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

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

DOWNEY FINANCIAL CORP.
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(Name of Registrant as Specified In Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required

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[_] Check box if any part of the fee is offset as provided by Exchange
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was paid previously. Identify the previous filing by registration statement
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Notes:

DOWNEY FINANCIAL CORP.
3501 JAMBOREE ROAD
NEWPORT BEACH, CA 92660
(714) 854-0300
March 21, 1998

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

WEDNESDAY, APRIL 22, 1998
10:00 A.M.
THE IRVINE MARRIOTT HOTEL
18000 VON KARMAN AVENUE
IRVINE, CALIFORNIA

Dear Friend and Shareholder:

The Board of Directors and officers of Downey Financial Corp. ("Downey") are
pleased to extend to you a cordial invitation to attend Downey's Annual
Meeting of Shareholders at the time and place shown above to:

1. Elect two Class 3 Directors for terms of three years each and to elect
one Class 1 Director for a term of one year; and

2. Transact such other business as may properly come before the Annual
Meeting and any adjournments thereof.

The Board of Directors has selected February 27, 1998 as the record date for
the Annual Meeting. Only those shareholders of record at the close of business
on that date will be entitled to notice of and to vote at the Annual Meeting
or any adjournments thereof. Information about the matters on which
shareholders will act is included in the attached Proxy Statement. Downey's
directors and executive officers will be available at the meeting to meet with
shareholders.

Your vote is important regardless of the number of shares you own. Whether
or not you expect to attend the meeting, we ask that you PLEASE SIGN AND
RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. Thank
you in advance for your cooperation.

We look forward to seeing you at the meeting.

Sincerely yours,

/s/ Maurice L. McAlister /s/ Cheryl E. Jones
MAURICE L. McALISTER CHERYL E. JONES
Chairman of the Board Vice Chairman of the Board

/s/ James W. Lokey
JAMES W. LOKEY
President and Chief Executive Officer

TABLE OF CONTENTS

PAGE
----

Proxy Statement........................................................... 1
Record Date and Voting of Shares.......................................... 1
Voting and Revocation of Proxies.......................................... 1
Solicitation of Proxies................................................... 1
Election of Directors..................................................... 2
.Information Concerning Nominees and Directors........................ 2
.Nominees for Election at this Meeting, as Class 3 Directors, to Terms
Expiring in 2001..................................................... 3
.Nominee for Election at this Meeting, as Class 1 Director, to Term
Expiring in 1999..................................................... 3
.Continuing Directors Whose Present Terms Continue until 1999......... 3
.Continuing Directors Whose Present Terms Continue until 2000......... 3
Board Committees and Meeting Attendance................................... 4
Security Ownership of Directors and Executive Officers.................... 6
Executive Officers........................................................ 7
Compensation Committee Report............................................. 9
.Compensation Philosophy.............................................. 9
.1997 Compensation Programs........................................... 9
Compensation.............................................................. 12
.Executive Compensation............................................... 12
.Stock Options........................................................ 13
.Option Exercises and Holdings........................................ 14
.Employment Agreements................................................ 14
.Director Compensation................................................ 14
Performance Graph......................................................... 16
Certain Relationships and Related Transactions............................ 17
.Transactions with Management and Certain Business Relationships...... 17
.Indebtedness of Management........................................... 17
Security Ownership of Certain Beneficial Owners........................... 17
.Principal Shareholders............................................... 18
Section 16(a) Beneficial Ownership Reporting Compliance................... 18
Proposals of Shareholders................................................. 18
Relationship with Independent Public Accountants.......................... 18
Annual Report to Shareholders............................................. 19
Other Business............................................................ 19
.Presented by Management.............................................. 19
.Presented by Shareholders............................................ 19

