ---------------------------------------
                                              Gross      Gross
                                 Historical Unrealized Unrealized   Fair
                                    Cost      Gains      Losses     Value
                                ----------  ---------- ---------  -------
                                                (In thousands)
<S>                              <C>       <C>       <C>        <C>
Collateralized Mortgage          $ 249,781 $   1,121 $    (316) $ 250,586
Obligations...................... ========  ========  =========  ========
</TABLE>

      Collateralized   Mortgage  Obligations  at  December  31,  2005  all  have
contractual maturities greater than 10 years and have expected maturities within
five years.  There were no sales of investment  securities  during 2005, 2004 or
2003.  Accrued  interest on investments  was $1,231,000 and $739,000 at December
31, 2005 and 2004, respectively.

(3) Mortgage-backed Securities

      Mortgage-backed  securities,   available-for-sale,  all  have  contractual
maturities  greater  than  10  years  and  are  summarized  below  at the  dates
indicated:
<TABLE>
                                            At December 31, 2005
                                 ------------------------------------------
                                              Gross       Gross
                                Historical  Unrealized  Unrealized    Fair
                                  Cost        Gains       Losses     Value
                                ---------   ----------   --------- --------
                                               (In thousands)
<S>                           <C>       <C>          <C>          <C>
Fannie Mae....................$   4,661 $        12  $         -  $  4,673
FHLMC..........................  69,407         174            -    69,581
                                 -------   ----------   ----------  -------
                              $  74,068 $       186  $         -  $ 74,254
                                 =======   ==========   ==========  =======
</TABLE>

<TABLE>

                                            At December 31, 2004
                                 ------------------------------------------
                                              Gross       Gross
                               Historical  Unrealized   Unrealized    Fair
                                  Cost        Gains       Losses     Value
                               ----------  ----------   ----------  -------
                                               (In thousands)
<S>                           <C>       <C>          <C>          <C>
Fannie Mae....................$   5,752 $        43  $         -  $  5,795
FHLMC..........................  90,582         682            -    91,264
                                 -------   ----------   ----------  -------
                              $  96,334 $       725  $         -  $ 97,059
                                 =======   ==========   ==========  =======
</TABLE>
      Accrued  interest   receivable  related  to   mortgage-backed   securities
outstanding  at  December  31,  2005 and 2004  totaled  $480,000  and  $478,000,
respectively.

                                       54
<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) Loans Receivable

The following is a summary of loans receivable at the periods indicated:

<TABLE>
                                                At December 31,
                                             ---------------------
                                                2005       2004
                                             ---------  ----------
                                                (In thousands)
<S>                                       <C>           <C>
Real estate loans:
  First trust deed residential loans:
     One-to-four units ................   $  7,361,476 $4,585,962
     Five or more units .............        1,942,021  1,825,564
                                             ---------  ----------
     Residential loans ................      9,303,497  6,411,526
  Other real estate loans:
     Commercial and industrial ........        257,560    324,805
     Construction .....................          4,910     20,902
     Land .............................             --         --
     Second trust deeds ...............          6,505      5,466
                                             ---------  ----------
  Real estate loans ...................      9,572,472  6,762,699
Non-real estate loans:
  Deposit accounts  ...................            595        491
  Commercial business loans  ..........         80,186     58,869
  Consumer  ...........................         57,399     60,677
                                             ---------  ----------
     Loans receivable .................      9,710,652  6,882,736
Less:
  General loan valuation allowance  ...         97,558     78,675
  Valuation allowances for impaired loans           --        496
  Deferred loan origination (costs) fees       (68,039)   (34,380)
                                             ---------  ----------
     Subtotal .........................      9,681,133  6,837,945
Less:
   Loans held-for-sale.................          2,873         --
                                             ---------  ----------
Loans receivable, net..................   $  9,678,260 $6,837,945
                                             =========  ==========
</TABLE>

      At December 31, 2005 and 2004, negative  amortization on all loans totaled
$62,622,000 and $5,484,000,  respectively.  The portfolio of single family loans
with a one-year  fixed  payment was  $4,630,320,000  at December 31,  2005,  and
$2,947,446,000  as of December 31, 2004.  The  portfolio of single  family loans
with a three-to-five  year fixed payments was  $2,693,273,000 as of December 31,
2005, and $1,601,856,000 as of December 31, 2004.

      During 2005 the Bank created $1,289,659,000 in mortgage-backed  securities
with  loans  from its  multi-family  loan  portfolio  for use in  collateralized
borrowing  arrangements.  Because the Bank  retained full recourse on the loans,
the mortgage-backed  securities continue to be accounted for as loans receivable
in the accompanying  consolidated  balance sheet.  There were no mortgage-backed
securities created with loans originated by the Bank in 2004 or 2003. There were
no sales of mortgage-backed securities during 2005, 2004 or 2003.

      The Bank had adjustable loans totaling  $9,302,600,000  and $6,252,617,000
at December 31, 2005 and 2004, respectively.

      The Bank had outstanding commitments to fund $599,433,000 and $681,320,000
in real estate loans at December  31, 2005 and December 31, 2004,  respectively.
All of these  loans  had  variable  interest  rates.  The  Bank had  outstanding
commitments to sell real estate loans of $2,873,000 at December 31, 2005.  There
were no outstanding commitments to sell real estate loans at December 31, 2004.

      The Bank had undisbursed  commercial and construction  loan funds totaling
$62,544,000  at  December  31,  2005  and  $76,884,000  at  December  31,  2004.
Undisbursed  consumer  loan  funds  totaled  $136,219,000  and  $141,862,000  at
December 31, 2005 and December 31, 2004, respectively.

      Accrued interest  receivable  related to loans outstanding at December 31,
2005 and 2004 totaled $44,839,000 and $21,502,000, respectively.

      Loans  delinquent  greater than 90 days or in foreclosure  were $4,966,000
and  $4,985,000  at December  31, 2005 and 2004,  respectively,  and the related
allowance for delinquent interest was $147,000 and $256,000, respectively.

                                       55

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) Loans Receivable (continued)

      Loans made to directors and executive officers (senior vice presidents and
above)  totaled  $4,043,000  and  $4,435,000  at  December  31,  2005 and  2004,
respectively.

      See Note 9 for loans that were  pledged as security for  borrowings  as of
December 31, 2005.

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

<TABLE>

                                                            Valuation
                                                            Allowance
                                                General     for
                                                Valuation   Impaired
                                                Allowance    Loans       Total
                                                --------    --------    --------
                                                        (In thousands)
<S>                                          <C>         <C>        <C>
Balance at December 31, 2002..............   $    75,223 $      496  $   75,719
  Transfers...............................          (103)        --        (103)
  Charge-offs.............................           118         --         118
                                                --------    --------    --------
  Recoveries..............................        75,238        496      75,734
Balance at December 31, 2003..............         3,000         --       3,000
  Charge-offs.............................           (19)        --         (19)
  Recoveries..............................           456         --         456
                                                --------    --------    --------
Balance at December 31, 2004..............        78,675        496      79,171
  Provision for loan losses...............        18,650      1,100      19,750
  Charge-offs.............................          (168)    (1,596)     (1,764)
  Recoveries..............................           401         --         401
                                                --------    --------    --------
Balance at December 31, 2005..............   $    97,558 $       --  $   97,558
                                                ========    ========    ========
</TABLE>

      Loans serviced for others totaled $89,074,000 and $102,546,000 at December
31, 2005 and 2004, respectively.

      The Bank has  certain  loans  that were sold with  recourse.  These  loans
totaled $59,856,000 and $76,338,000 at December 31, 2005 and 2004, respectively.
The  maximum  potential  recourse  liability  associated  with  loans  sold with
recourse was  $16,197,000  and $18,320,000 at December 31, 2005 and December 31,
2004,  respectively.  Because no additional  losses are expected on these loans,
the repurchase liability associated with these loans was eliminated during 2004.

      The following is a summary of impaired loans, net of valuation  allowances
or impairment, at the dates indicated:

<TABLE>
                                                       At December 31,
                                                  -----------------------
                                                   2005            2004
                                                  --------        -------
                                                       (In thousands)
                <S>                             <C>             <C>
                 Single family................  $   1,663       $   1,360
                 Commercial...................      1,364              --
                                                  --------        -------
                 Total non-accrual loans......  $   3,027       $   1,360
                                                  ========        =======
</TABLE>



      The Bank  considers a loan  impaired when  management  believes that it is
probable  that the Bank will not be able 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,  disclosed net of
valuation allowances, include non-accrual major loans (commercial business loans
with an outstanding  principal amount greater than or equal to $500,000,  single
family loans greater than or equal to $1,000,000 and income  property loans with
an outstanding  principal amount greater than or equal to $1,500,000),  modified
loans,  and major loans less than 90 days  delinquent  in which full  payment of
principal and interest is not expected to be received.

                                       56

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) Loans Receivable (continued)

      As of December 31, 2005, the Bank's total recorded  investment in impaired
loans  identified  in  accordance  with SFAS 114 was  $3,027,000.  There were no
impairment  allowances  attributable to such loans. As of December 31, 2004, the
total recorded  investment in impaired loans was $1,360,000  (net of $496,000 of
impairment allowances).

      The  following  is a summary of  information  pertaining  to impaired  and
non-accrual loans:

<TABLE>
                                                                      At December 31,
                                                                  -----------------------
                                                                     2005         2004
                                                                  ----------    ---------
                                                                       (In thousands)
<S>                                                               <C>           <C>
Impaired loans without a valuation allowance..................... $     3,027   $     1,360
Impaired loans with a valuation allowance........................ $        --   $       496
Valuation allowance related to impaired loans.................... $        --   $       496

Total non-accrual loans.......................................... $     4,966   $     4,985

</TABLE>


<TABLE>

                                                                            Year Ended December 31,
                                                                        ----------------------------------
                                                                           2005         2004       2003
                                                                        ---------    ---------   ---------
                                                    (In thousands)
  <S>                                                                   <C>         <C>          <C>
  Average investment in impaired loans.............................     $   2,649   $   1,467    $   4,327
  Interest income recognized on impaired loans.....................     $     174   $      16    $     226
  Interest income recognized on a cash
   basis on impaired loans.........................................     $     166   $      22    $     215
</TABLE>

      There were no commitments to lend additional funds to borrowers whose loan
terms had been modified for any of these periods.


(5) Real Estate

      The Bank owned no real  estate as of  December  31,  2005.  The Bank owned
$986,000 in real estate held for  investment  as of  December  31,  2004.  These
properties were acquired from borrowers in settlement of judgments.

<TABLE>
      The following table summarizes real estate operations, net:
                                                                           For the Year Ended December
                                                                                        31,
                                                                        --------------------------------
                                                                          2005         2004       2003
                                                                        --------     --------   --------
                                                                                  (In thousands)
<S>                                                                     <C>         <C>         <C>
Net income from operations:
  Gain on sale of REO and real estate held for investment..........     $   2,245   $    496    $    884
  Other REO operations.............................................          (232)      (188)      (104)
                                                                        ---------   ---------   --------
     Real estate operations, net ..................................     $   2,013   $    308    $    780
                                                                         ========    ========    =======
</TABLE>

      No real estate was acquired in  settlement  of loans during 2005 and 2004.
The Bank acquired real estate totaling  $1,582,000 in settlement of loans during
2003.

                                       57

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) Office Properties, Equipment and Lease Commitments

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

                                                     At December 31,
                                                   -----------------------
                                                     2005           2004
                                                   --------       --------
                                                     (In thousands)
<S>                                             <C>             <C>
Land..........................................   $   6,713      $    6,713
Office buildings..............................       6,642           6,568
Furniture, fixtures and equipment.............      18,428          17,195
Leasehold improvements........................       9,044           9,102
Other.........................................         855             646
                                                   --------       --------
                                                    41,682          40,224
Less accumulated depreciation and amortization      25,923          24,343
                                                   --------       --------
                                                 $  15,759      $   15,881
                                                   ========       ========
</TABLE>

      The Bank is obligated under  non-cancelable  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, 2005 under all non-cancelable leases are as follows (in thousands):

<TABLE>
<S>                             <C>
2006.......................     $   4,781
2007........................        4,434
2008........................        3,095
2009........................          694
2010........................          410
Thereafter..................       13,619
                                  -------
                                $  27,033
                                  =======
</TABLE>

      Rent expense under these leases was $5,148,000,  $4,836,000 and $4,690,000
for 2005,  2004 and 2003,  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,  2005 and 2004 was
$205,696,000 and $143,425,000,  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 FHLB 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 4.7% of its  advances  (borrowings)  from the  FHLB.  The Bank was in
compliance with this requirement at December 31, 2005. The Bank's  investment in
FHLB stock was pledged as collateral  for advances from the FHLB at December 31,
2005 and 2004. 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.
During 2004,  the FHLB amended the redemption  policy  requiring 5 years written
notice to redeem stock effective 2005.  Accrued  dividends on FHLB stock totaled
$2,223,000   and  $1,310,000  at  December  31,  2005  and  December  31,  2004,
respectively.

                                       58

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) Deposits

<TABLE>
      Deposit account balances are summarized as follows:

                                                   At December 31,
                                           ---------------  ---------------
                                                2005             2004
                                           --------  -----  ---------  ----
                                            Amount     %      Amount     %
                                           --------  -----  ---------  ----
                                                (Dollars in thousands)
<S>                                     <C>         <C>  <C>            <C>
Variable rate non-term accounts:
Money market deposit accounts (weighted
   average rate of  2.80% and 1.61%).   $   886,592   20  $ 1,328,230   35%
Interest-bearing checking accounts
   (weighted average rate of 0.22% and      299,796    7     279,912     8
   0.23%)............................
Passbook accounts (weighted average rate
   of 1.00%                                 115,380    3     121,355     3
      and 1.00%).....................
Non-interest bearing checking accounts      290,925    7     276,438     7
                                           --------  -----  ---------  ----
                                           1,592,693  37    2,005,935   53
                                           --------  -----  ---------  ----
Fixed-rate term certificate accounts:
Under six-month term (weighted average
   rate of 3.79% and 2.06%)..........       278,621    6     373,907    10
Six-month term (weighted average rate of
   3.65% and 1.96%)..................      1,305,715  30     359,871    10
Nine-month term (weighted average rate
   of 4.00% and 2.27%)...............       532,271   12     526,587    14
One year to 18-month term (weighted
   average rate of 3.99% and 1.84%)..       383,776    9     193,038     5
Two year to 30-month term (weighted
   average rate of 2.85% and 2.40%)..        43,285    1      52,441     1
Over 30-month term (weighted average
   rate of 3.42% and 3.71%)..........        88,468    2     133,402     4
Negotiable certificates of $100,000 and
   greater, 30 day to one year terms
   (weighted average rate of   3.67% and    146,828    3     115,984     3
   1.97%)............................
                                           --------  -----  ---------  ----
                                           2,778,964  63    1,755,230   47
                                           --------  -----  ---------  ----

Total deposits (weighted average rate of
   3.00% and 1.65%)..................   $  4,371,657 100% $ 3,761,165  100%
                                           ========  =====  =========  ====
</TABLE>

      Certificates  of deposit,  placed  through four major  national  brokerage
firms, totaled  $1,675,555,000 and $1,192,657,000 at December 31, 2005 and 2004,
respectively.

      Cash  payments  for  interest on deposits  (including  interest  credited)
totaled  $80,294,000,  $35,308,000 and  $42,108,000  during 2005, 2004 and 2003,
respectively. Accrued interest on deposits at December 31, 2005 and 2004 totaled
$25,310,000 and $7,746,000,  respectively,  and is included in accrued  expenses
and other liabilities in the accompanying Consolidated Balance Sheets.