DOWNEY FINANCIAL CORP.
3501 JAMBOREE ROAD
NEWPORT BEACH, CALIFORNIA 92660

PROXY STATEMENT

This proxy statement ("Proxy Statement") and the accompanying proxy card are
furnished in connection with the solicitation of proxies by the Board of
Directors for use at the Annual Meeting of Shareholders of Downey Financial
Corp., a Delaware corporation ("Downey"), to be held at 10:00 a.m., local
time, on Wednesday, April 22, 1998, at The Irvine Marriott Hotel, 18000 Von
Karman Avenue, Irvine, California 92715, and any adjournments thereof (the
"Annual Meeting"). Certain of the information provided in this Proxy Statement
relates to Downey Savings and Loan Association, F.A. and any predecessor
entity (the "Bank"), a wholly owned subsidiary of Downey. This Proxy Statement
and the accompanying form of proxy are being mailed to shareholders on or
about March 21, 1998. The mailing address of the principal office of Downey is
3501 Jamboree Road, Newport Beach, California 92660. Downey's telephone number
is (714) 854-0300.

RECORD DATE AND VOTING OF SHARES

On February 27, 1998, the record date for determining the shareholders
entitled to notice of and to vote at the Annual Meeting, 26,755,938 shares of
Downey's common stock ("Common Stock") were outstanding. A majority of the
shares entitled to vote will constitute a quorum at the Annual Meeting. The
three nominees for director receiving the highest number of affirmative votes
at the Annual Meeting will be elected. Abstentions and broker non-votes are
counted for purposes of determining a quorum, but are not considered as having
voted for purposes of determining the outcome of a vote.

VOTING AND REVOCATION OF PROXIES

All shares represented by a properly executed proxy will be voted in
accordance with the directions on such proxy. If no directions are specified,
such shares will be voted FOR the election of the Board's nominees for
directors. If for any reason one or more of the nominees should be unable or
refuse to serve as a director (an event which the Board of Directors does not
anticipate), the persons named in the enclosed proxy, in their discretion,
will vote for substitute nominees of the Board of Directors unless otherwise
instructed. If any other matters are properly presented to the Annual Meeting
for action (including any proposal to adjourn the Annual Meeting), the persons
named in such proxy and acting thereunder will vote in accordance with their
best judgment on such matters.

Any shareholder may revoke his or her proxy at any time before it is voted
by filing with the Corporate Secretary of Downey a written instrument revoking
it or by filing a duly executed proxy bearing a later date. The execution of
the enclosed proxy will not affect the right of a shareholder to vote in
person if such shareholder should decide to attend the Annual Meeting and
desires to vote in person.

SOLICITATION OF PROXIES

Downey will bear the cost of soliciting proxies. Directors and officers of
Downey and directors, officers and employees of the Bank may solicit proxies
personally, by mail, telephone, telecopier or other electronic transmission.
Such directors, officers or employees will receive no compensation for their
solicitation services other than their regular salaries, but may be reimbursed
for out-of-pocket expenses. Downey will request record holders of shares
beneficially owned by others to forward this Proxy Statement and related
materials to the beneficial owners of such shares and will reimburse such
record holders for their reasonable expenses incurred in doing so.

ELECTION OF DIRECTORS

The directors of Downey are divided into three classes, as nearly equal in
number as possible, with one class to be elected annually. The members of each
class are elected for terms of three years and until their successors are
elected and qualified, with one of the three classes of directors being
elected each year. Article III, Section 3.2 of Downey's Bylaws provides that
the Board of Directors shall be composed of not less than seven nor more than
nine members, the exact number to be fixed by the Board.

At this Annual Meeting, two Class 3 Directors are to be elected to serve
three-year terms and until their respective successors are elected and
qualified. James W. Lokey will also stand for election as a Class 1 Director.
Accordingly, the following persons have been nominated by the Board of
Directors to serve as directors, as set forth below:

For election as Class 3 Directors to hold office until the 2001 Annual
Meeting of Shareholders, and until their successors are duly elected and
qualified: Dr. Paul Kouri and Brent McQuarrie.

For election as a Class 1 Director to hold office until the 1999 Annual
Meeting of Shareholders, and until his successor is duly elected and
qualified: James W. Lokey.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
EACH OF THE NOMINEES FOR DIRECTOR.