                                       59

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) Deposits (continued)

<TABLE>
      The following table indicates the maturities and weighted average interest
rates of the Bank's deposits:


                          Non-Term                                                There-
                          Accounts          2006            2007         2008      after      Total
                        ------------    ------------     ----------   ---------  --------  -----------
                                           (Dollars in thousands)
<S>                     <C>             <C>             <C>          <C>        <C>       <C>
Deposits at
  December 31, 2005.... $  1,592,693    $  2,693,932    $  48,462    $  23,039  $  13,531 $ 4,371,657
Weighted average
  Interest rates.......         1.67%           3.76%        3.79%        3.67%      3.83%       3.00%
</TABLE>


<TABLE>
      Interest expense on deposits is summarized as follows:
                                                    For the Year Ended December 31,
                                                    -------------------------------
                                                      2005        2004      2003
                                                    ---------  ---------   --------
                                                          (In thousands)
<S>                                             <C>          <C>        <C>
Passbook accounts..............................  $    1,205  $   1,287  $    1,370
Money market deposits and interest-bearing
checking accounts..............................      22,585     20,953      21,920
Certificate accounts...........................      74,067     19,919      15,814
                                                    ---------  ---------   --------
                                                 $   97,857  $  42,159  $   39,104
                                                    =========  =========   ========
</TABLE>


(9) Federal Home Loan Bank Advances

<TABLE>
      FHLB advances consist of the following at December 31:
                                                           2005            2004
                                                        ---------       ----------
                                                                  (In thousands)
    <S>                                                 <C>             <C>
    Advances from the FHLB of San Francisco with a
    weighted average interest rate of 4.19% and 2.59%,
    respectively, secured by FHLB stock and certain
    real estate loans with unpaid principal balances of
    approximately $8,200,000,000 at December 31, 2005,
    advances mature through 2010................        $4,155,500      $3,004,600
                                                        ==========      ==========
</TABLE>


      At December 31, 2005 and 2004,  accrued  interest payable on FHLB advances
totaled  $14,129,000  and $213,000,  respectively,  which is included in accrued
expenses and other liabilities in the accompanying Consolidated Balance Sheets.

      The Bank has a credit  facility  with  the  FHLB  (advances  and  lines of
credit) which allow  borrowings up to 60% of the Bank's assets,  as computed for
regulatory purposes, or approximately  $6,300,000,000 at December 31, 2005, with
terms up to 30 years.

      The following is a summary of FHLB advance maturities at December 31, 2005
(in thousands):
<TABLE>

                        <S>                             <C>
                         2006......................     $ 4,035,500
                         2007.......................         85,000
                         2008.......................         10,000
                         2009.......................          5,000
                         2010.......................         20,000
                                                           --------
                                                        $ 4,155,500
                                                          =========
</TABLE>

                                       60

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(9) Federal Home Loan Bank Advances (continued)

      Cash payments for interest on  borrowings  (including  reverse  repurchase
agreements  and senior  debenture  - see Note 10 and 11)  totaled  $122,075,000,
$58,248,000 and $49,393,000 during 2005, 2004 and 2003, respectively.

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

<TABLE>
                                               For the Year Ended December 31,
                                               ------------------------------
                                                 2005       2004      2003
                                               --------   --------   --------
                                                     (In thousands)
<S>                                         <C>        <C>        <C>
FHLB advances............................   $  114,780 $   56,789 $   47,299
Reverse repurchase agreements............       35,006      1,964      1,800
Other....................................        1,547        278        139
                                               --------   --------   --------
                                            $  151,333 $   59,031 $   49,238
                                               ========   ========   ========
</TABLE>

      Other  interest  expense in 2005,  2004,  and 2003  includes  accruals and
reversals of accrued  interest due to the Internal Revenue Service and Franchise
Tax Board. See Note 12.


(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 Balance Sheets. The mortgage-backed  securities  underlying the
agreements  were  delivered to the dealer who arranged the  transactions  or its
trustee.

      In January of 2005, the Bank completed a loan  securitization  with Fannie
Mae in which $1,289,659,000 in multi-family loans from the Bank's loan portfolio
were formed into  mortgage-backed  securities.  Because the Bank  retained  full
recourse on the securitized loans, the mortgage-backed securities continue to be
accounted  for as  part of the  loan  portfolio  under  Statement  of  Financial
Accounting  Standards No. 140,  Accounting for and Servicing of Financial Assets
and Extinguishments of Liabilities.  These  mortgage-backed  securities are also
being delivered to the dealer who arranged the transactions or its trustee.

      At December 31, 2005, $1,163,684,000 in reverse repurchase agreements were
collateralized  by  loans  with a fair  market  value  totaling  $1,054,179,000,
mortgage-backed securities with a fair value of $61,441,000,  investments with a
fair market  totaling  $108,772,000,  and FHLB stock  totaling  $10,387,000.  At
December  31,  2004,   $187,000,000  in  reverse   repurchase   agreements  were
collateralized by  mortgage-backed  securities with a fair market value totaling
$80,687,000 and investments with a fair market totaling $116,644,000.

      The  weighted   average   interest  rates  for  borrowings  under  reverse
repurchase  agreements  were 4.04% and 2.24%,  at December 31, 2005 and December
31, 2004, respectively.

      Securities sold under agreements to repurchase averaged $1,048,524,000 and
$129,192,000  during  2005  and  2004,  respectively,  and the  maximum  amounts
outstanding  at any  month-end  during  2005 and 2004  were  $1,231,978,000  and
$192,000,000, respectively.


      The  following  is a  summary  of  maturities  at  December  31,  2005 (in
thousands):

<TABLE>

                        <S>                        <C>
                        Up to 30 days..............$        --
                        30 to 90 days...............   827,684
                        Over 90 to 182 days.........   336,000
                                                      --------
                                                   $ 1,163,684
                                                     =========
</TABLE>

      Accrued  interest  on  securities  sold under  agreements  to  repurchase,
included  in  accrued  expenses  and  other   liabilities  in  the  accompanying
Consolidated  Balance Sheets,  was $14,590,000 and $796,000 at December 31, 2005
and 2004, respectively.

                                       61

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(11)  Senior Debentures

   During 2005 the Company  completed the placement of $100,000,000 in unsecured
   fixed/floating  rate senior debentures.  The first $50,000,000,  completed in
   June of 2005, is due in 2015 and has a fixed rate of 5.65% for the first five
   years and is adjustable  afterwards at 1.55% over the three-month  LIBOR. The
   second  $50,000,000,  completed in December of 2005, is due in 2016 and has a
   fixed rate of 6.23% for the first five years and is adjustable  afterwards at
   1.55% over the  three-month  LIBOR.  Covenants  contained  in the  Indentures
   prohibit the Company from selling or otherwise  disposing of shares of voting
   stock of the Bank or  permitting  liens on such Bank stock other than certain
   permitted liens. The Indentures also impose certain affirmative  covenants on
   the Company,  none of which has any material  adverse effect on the Company's
   ability to operate its business.



(12)  Income Taxes

<TABLE>
      Income taxes (benefit) consist of the following:
                                                    Year Ended December 31,
                                                 ------------------------------
                                                   2005       2004      2003
                                                 --------   --------   --------
                                                       (In thousands)
<S>                                           <C>        <C>        <C>
   Current:
     Federal...............................   $   60,602 $   42,297 $  32,136
     State.................................       20,299     13,747    13,842
                                                 --------   --------   --------
                                                  80,901     56,044    45,978
                                                 --------   --------   --------
   Deferred:
     Federal...............................      (11,208)    (6,842)    2,694
     State.................................       (2,940)    (1,588)   (4,456)
                                                 --------   --------   --------
                                                 (14,148)    (8,430)   (1,762)
                                                 --------   --------   --------
   Total:
     Federal...............................       49,394     35,455    34,830
     State.................................       17,359     12,159     9,386
                                                 --------   --------   --------
                                              $   66,753 $   47,614 $  44,216
                                                 ========   ========   ========
</TABLE>

<TABLE>
      A reconciliation of the statutory federal corporate income tax rate to the
Company's effective income tax rate follows:
                                           Year Ended December 31,
                                          ---------------------------
                                            2005      2004     2003
                                          --------   ------  --------
<S>                                         <C>      <C>      <C>

Statutory federal income tax rate ..         35.0%    35.0%     35.0%
Increase in taxes resulting from:
State franchise tax, net of federal
income tax benefit..................          7.1      7.0        5.6
Other, net..........................           --       --        0.1
                                          --------   ------  --------
Effective rate......................         42.1%    42.0%   40.7%
                                          ========   ======  ========
</TABLE>


      The Company,  the Bank and its subsidiaries  file a consolidating  federal
income tax return.  Each entity is responsible for paying its pro-rata shares of
the consolidated tax liability.  Substantially all of the income taxes (benefit)
belong to the Bank during 2005, 2004, and 2003, respectively.

      Cash  payments  for income  taxes  totaled  $76,490,000,  $53,471,000  and
$38,727,000 during 2005, 2004 and 2003, respectively.

      Income taxes payable totaled $7,455,358 as of December 31, 2005 and income
taxes receivable totaled $3,709,980 as of December 31, 2004.

                                       62

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(12) Income Taxes (continued)

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

                                                      At December 31,
                                                   --------------------
                                                      2005        2004
                                                   ---------   --------
                                                     (In thousands)
<S>                                              <C>       <C>
Components of the deferred tax asset:
  Bad debts..................................    $ (44,721) $  (36,064)
  Pension expense............................       (6,072)     (5,565)
  State taxes................................       (4,651)     (4,303)
  Core deposit intangible asset..............       (2,902)     (2,535)
  Loan fees..................................       (5,942)         --
  Other......................................       (2,773)     (4,374)
                                                   ---------   --------
    Total deferred tax asset.................      (67,061)    (52,841)
                                                   ---------   --------
Components of the deferred tax liability:
  Loan fees..................................           --       3,346
  FHLB stock dividends.......................       27,242      23,820
  Tax effect of unrealized gain on
     securities available-for-sale...........          315         644
  Other......................................          447         451
                                                   ---------   --------
    Total deferred tax liability.............       28,004      28,261
                                                   ---------   --------
Net deferred tax asset.......................    $ (39,057) $  (24,580)
                                                   =========   ========
</TABLE>

      The Company did not have a valuation  allowance for the deferred tax asset
at December  31, 2005 or 2004,  as it is more likely than not that the  deferred
tax asset will be realized due to the existence of loss carry-backs and expected
future earnings.

      The  Internal   Revenue   Service   ("IRS")  has  examined  the  Company's
consolidated  federal income tax returns for tax years up to and including 2003.
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  has  provided  for  deferred  taxes for  federal  and state
purposes,  a change in the period of  recognition  of certain income and expense
items can result in interest due to the IRS and the Franchise Tax Board ("FTB").
Interest  accruals of $56,000 and $260,000 were  recorded  during 2005 and 2004,
respectively for interest on amended  returns.  During 2005,  interest  payments
totaling  $207,000  were paid in  settlement  of tax years 2001,  2002 and 2003.
During 2004,  interest payments totaling $252,000 were paid in settlement of tax
years 1999 and 2001. The balance of accrued interest payable for amended returns
was  $159,000  and  $408,000 as of  December  31, 2005 and  December  31,  2004,
respectively.

      The Bank is required to use the specific  charge-off  method of accounting
for bad debts for Federal income tax purposes.  Prior to 1995, the Bank used the
reserve method of accounting for bad debts. The  Consolidated  Balance Sheets at
December 31, 2005 and 2004 do not include a tax liability of $5,356,000  related
to the adjusted base year bad debt reserve that was created when the Bank was on
the reserve  method.  The base year reserve is subject to recapture  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.  Management  does not expect any of these
events to occur.

                                       63

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) Stockholders' Equity and Earnings Per Share

      The  Company's  stock  charter  authorizes   5,000,000  shares  of  serial
preferred stock. As of December 31, 2005, no preferred shares had been issued.

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
classification are also subject to qualitative judgments by the regulators about
asset 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  that the Bank  meets all
capital adequacy requirements to which it is subject as of December 31, 2005.

      As of  December  31,  2005,  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,
2005 that management believes have changed the Bank's classification.

      The following table summarizes the Bank's regulatory  capital and required
capital as of the dates indicated:

<TABLE>
                                               December 31, 2005
                                 ----------------------------------------------
                                                          Tier 1     Risk-based
                                 Tangible    Core       Risk-based    Capital
                                  Capital    Capital     Capital
                                 ----------  ---------  -----------  ----------
                                            (Dollars in thousands)
<S>                             <C>         <C>        <C>          <C>
Actual capital:
   Amount...................... $ 651,447   $ 651,447  $  651,447   $ 720,585
   Ratio........................     6.23%      6.23%       11.84%      13.10%
FDICIA minimum required capital:
   Amount...................... $ 156,772   $ 418,059  $       --   $ 440,213
   Ratio........................     1.50%      4.00%          --%       8.00%
FDICIA well-capitalized required capital:
   Amount...................... $      --   $ 522,573  $  330,159   $ 550,266
   Ratio........................       --%      5.00%        6.00%      10.00%
</TABLE>

<TABLE>
                                               December 31, 2004
                                  ---------------------------------------------
                                                          Tier 1     Risk-based
                                  Tangible   Core       Risk-based    Capital
                                  Capital    Capital     Capital
                                  ---------  ---------  -----------  ----------
                                             (Dollars in thousands)

<S>                             <C>         <C>        <C>           <C>
Actual capital:
   Amount...................... $  446,662  $ 446,662  $   446,662   $ 499,151
   Ratio........................      5.99%      5.99%       10.70%      11.96%
FDICIA minimum required capital:
   Amount...................... $  111,933  $ 298,489  $        --   $ 333,838
   Ratio........................      1.50%      4.00%          --%       8.00%
FDICIA well-capitalized required capital:
   Amount...................... $      --   $ 373,111  $   250,378   $ 417,297
   Ratio........................       --%      5.00%         6.00%      10.00%
</TABLE>

                                       64

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

      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 income and profits and  accumulated
tax income and profits as of the beginning of the year.

      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 income for the  applicable  calendar  year plus  retained net
income for the two prior calendar years.  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, 2005, the outstanding loan
to the ESOP totaled $890,000.  At December 31, 2004, the outstanding loan to the
ESOP  totaled  $45,000.  Interest on any  outstanding  loan  balance is due each
December  31.  Interest  varies based on the Bank's  monthly cost of funds.  The
average rates paid during 2005 and 2004 were 2.91% and 1.91%, respectively.

      The Company  maintains a 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. 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.

(14) Employee Benefit Plans

      The Bank maintains a qualified defined contribution plan established under
Section 401 (k) of the Internal  Revenue Code,  as amended (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 $416,000,  $500,000
and $540,000 for 2005, 2004 and 2003, 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  $1,476,000,
$1,381,000  and  $1,287,000 in 2005,  2004 and 2003,  respectively.  The SERP is
unfunded.  The expected  contribution  to the SERP for the proceeding five years
will be $287,000.

      The discount  rates used in  determining  the  actuarial  value of benefit
obligations  were 5.50% and 5.75%,  respectively,  as of  December  31, 2005 and
2004. The rate of increase in future compensation levels used in determining the
pension  cost for the SERP was 4.0% as of December 31, 2005 and 4.0% as of 2004.
The plan had no assets as of December 31, 2005 or 2004.

                                       65

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) Employee Benefit Plans (continued)

<TABLE>
      The  following  table sets forth the funded status of the SERP and amounts
recognized in the Company's financial statements for the years indicated:

                                                                    At December 31,
                                                                  ------------------
                                                                   2005       2004
                                                                  --------   -------
                                                                     (In thousands)
<S>                                                             <C>        <C>
Change in Benefit Obligation
      Projected benefit obligation, beginning of the year.....  $  11,748  $  10,185
      Service cost............................................        565        488
      Interest cost...........................................        667        607
      Benefits paid...........................................       (286)      (286)
      Actuarial gain..........................................      1,781        754
                                                                  --------   -------
      Projected benefit obligation, end of the year...........  $  14,475  $  11,748
                                                                  ========   =======

Change in Plan Assets
      Benefits Paid..........................................   $    (286) $    (286)
      Employer contributions.................................         286        286
      Funded status..........................................     (14,474)   (11,748)
      Unrecognized transition obligation.....................          --         --
      Unrecognized prior service cost........................          --         15
      Unrecognized loss......................................       4,270      2,717
                                                                 --------   -------
      Net amount recognized..................................   $ (10,204) $ (9,016)
                                                                  ========   =======

Components of Net Periodic Benefit Cost
      Service cost...........................................   $     565  $     488
      Interest cost..........................................         667        607
      Amortization of net loss...............................         229        151
      Amortization of unrecognized prior service cost                  15        135
                                                                  --------   -------
      Pension cost...........................................   $   1,476  $   1,381
                                                                  ========   =======
</TABLE>

      The projected benefit obligation, accumulated benefit obligation, and fair
value of assets were $14,475,000,  $11,574,000, and $0 respectively, at December
31, 2005 and  $11,748,000,  $9,944,000,  and $0,  respectively,  at December 31,
2004.