INFORMATION CONCERNING NOMINEES AND DIRECTORS

Certain information concerning each nominee for director and each current
director is set forth below. For information regarding ownership of Downey
Common Stock by nominees and directors of Downey, see "Securities Ownership of
Directors and Executive Officers." There are no arrangements or understandings
between any director, or any nominee, or any other person pursuant to which
such director or nominee is or was nominated to serve as director.

The following table sets forth certain information concerning (i) the three
nominees standing for election to the Board of Directors at the Annual
Meeting, and (ii) all other directors whose terms as directors will continue
after the Annual Meeting.

DIRECTOR OF YEAR
AGE AT POSITION(S) DOWNEY TERM
NAME FEBRUARY 28, 1998 CURRENTLY HELD SINCE(1) EXPIRES
---- ----------------- ---------------------- ----------- -------

NOMINEES FOR ELECTION
Dr. Paul Kouri.......... 76 Director 1994 1998
Brent McQuarrie......... 46 Director 1994 1998
James W. Lokey.......... 50 President and Chief N/A N/A
Executive Officer
CONTINUING DIRECTORS
Maurice L. McAlister.... 72 Director/Chairman 1994 1999
Sam Yellen.............. 67 Director 1994 1999
Cheryl E. Jones......... 41 Director/Vice Chairman 1994 2000
Lester C. Smull......... 65 Director 1994 2000

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(1) Downey was organized on October 21, 1994. Prior thereto, except for James
W. Lokey, each of the directors was a director of the Bank.

NOMINEES FOR ELECTION AT THIS MEETING, AS CLASS 3 DIRECTORS, TO TERMS EXPIRING
IN 2001

Dr. Paul Kouri--Dr. Kouri is a director of Downey and the Bank. Dr. Kouri
has served as a director of the Bank since 1959. Dr. Kouri also is actively
involved in a variety of real estate development and management activities.
Dr. Kouri is a retired physician having practiced for more than 45 years.

Brent McQuarrie--Mr. McQuarrie is a director of Downey and the Bank. Mr.
McQuarrie has served as a director of the Bank since 1987. Mr. McQuarrie's
principal occupation for more than the past five years has been President and
a director of Investment Properties, a real estate development company. Mr.
McQuarrie also was President and a director of Sea Coast Mortgage Corporation,
which was dissolved in December 1993.

NOMINEE FOR ELECTION AT THIS MEETING, AS CLASS 1 DIRECTOR, TO TERM EXPIRING IN
1999

James W. Lokey--Mr. Lokey is the President and Chief Executive Officer of
Downey and the Bank. Prior to joining Downey in February 1997, Mr. Lokey
served as Executive Vice President and Division Manager of Wells Fargo Bank,
N.A., where he was responsible for the successful integration of the Wells
Fargo Bank, N.A. and First Interstate Bank of California Commercial Banking
Divisions in Southern California. Prior to Wells Fargo Bank, N.A., Mr. Lokey
spent 23 years at First Interstate Bank of California in various executive
management positions, including credit policy and administration, private
banking, commercial banking, cash management and retail branch banking.

CONTINUING DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 1999

Maurice L. McAlister--Mr. McAlister is the Chairman of Downey's Board of
Directors and was a co-founder of the Bank together with the other co-founder,
the late Gerald H. McQuarrie. Since 1957, Mr. McAlister has been actively
involved in the growth and management of Downey and the Bank. Mr. McAlister
served as President of the Bank from 1957 until his retirement in September
1991. In addition, Mr. McAlister is a director and President of Laura J.
Company and McAlister Investments, Inc., affiliates of Downey.

Sam Yellen--Mr. Yellen is a director of Downey and the Bank. Mr. Yellen has
served as a director of the Bank since 1992. Mr. Yellen has been a consultant
since his retirement as a partner from the accounting firm of KPMG Peat
Marwick LLP in December 1990. Mr. Yellen served KPMG Peat Marwick LLP and its
predecessors for 35 years preceding his retirement from the firm. While a
partner with the firm, Mr. Yellen was also a member of its Board of Directors.
Mr. Yellen is the former President of both the California State Board of
Accountancy and the National Association of State Boards of Accountancy.
Currently, in addition to his service to Downey and the Bank, Mr. Yellen
serves on the Boards of Directors of Beverly Funding Corporation, Del Webb
Corporation, LTC Properties, Inc. and E* Capital Corporation.