      The Bank has a profit sharing plan (the "ESOP") for all eligible employees
and officers who have  completed  one year of  continuous  service.  The ESOP is
accounted for in accordance  with SOP 93-6.  The number of shares to be released
to ESOP  participants  each year is determined based on the contribution made by
the Bank  divided by the average  market  price of the  Company's  stock for the
year. At December 31, 2005, the ESOP held 4.27% of the outstanding  stock of the
Company.  Profit sharing expense for the years ended December 31, 2005, 2004 and
2003 was $1,545,000, $2,530,000 and $2,030,000,  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.

      At December 31, 2005 and 2004 total allocated ESOP shares were 651,113 and
695,957 shares,  respectively.  At December 31, 2005 and 2004 total  unallocated
ESOP  shares  were  20,267  and 1,162  shares,  respectively.  The fair value of
unallocated ESOP shares totaled  $1,105,000 and $60,000 at December 31, 2005 and
2004, respectively.

Stock Compensation Plans

      At  December  31,  2005,  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.

                                       66

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) Employee Benefit Plans (continued)

      The  Company  applies  the  intrinsic-value-based   method  of  accounting
prescribed by Accounting  Principles Board (APB) Opinion No. 25,  Accounting for
Stock  Issued  to  Employees,   and  related   interpretations   including  SFAS
Interpretation  No. 44,  Accounting  for Certain  Transactions  involving  Stock
Compensation,  an interpretation of APB Opinion No. 25, issued in March 2000, to
account  for its  fixed-plan  stock  options.  Under this  method,  compensation
expense is recorded on the date of grant only if the current market price of the
underlying  stock  exceeded the exercise  price.  SFAS  No.123,  Accounting  for
Stock-Based  Compensation,  established  accounting and disclosure  requirements
using  a  fair-value-based   method  of  accounting  for  stock-based   employee
compensation  plans.  As allowed by SFAS No.  123,  the  Company  has elected to
continue  to apply  the  intrinsic-value-based  method of  accounting  described
above,  and has adopted only the  disclosure  requirements  of SFAS No. 123. The
aggregate intrinsic value was $2,471,000 and $4,355,000 at December 31, 2005 and
December 31 2004, respectively.


      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 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 the maximum
term of an option is 10 years.  Options  typically  begin to vest on the  second
anniversary date of the grant.

      The Company also has a stock option plan for non-employee  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 the  maximum  term of an option is 10 years plus one month.  Options
typically vest 100% on the one-year anniversary date of the grant.

<TABLE>
The following table  summarizes  information  about stock option activity during
the periods indicated:


                                                      ---------------------------
                 Options Outstanding                    2005      2004     2003
                                                      --------  --------  -------
     (Weighted average option prices)                        (In shares)

<S>                                                   <C>       <C>       <C>
Beginning of year ($24.05, $19.68, and $17.08 )..     725,458    808,248   857,682
       Granted ($52.47, $42.24, and $29.55)......     156,150    131,785   150,510
       Exercised ($17.43 $13.20, and $12.73).....     (68,497)  (150,011) (149,664)
       Canceled ($35.45 $30.67, and $26.89)......     (55,030)   (64,564)  (50,280)
                                                      --------  --------  -------
End of year ($29.70 $24.05, and $19.68)..........     758,081    725,458   808,248
                                                      ========  ========   =======
Shares exercisable at December 31, ($20.21
      $17.39, and $15.50)........................     390,182    354,398   352,004
                                                      ========   ========  =======
</TABLE>


<TABLE>

      Additional  information  with  respect  to stock  options  outstanding  at
December 31, 2005 follows:

                                                    Price  Ranges
                                  ----------------------------------------------------
                                  ($10.88 - $17.25) ($17.25- $31.44) ($31.44 - $52.47)

<S>                                     <C>            <C>             <C>
Options outstanding:

Number of outstanding shares.........   286,901        228,540         242,640
Weighted-average contractual life ...      2.74           6.19            3.81
Weighted-average exercise price .....    $14.21         $29.07          $48.61

Options exercisable:

Number of exercisable shares.........   256,718        105,464          28,000
Weighted-average exercise price .....    $14.22         $29.09          $41.70
</TABLE>

                                       67

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15) 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.
<TABLE>
CONDENSED BALANCE SHEETS

                                                            At December 31,
                                                       -------------------------
                                                         2005             2004
                                                       --------         --------
                                                         (In thousands)
<S>                                                  <C>              <C>
Assets:
Cash.............................................    $   13,235        $  23,607
Other assets.....................................         2,268              908
Investment in subsidiary.........................       655,336          453,074
                                                      ---------         --------
                                                     $  670,839        $ 477,589
                                                       ========         ========
Liabilities and Stockholders' Equity:
Other liabilities................................             -              115
Stockholders' equity.............................       570,839          477,474
Senior notes.....................................       100,000                -
                                                       --------         --------
                                                     $  670,839       $  477,589
                                                       ========         ========
</TABLE>
<TABLE>
                                                                     Year Ended December 31,
                                                            ------------------------------------------
CONDENSED STATEMENTS OF INCOME AND                             2005            2004             2003
                                                            --------         --------        ---------
                 COMPREHENSIVE INCOME                                (In thousands)
<S>                                                        <C>             <C>             <C>
Dividends received from Bank.....................          $       -       $   30,000      $        -
Equity in undistributed net income of
 subsidiary .....................................             92,829           36,077          64,605
Other expense, net...............................             (1,131)            (235)           (130)
                                                            --------          --------        --------
Net Income.......................................             91,698           65,842          64,475
Change in other comprehensive income, net of
 taxes...........................................               (453)            (204)         (1,110)
                                                            --------           --------       --------
Comprehensive Income.............................          $  91,245       $   65,638      $   63,365
                                                            ========           ========        =======
</TABLE>
<TABLE>
                                                         Year Ended December 31,
                                                ----------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS                2005            2004            2003
                                                --------        ---------       --------
                                                      (In thousands)
<S>                                             <C>             <C>             <C>
Net Cash Flows from Operating Activities:
  Net income................................... $ 91,698        $ 65,842        $  64,475
  Adjustments to reconcile net income to
      net   cash   provided   by   operating
      activities:
    Equity in undistributed
      net income of subsidiary................   (92,829)       (36,077)          (64,605)
    Depreciation expense......................         -              -               62
    Other.....................................    (1,360)          (415)             (646)
                                                ---------       --------         ---------
    Net cash provided (used) by operating         (2,491)         29,350             (714)
activities....................................  ---------       --------         ---------

Cash Flows from Investing Activities:
    Investment in subsidiary..................  (110,000)              -                -
    Decrease in fixed assets..................         -               -              197
                                                --------        --------        ---------
    Net cash used in investing activities.....  (110,000)              -              197
                                                --------        --------        ---------
Cash Flows from Financing Activities:
    Purchase of treasury stock................        -          (28,049)            (965)
    Proceeds from issuance of senior debt.....  100,000                -                -
    (Increase) decrease in unreleased shares..   (1,051)               72              472
    Exercise of stock options.................    3,024             3,296            2,053
    Other.....................................      146               (52)               -
                                                --------        --------        ----------
Net cash provided by (used in) financing
activities....................................  102,119          (24,733)           1,560
                                                --------        --------        ----------
Net increase (decrease) in cash...............  (10,372)           4,617            1,043
Cash at beginning of period...................   23,607           18,990           17,947
                                                --------        --------        ----------
Cash at end of period.........................$  13,235         $ 23,607        $  18,990
                                                ========        ========         =========
</TABLE>

                                       68

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16) Quarterly Results of Operations (unaudited)

<TABLE>
      Summarized  below are the  Company's  results of operations on a quarterly
basis for 2005, 2004, and 2003:
                                             Provision                                             Basic       Diluted
                                             for                       Non-                       Earnings     Earnings
                Interest      Interest       Loan         Other       Interest       Net            per          per
                 Income        Expense       Losses       Income      Expense       Income         Share        Share
                ---------     ---------     ---------   ---------    ---------    ----------     ---------    --------
                                                 (In thousands, except per share data)
<S>             <C>           <C>           <C>         <C>           <C>          <C>          <C>          <C>
First quarter
2005.........   $  91,657     $  41,580     $  3,750     $  4,496     $ 18,867     $ 18,492     $    1.12     $ 1.10
2004..........     58,517        20,804           --        3,461       15,282       14,977          0.88       0.86
2003..........     60,839        23,324           --        3,348       14,116       15,478          0.92       0.89
Second quarter
2005.........   $ 109,088     $  55,027     $  4,000     $  6,095     $ 18,686     $ 21,685     $    1.31     $ 1.29
2004..........     61,360        21,373           --        4,040       15,351       16,553          0.99       0.96
2003..........     59,412        22,350           --        3,393       13,429       15,633          0.92       0.90
Third quarter
2005.........   $ 124,757     $  68,755     $  8,000     $ 10,138     $ 17,772     $ 23,358     $    1.41     $ 1.38
2004..........     64,999        26,133           --        9,326       17,694       17,872          1.09       1.06
2003..........     58,344        21,814           --        5,590       13,522       18,203          1.07       1.04
Fourth quarter
2005.........   $ 144,155     $  83,828     $  4,000     $ 10,486     $ 18,156     $ 28,163     $    1.70     $ 1.67
2004..........     77,846        32,880        3,000        4,469       18,045       16,440          1.00       0.97
2003..........     57,286        20,854           --        4,410       14,522       15,161          0.89       0.87
Total year
2005.........   $ 469,657     $ 249,190     $ 19,750     $ 31,215     $ 73,481     $ 91,698     $    5.55     $ 5.43
2004..........    262,722       101,190        3,000       21,296       66,372       65,842          3.95       3.85
2003..........    235,881        88,342           --       16,741       55,589       64,475          3.80       3.70
</TABLE>


(17) Fair Value of Financial Instruments

<TABLE>

      The  following  table  presents  fair  value   information  for  financial
instruments for which a market exists:

                                                     At December 31,
                                    -------------------------------------------------
                                              2005                      2004
                                    -----------------------   -----------------------
                                    Carrying                  Carrying
                                      Value     Fair Value      Value     Fair Value
                                    ---------   -----------   ---------   -----------
                                                      (In thousands)
<S>                               <C>        <C>           <C>         <C>
Mortgage-backed securities ...... $   74,254 $      74,254 $    97,059 $      97,059
Collateralized mortgage
obligations .....................    294,017       294,017     250,586       250,586
Loans held-for-sale .............      2,873         2,873          --            --
</TABLE>

                                       69

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17) Fair Value of Financial Instruments (continued)

      The  following  table  presents  fair  value   information  for  financial
instruments shown in the Company's  Consolidated  Balance Sheets 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>

                                                      At December 31,
                                    --------------------------------------------------
                                              2005                       2004
                                    ------------------------   -----------------------
                                                 Calculated                 Calculated
                                    Historical   Fair Value    Historical      Fair
                                       Cost        Amount         Cost         Value
                                                                               Amount
                                    -----------  -----------   ----------   ----------
                                                      (In thousands)
<S>                               <C>          <C>          <C>          <C>
ASSETS
Adjustable loans:
  Single family ................. $ 7,354,239  $ 7,515,594  $  4,576,671 $  4,619,960
  Multi-family ..................   1,938,988    1,949,306     1,817,727    1,820,991
  Commercial  ...................     203,124      208,778       309,491      315,807
Fixed rate loans:
   Single family ................       7,237        7,290         9,210        9,390
  Multi-family ..................       3,033        3,130        10,250       10,571
  Commercial  ...................      54,436       56,373        17,710       18,342
Commercial business loans........      80,186       85,444        59,993       59,845
Construction loans...............       4,910        5,179        20,288       21,476
Consumer loans...................      57,399       56,096        61,396       61,641
Other loans......................       7,100        7,100            --           --
Non-performing loans ............       4,966        4,966         4,985        4,985

LIABILITIES
Fixed-term certificate accounts .   2,778,964    2,768,236     1,755,230    1,754,787
Non-term deposit accounts .......   1,592,693    1,592,693     2,005,935    2,005,935
Borrowings ......................   5,419,184    5,415,365     3,191,600    3,189,486
</TABLE>


      GAAP 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  Balance Sheets for this
item approximate fair value.

Investment Securities and Mortgage-Backed Securities

      Fair values are based on bid quotations  received from national securities
dealers.

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. At December 31, 2005, the Bank
had outstanding  commitments to fund $599,433,000 in real estate mortgage loans,
and undisbursed funds totaling  $62,544,000 in commercial and construction loans
and  $136,219,000  in consumer  loans,  respectively.  All loan  commitments are
substantially  at fair  value.  There is no  value  associated  with the  Bank's
commitment to originate these loans.

                                       70

<PAGE>
                    FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17) Fair Value of Financial Instruments (continued)

Non-performing Loans

      The carrying amounts reported in the Consolidated Balance Sheets for these
assets 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  Balance Sheets.  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. For
long-term  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.

                                       71

<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of Directors and Stockholders
FirstFed Financial Corp. and Subsidiary


We have  audited  the  accompanying  consolidated  balance  sheets  of  FirstFed
Financial Corp. and Subsidiary as of December 31, 2005 and 2004, and the related
consolidated   statements  of  income,   changes  in  stockholders'  equity  and
comprehensive  income,  and cash  flows for each of the two years in the  period
ended December 31, 2005. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). 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, 2005 and 2004,  and the results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  the  effectiveness  of FirstFed
Financial Corp. and subsidiary's internal control over financial reporting as of
December 31, 2005 based on criteria  established in Internal  Control-Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission  (COSO) and our report dated March 3, 2006  expressed an  unqualified
opinion thereon.



Grant Thornton LLP



Woodland Hills, California
March 3, 2006

                                       72

<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
FirstFed Financial Corp.:

We have audited the accompanying  consolidated  statements of income, changes in
stockholders'   equity,   and  cash  flows  of  FirstFed   Financial  Corp.  and
subsidiaries  (the  Company)  for  the  year  ended  December  31,  2003.  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 audit.

We  conducted  our audit in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). 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  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash
flows of FirstFed  Financial Corp and  subsidiaries  for the year ended December
31, 2003 in conformity with U.S. generally accepted accounting principles.


KPMG LLP




Los Angeles, California
January 28, 2004

                                       73

<PAGE>
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

Effective September 2, 2004, based on a recommendation of the Audit Committee of
our Board of Directors,  we dismissed our independent public  accountants,  KPMG
LLP.  KPMG LLP's  reports on our  financial  statements  for the past two fiscal
years ended  December 31, 2003 did not contain an adverse  opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty,  audit scope or
accounting  principles.  During the two fiscal years ended December 31, 2003 and
during the subsequent interim period through the date of dismissal, September 2,
2004, there were not any disagreements between us and KPMG LLP on any matters of
accounting  principles or practices,  financial statement disclosure or auditing
scope or procedure,  or any reportable events as defined under Item 304(a)(1)(v)
of Regulation S-K promulgated by the Securities and Exchange Commission.

A copy of a letter addressed to the Securities and Exchange Commission from KPMG
LLP stating that it agrees with the above  statements was filedas  Exhibit 16 to
the form 10K for the year ended December 31, 2004.

Also  effective  September  2, 2004,  based upon a  recommendation  of the Audit
Committee of our Board of Directors,  we engaged the firm of Grant  Thornton LLP
to be our  independent  registered  public  accounting  firm. We did not consult
Grant Thornton LLP prior to September 2, 2004 with respect to the application of
accounting principles to a specified transaction,  either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
or concerning any disagreement or reportable event with KPMG LLP.