CONTINUING DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 2000

Cheryl E. Jones--Ms. Jones is the Vice Chairman of the Boards of Directors
of Downey and the Bank. Ms. Jones has served as a director of the Bank since
1987. Ms. Jones is actively involved in a variety of real estate development,
management and consultant activities. In addition, Ms. Jones serves on the
Board of Directors of McAlister Investments, Inc., an affiliate of Downey. Ms.
Jones is the daughter of Maurice L. McAlister, Chairman of Downey's Board of
Directors.

Lester C. Smull--Mr. Smull is a director of Downey and the Bank and has
served as a director since 1994. In 1970, Mr. Smull founded Business
Properties Development Company ("Business Properties"), a real estate
development company with offices in Irvine, California and Phoenix, Arizona.
Business Properties' activities consist of the development, construction and
management of commercial shopping centers, office and industrial buildings
throughout California and Arizona, in addition to land acquisition, planning,
design, property management, marketing and asset management services. Mr.
Smull is also a licensed general contractor and operates Business Properties
Construction Company.

BOARD COMMITTEES AND MEETING ATTENDANCE

Currently, Downey has the following four Board Committees: Audit,
Compensation, Executive and Nominating. Membership in the committees, as of
the record date of February 27, 1998, is as follows:

AUDIT COMPENSATION NOMINATING
- ----- ------------ ----------
Sam Yellen, Chair Dr. Dennis J. Aigner, Chair Cheryl E. Jones, Chair
Dr. Paul Kouri Cheryl E. Jones Maurice L. McAlister
Brent McQuarrie Lester C. Smull Sam Yellen

EXECUTIVE
- ---------
Maurice L. McAlister, Chair
Cheryl E. Jones
Brent McQuarrie

AUDIT COMMITTEE 5 MEETINGS IN 1997

. Responsible for recommending to the Board the engagement of Downey's
and the Bank's independent accountants and assuring their
independence and objectivity;

. Reviews the scope of the audit plans of the independent accountants
and the internal auditors;

. Oversees Downey's and the Bank's policies pertaining to the
effectiveness of internal controls;

. Reviews the objectivity, effectiveness and resources of the internal
audit and internal asset review functions which report directly to
the Audit Committee;

. Reviews non-audit services to be performed by the independent
accountants; and

. Reviews the appropriateness of fees for audit and non-audit services
performed by the independent accountants.

COMPENSATION COMMITTEE 1 MEETING IN 1997

. Establishes the overall compensation and benefits policies for Downey
and the Bank;

. Reviews and recommends to the Board salary and incentive
compensation for the Chief Executive Officer;

. Reviews and approves the salaries and incentive compensation for all
other executive and senior officers of Downey and the Bank; and

. Reviews and approves the short-term and long-term incentive
compensation programs, including individual performance goals.

EXECUTIVE COMMITTEE 1 MEETING IN 1997

. Exercises the powers of the Board of Directors when the Board of
Directors is not in session, except for the authority to approve the
declaration of dividends and except as may otherwise be limited or
restricted under applicable Delaware law or under Downey's
Certificate of Incorporation or Bylaws.

NOMINATING COMMITTEE 1 MEETING IN 1997

Reviews and makes recommendations to the Board regarding:

. Oversight of Board activities related to corporate governance and
organization structure;

. Qualifications for director candidates;

. Candidates for election and re-election to the Board;

. Candidates for the position of Chairman of the Board, Chief Executive
Officer and President; and

. The performance of the Chief Executive Officer, in conjunction with
the Compensation Committee.

Nominations of individuals for election to the Board of Directors of Downey
at an annual meeting of shareholders may be made by any shareholder of Downey
entitled to vote for the election of directors at such annual meeting who
complies with the notice procedures set forth in Downey's Bylaws. No person
shall be elected as a director of Downey unless nominated in accordance with
the procedures set forth in this section.