Item 9A.- Controls and Procedures

Management's Evaluation of Disclosure Controls and Procedures

(a)    Under the supervision  and  with  the   participation  of  the  Company's
       management, including  its  principal  executive  officer  and  principal
       accounting  officer,   the  Company   conducted  an   evaluation  of  its
       disclosure controls and  procedures,  as such term is defined  under Rule
       13a-14(c) promulgated  under  the  Securities  Exchange  Act of 1934,  as
       amended (the "Exchange  Act"),  within 90 days of the filing date of this
       report.  Based on their evaluation,  the  Company's  principal  executive
       officer and  principal accounting  officer  concluded  that the Company's
       disclosure  controls and  procedures  are  effective to alert them to any
       material  information relating to the Company (including its consolidated
       subsidiaries) that must be included in the Company's periodic  Securities
       and Exchange Commission filings.

(b)    There have been no significant changes (including corrective actions with
       regard  to  significant  deficiencies  or  material  weaknesses)  in  the
       Company's internal controls or in other factors that could  significantly
       affect these controls subsequent to the date of the evaluation referenced
       in paragraph (a) above.

(c)   The Company  intends to review and  evaluate  the design and effectiveness
       of its disclosure  controls and  procedures from time to time in order to
       improve its controls and procedures.  If any deficiencies  are discovered
       in the  future,  corrective  action will be taken in order to ensure that
       senior  management  has  timely  access to  all  material  financial  and
       non-financial   information  concerning the  Company's  business.   While
       management   believes   that  the  Company's   disclosure   controls  and
       procedures  are  currently  effective to achieve  these  results,  future
       events  affecting  the Company's business may cause  management to modify
       its disclosure controls and procedures.

Management's Report on Internal Control over Financial Reporting

Management is responsible for  establishing  and maintaining  adequate  internal
control  over  financial  reporting  for the  Company.  In order to evaluate the
effectiveness  of internal  control  over  financial  reporting,  as required by
Section 404 of the Sarbanes-Oxley  Act,  management has conducted an assessment,
including  testing,   using  the  criteria  in  Internal  Control  -  Integrated
Framework,  issued by the Committee of Sponsoring  Organizations of the Treadway
Commission  (COSO).  The  Company's  system of internal  control over  financial
reporting is designed to provide reasonable  assurance regarding the reliability
of financial reporting and the preparation of financial  statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent  limitations,  internal  control over  financial  reporting may not
prevent  or  detect  misstatements.  Also,  projections  of  any  evaluation  of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

Based on its  assessment,  management has concluded that the Company  maintained
effective  internal  control over  financial  reporting as of December 31, 2005,
based on criteria in Internal Control - Integrated Framework issued by the COSO.
Management's  assessment of the effectiveness of the Company's  internal control
over  financial  reporting as of December  31,  2005,  has been audited by Grant
Thornton LLP, an independent  registered  public  accounting  firm, as stated in
their report which is included herein.

                                       74

<PAGE>
No changes in the Company's internal control over financial reporting identified
in connection  with the evaluation  required by Exchange Act Rule 13a-14(c) have
come to management's  attention that have materially affected, or are reasonably
likely to materially  affect,  the  Company's  internal  control over  financial
reporting.  While no material  weakness in the Company's  internal  control over
financial reporting has been identified by management,  the Company's management
has  become  aware of  significant  deficiencies  with  regard  to the  level of
documentation  of  certain  accounting  policies  and  procedures.  The  Company
believes  that these  deficiencies  did not affect the accuracy of its financial
statements  included in this annual  report on Form 10-K.  The Company is taking
steps to correct these deficiencies.

Management's Certifications

The  certifications of the Company's Chief Executive Officer and Chief Financial
Officer required by the Sarbanes-Oxley Act have been included as Exhibits 31 and
32 in the  Company's  Form 10-K.  In  addition,  in 2005,  the  Company's  Chief
Executive  Officer  provided  to the New York  Stock  Exchange  the  annual  CEO
certification  regarding  the  Company's  compliance  with  the New  York  Stock
Exchange's corporate governance listing standards.

                                       75


<PAGE>
               REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
             FIRM ON MANAGEMENT'S ASSESSMENT OF THE EFFECTIVENESS OF
         INTERNAL CONTROL OVER FINANCIAL REPORTING AND THE EFFECTIVENESS
                  OF INTERNAL CONTROL OVER FINANCIAL REPORTING


Board of Directors and Stockholders
FirstFed Financial Corp. and Subsidiary

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's Report on Internal Control over Financial Reporting,  that FirstFed
Financial  Corp.  and Subsidiary  (the Company)  maintained  effective  internal
control over  financial  reporting  as of December  31, 2005,  based on criteria
established in Internal Control-Integrated  Framework issued by the Committee of
Sponsoring  Organizations  of the  Treadway  Commission  (COSO).  The  Company's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion,  management's  assessment that the Company maintained  effective
internal  control over  financial  reporting as of December 31, 2005,  is fairly
stated,  in all material  respects,  based on criteria  established  in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also in our opinion,  the Company maintained,
in all material respects, effective internal control over financial reporting as
of  December  31,  2005,  based on  criteria  established  in  Internal  Control
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway Commission (COSO).

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
FirstFed  Financial  Corp.  and Subsidiary as of December 31, 2005 and 2004, and
the related consolidated  statements of income,  changes in stockholders' equity
and comprehensive  income, and cashflows for each of the two years in the period
ended  December  31,  2005 and our  report  dated  March 3,  2006  expressed  an
unqualified opinion on those financial statements.



Grant Thornton LLP

Woodland Hills, California
Macrh 3, 2006

                                       76

<PAGE>
                                    PART III

ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information regarding directors and executive officers appearing on page 5
of the Proxy Statement for the Annual Meeting of  Stockholders' to be held April
26, 2006 (the "Proxy Statement") is incorporated herein by reference.

ITEM 11. - EXECUTIVE COMPENSATION

      Information  regarding executive  compensation  appearing on page 8 of the
Proxy Statement 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, 3 and 12 of the Proxy  Statement  incorporated
herein by reference.  Information  regarding securities  authorized for issuance
under equity  compensation  plans appearing on page 12 of the Proxy Statement is
incorporated herein by reference.

ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information  regarding  certain  relationships  and  related  transactions
appearing on page 12 of the Proxy Statement is incorporated herein by reference.

ITEM 14. - PRINCIPAL ACCOUNTING FEES AND SERVICES

      Information  regarding principal accounting fees and services appearing on
page 16 of the Proxy Statement is incorporated herein by reference.

                                       77

<PAGE>
                                     PART IV

ITEM 15. - EXHIBITS

(a)   The following documents are filed as a part of this report:

(1)   Financial Statements  (included  in this 2005  Annual  Report on Form 10-K
      under Item 8)
(2)   Exhibits as shown below


 EXHIBIT
 NUMBER
 -------------
(3.1)  Restated  Certificate of Incorporation  filed as Exhibit 3.1 to Form 10-K
       for the fiscal year ended December 31,1999 and incorporated by reference.
(3.2)  By-laws filed as Exhibit  (1)(a) to Form 8-A dated  September  4,1987 and
       incorporated by reference.
(4.1)  Amended and Restated  Rights  Agreement  dated as of September  25, 1998,
       filed  as  Exhibit  4.1 to Form  8-A/A,  dated  September  25,  1998  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) 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.
(10.3) 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 Amendment
       filed as  Exhibit  10.3 10.4 for  change of  control to Form 10-Q for the
       Quarter ended September 30, 2000 and incorporated by reference.
(10.4) 1997  Non-employee  Directors  Stock Incentive Plan filed as Exhibit 1 to
       Form S-8 dated  August 12, 1997 and  Amendment  filed as Exhibit  10.5 to
       Form 10-Q for the Quarter ended  September 30, 2000, and  incorporated by
       reference.
(21)   Registrant's  sole  subsidiary  is First  Federal Bank of  California,  a
       federal savings bank.
(23)   Independent  Auditors' consent.  (24) Power of Attorney (included at page
       78).
(31.1) Certification  of  Babette E.  Heimbuch,  Chairman,  President  and Chief
       Executive  Officer of the  Company,  pursuant  to Rule  13a-14(a)  of the
       Exchange Act.
(31.2) Certification  of Douglas J. Goddard,  Executive Vice President and Chief
       Financial  Officer of the  Company,  pursuant  to Rule  13a-14(a)  of the
       Exchange Act.
(32.1) Certification  of  Babette E.  Heimbuch,  Chairman,  President  and Chief
       Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350.
(32.1) Certification  of Douglas J. Goddard,  Executive Vice President and Chief
       Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350.

      This 2005 Annual Report on Form 10-K and the Proxy  Statement 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 3, 2006 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.

                                       78

<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

Dated this 23rd day of February, 2006
                                       By: /s/ Babette E. Heimbuch
                                               -----------------------
                                               Babette E. Heimbuch
                                               Chief Executive Officer

                                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 be signed by the following  persons on behalf of the  Registrant  and in the
capacities indicated on the 23rd day of February, 2006.




SIGNATURE                        TITLE

                                 Chairman of the Board and
                                 Chief Executive Officer (Principal
/s/  Babette E. Heimbuch         Executive Officer)
----------------------------
     Babette E. Heimbuch

                                 Director, President and Chief
/s/  James P. Giraldin           Operating Officer
----------------------------
     James P. Giraldin

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

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

/s/  Jesse Casso, Jr.            Director
----------------------------
     Jesse Casso, Jr.

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

/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

                                       79

<PAGE>
                                  Exhibit 31.1

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER


I, Babette Heimbuch, certify that:


(1) I have reviewed this annual report on Form 10-K of FirstFed Financial Corp.;


(2) Based on my  knowledge,  this  annual  report  does not  contain  any untrue
    statement of a material fact or omit to state a material  fact  necessary to
    make the  statements  made, in light of the  circumstances  under which such
    statements  were made, not misleading  with respect to the period covered by
    this annual report;


(3) Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information  included in this annual report,  fairly present in all material
    respects the consolidated balance sheets,  consolidated statements of income
    and cash flows of the  registrant  as of, and for, the periods  presented in
    this annual report;


(4) The  registrant's  other  certifying  officer  and  I  are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial
    reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
    registrant and have:

    (i)  Designed  such  disclosure  controls  and  procedures,  or caused  such
         disclosure   controls  and   procedures   to  be  designed   under  our
         supervision,  to  ensure  that  material  information  relating  to the
         registrant,  including its consolidated subsidiaries,  is made known to
         us by others within those entities,  particularly  during the period in
         which this annual report is being prepared;

    (ii) Designed such internal control over financial reporting, or caused such
         internal  control over  financial  reporting  to be designed  under our
         supervision,  to provide reasonable assurance regarding the reliability
         of financial reporting and the preparation of financial  statements for
         external  purposes in accordance  with  generally  accepted  accounting
         principles;

    (iii)Evaluated the effectiveness of the registrant's disclosure controls and
         procedures  and  presented  in this  report our  conclusions  about the
         effectiveness of the disclosure controls and procedures,  as of the end
         of the period covered by this report based on such evaluation; and

    (iv) Disclosed  in this  report  any  change  in the  registrant's  internal
         control over financial  reporting that occurred during the registrant's
         fourth fiscal  quarter that has materially  affected,  or is reasonably
         likely to materially  affect,  the  registrant's  internal control over
         financial reporting;


(5) The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation of internal control over financial reporting,  to the
    registrant's  auditors and the audit committee of the registrant's  board of
    directors:


    (i)  All significant  deficiencies and material  weaknesses in the design or
         operation  of  internal  control  over  financial  reporting  which are
         reasonably  likely to  adversely  affect  the  registrant's  ability to
         record, process, summarize and report financial information; and


    (ii) Any fraud,  whether or not material,  that involves management or other
         employees  who have a  significant  role in the  registrant's  internal
         control over financial reporting; and


(6) The  registrant's  other  certifying  officer and I have  indicated  in this
    annual  report  whether or not there were  significant  changes in  internal
    control  over   financial   reporting   or  in  other   factors  that  could
    significantly affect internal control over financial reporting subsequent to
    the date of our most recent  evaluation,  including any  corrective  actions
    with regard to significant deficiencies and material weaknesses.


Dated this 23rd day of February, 2006

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

                                       80
<PAGE>
                                  Exhibit 31.2

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Douglas J. Goddard, certify that:

(1) I have reviewed this annual report on Form 10-K of FirstFed Financial Corp.;

(2) Based on my  knowledge,  this  annual  report  does not  contain  any untrue
    statement of a material fact or omit to state a material  fact  necessary to
    make the  statements  made, in light of the  circumstances  under which such
    statements  were made, not misleading  with respect to the period covered by
    this annual report;

(3) Based  on my  knowledge,  the  financial  statements,  and  other  financial
    information  included in this annual report,  fairly present in all material
    respects the consolidated balance sheets,  consolidated statements of income
    and cash flows of the  registrant  as of, and for, the periods  presented in
    this annual report;

(4) The  registrant's  other  certifying  officer  and  I  are  responsible  for
    establishing and maintaining  disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-14 and 15d-14) and internal control over financial
    reporting (as defined in Exchange Act Rules 13a-15(f) and  15d-15(f)for  the
    registrant and have:

    (i)   Designed  such  disclosure  controls  and  procedures  or caused  such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this annual report is being prepared;

    (ii)  Designed such internal  control over  financial  reporting,  or caused
          such internal  control over  financial  reporting to be designed under
          our  supervision,   to  provide  reasonable  assurance  regarding  the
          reliability  of financial  reporting and the  preparation of financial
          statements for external purposes in accordance with generally accepted
          accounting principles;

    (iii) Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

    (iv)  Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          fourth fiscal quarter that has materially  affected,  or is reasonably
          likely to materially  affect,  the registrant's  internal control over
          financial reporting;

(5) The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation of internal control over financial reporting,  to the
    registrant's  auditors and the audit committee of the registrant's  board of
    directors:

    (i)  All significant  deficiencies and material  weaknesses in the design or
         operation  of  internal  control  over  financial  reporting  which are
         reasonably  likely to  adversely  affect  the  registrant's  ability to
         record, process, summarize and report financial information; and

    (ii) Any fraud,  whether or not material,  that involves management or other
         employees  who have a  significant  role in the  registrant's  internal
         control over financial reporting; and

(6) The  registrant's  other  certifying  officer and I have  indicated  in this
    annual  report  whether or not there were  significant  changes in  internal
    control  over   financial   reporting   or  in  other   factors  that  could
    significantly affect internal control over financial reporting subsequent to
    the date of our most recent  evaluation,  including any  corrective  actions
    with regard to significant deficiencies and material weaknesses.

Dated this 23rd day of February,2006.

                                    By: /s/ Douglas J. Goddard
                                            -----------------------
                                            Douglas J. Goddard
                                            Chief Financial Officer

                                       81

<PAGE>
                                  EXHIBIT 32.1

                                CEO CERTIFICATION

The undersigned, as Chief Executive Officer hereby certifies, to the best of her
knowledge and belief, that:

      (1)   the Form 10-K of FirstFed  Financial  Corp.  (the "Company") for the
            annual period ended  December 31, 2005 (the "Report ")  accompanying
            this  certification  fully complies with the requirements of Section
            13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
            or 78o(d)); and

      (2)   the  information  contained in the Report  fairly  presents,  in all
            material respects,  the consolidated balance sheets and consolidated
            statements of income of the Company for such period.

This  certification is made solely for purposes of complying with the provisions
of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

                               FIRSTFED FINANCIAL CORP.
                               Registrant


Date: February 23, 2006
                               By: /s/ Babette E. Heimbuch
                                       -----------------------
                                       Babette E. Heimbuch
                                       Chief Executive Officer

                                       82

<PAGE>
                                  EXHIBIT 32.2


                                CFO CERTIFICATION

The undersigned, as Chief Financial Officer hereby certifies, to the best of his
knowledge and belief, that:

      (1)   the Form 10-K of FirstFed  Financial  Corp.  (the "Company") for the
            annual period ended  December 31, 2005 (the "Report ")  accompanying
            this  certification  fully complies with the requirements of Section
            13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
            or 78o(d)); and

      (2)   the  information  contained in the Report  fairly  presents,  in all
            material respects,  the consolidated balance sheets and consolidated
            statements of income of the Company for such period.

This  certification is made solely for purposes of complying with the provisions
of Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.


                               FIRSTFED FINANCIAL CORP.
                               Registrant



Date: February 23, 2006
                               By:  /s/ Douglas J. Goddard
                                        ---------------------------
                                        Douglas J. Goddard
                                        Chief Financial Officer and
                                        Executive Vice President

                                       83