To be timely, a shareholder's notice shall be delivered to or received at
the principal executive offices of Downey not less than 20 days prior to the
meeting; provided, however, that in the event that less than 30 days' notice
of the date of the meeting is given to shareholders by Downey (which notice
must be accompanied by a proxy or information statement which identifies the
nominees of the Board of Directors), notice by the shareholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed.
Such shareholder's notice shall set forth as to each person whom the
shareholder proposes to nominate for election or re-election as a director (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, and (iii) such person's
written consent to serving as a director, if elected; and as to the
shareholder giving the notice (i) the name and address of such shareholder,
and (ii) the class and number of shares of Downey which are owned of record by
such shareholder. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall furnish
to the Secretary of Downey that information required to be set forth in a
shareholder's notice of nomination which pertains to the nominee together with
the required written consents. Ballots bearing the names of all persons
nominated by the Nominating Committee and by shareholders shall be provided
for use at the annual meeting. If the Nominating Committee shall fail or
refuse to act at least 20 days prior to the annual meeting, nominations for
directors may be made at the annual meeting by any shareholder entitled to
vote and shall be voted upon.

Actions taken by any of the foregoing committees are reported to the Board,
usually at its next meeting.

During 1997, the Board of Directors met 12 times: 11 regular meetings and 1
special meeting. All directors attended at least 75% of the aggregate of
meetings held during 1997 by the Board of Directors and the committees of the
Board on which they serve. Directors meet their responsibilities not only by
attending Board and committee meetings, but also through communication with
the Chairman, Vice Chairman, Chief Executive Officer and other members of
management on matters affecting Downey and the Bank.

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth, as of February 27, 1998, certain information
regarding the beneficial ownership of shares of Common Stock by each director,
each of the executive officers named in the Summary Compensation Table on Page
12 and by all directors and executive officers as a group.

AGGREGATE NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES BENEFICIALLY OWNED(1) OUTSTANDING SHARES
- ------------------------------- ---------------------------- ------------------

Maurice L. McAlister........... 5,368,430(2) 20.1%
Cheryl E. Jones................ 558,648(3) 2.1%
Brent McQuarrie................ 413,786(4) 1.5%
Dr. Paul Kouri................. 15,140(5) *
Sam Yellen..................... 3,307 *
Dr. Dennis J. Aigner........... 1,654 *
Lester C. Smull................ 841(6) *
James W. Lokey................. 242 *
Thomas E. Prince............... 16,340 *
Donald E. Royer................ 16,340 *
Keith A. Voll.................. 16,340 *
Jane Wolfe..................... 6,103 *
All Directors and Executive
Officers as a Group
(24 persons).................. 6,516,214(7) 24.4%

- --------
(1) The shares shown include 69,100 shares of Common Stock with respect to
which executive officers acquired beneficial ownership because of vested
stock options as of December 20, 1997.

(2) Held by Mr. McAlister with his spouse, Dianne S. McAlister, as Co-trustor
and Co-trustee of the McAlister Family Trust.

(3) Includes 101,237 shares held by Ms. Jones as Custodian for Kelly Lambert,
David Lambert and Clayton Jones. Ms. Jones holds sole voting and
investment power with respect to 457,411 shares.

(4) Includes 152,172 shares held by Mr. McQuarrie as Trustee for Jared
McQuarrie, Jennifer McQuarrie, Justin McQuarrie and Jamie McQuarrie (Four
Jays, Ltd.). In addition, Mr. McQuarrie shares voting and investment power
with his spouse, Kathryn McQuarrie, as Co-trustor and Co-trustee with
respect to 158,000 shares, all of which are held in trust for the benefit
of their children. Mr. McQuarrie holds 2,826 shares in an Individual
Retirement Account, and Kathryn McQuarrie holds 788 shares in an
Individual Retirement Account. Mr. McQuarrie holds 100,000 shares through
Next Generation, Ltd., a Utah limited partnership, in which he serves as
General Partner.

(5) Dr. Kouri holds sole voting power with respect to 5,246 shares and shares
with his spouse, Bobbie Jean Kouri, voting and investment power with
respect to 9,894 shares.

(6) Mr. Smull holds sole voting and investment power with respect to 570
shares, and Mr. Smull's spouse, Jimmy Smull, holds sole voting and
investment power with respect to 271 shares.

(7) As of February 27, 1998, includes 154,408 shares held by executive
officers.

* Less than 1% of outstanding Common Stock at February 27, 1998.

EXECUTIVE OFFICERS

Executive officers are elected annually and serve at the pleasure of the
Board of Directors.

The following table sets forth the names of the current executive officers
of Downey and the Bank and their respective subsidiaries, along with certain
other information relating to such persons:

AGE AT
NAME FEBRUARY 28, 1998 CURRENT POSITION
---- ----------------- ----------------

James W. Lokey(1)................ 50 President and Chief
Executive Officer of
Downey and the Bank
Thomas E. Prince................. 51 Executive Vice President
and Chief Financial
Officer of Downey and
the Bank
Donald E. Royer.................. 48 Executive Vice President,
General Counsel and
Corporate Secretary of
Downey and the Bank
Keith A. Voll.................... 49 Executive Vice President
and Chief Information
Officer of the Bank
Jane Wolfe....................... 52 Executive Vice President
and Chief Lending
Officer of the Bank
Paul G. Woollatt................. 48 Executive Vice President
and Director of Retail
Banking of the Bank
Glenn K. Ford.................... 50 President of Downey Auto
Finance Corp. and Senior
Vice President and
Director of Consumer
Loans of the Bank
Daniel D. Rosenthal.............. 45 President of DSL Service
Company and Senior Vice
President and Director
of Major Loans of the
Bank
Michael P. Faucher............... 45 Senior Vice President and
Director of Commercial
Banking of the Bank
Lillian E. Gavin................. 35 Senior Vice President and
Director of Compliance
and Risk Management of
the Bank
Jane R. Gorby.................... 51 Senior Vice President and
Director of Marketing of
the Bank
Richard D. Silver................ 52 Senior Vice President and
Controller of the Bank
JoLene M. Wryn................... 43 Senior Vice President and
Director of Human
Resources of the Bank
Herb Cuesta...................... 48 Vice President and Chief
Appraiser of the Bank
Art J. Den-Heyer................. 40 Vice President and
Director of Internal
Audit of the Bank
Jane L. Smallwood................ 47 Vice President and
Director of Internal
Asset Review of the Bank
Carolyn B. DiOrio................ 41 Chief Financial Officer
of DSL Service Company
and Vice President of
the Bank

- --------
(1) See "Information Concerning Nominees and Directors--Nominee for Election
at this Meeting, as Class 1 Director, to Term Expiring in 1999," for a
description of Mr. Lokey's business background.

Thomas E. Prince--Prior to joining the Bank as Executive Vice President and
Chief Financial Officer in May 1992, Mr. Prince spent 24 years at Security
Pacific Corporation and Security Pacific National Bank in various financial
capacities, the last eight years of which as Senior Vice President and
Controller.

Donald E. Royer--Prior to joining the Bank as Executive Vice President,
General Counsel and Corporate Secretary in December 1991, Mr. Royer was
Executive Vice President and General Counsel of American Savings Bank, F.A.,
from December 1988 to February 1991, in addition to serving as retained
counsel from March 1991 through October 1991. Mr. Royer has over 20 years of
legal experience in the thrift industry.

Keith A. Voll--Mr. Voll joined the Bank in December 1977, was appointed
Senior Vice President, Chief Information Officer in 1990 and Executive Vice
President, Chief Information Officer in January 1992.

Jane Wolfe--Prior to re-joining the Bank as Executive Vice President and
Chief Lending Officer in April 1994, Ms. Wolfe served as Senior Vice President
and Manager of Mortgage Lending for Liberty National Bank from September 1993
to April 1994. Ms. Wolfe acted as a mortgage lending consultant to several
financial institutions from November 1992 to September 1993. Prior to such
time, Ms. Wolfe served as Executive Vice President and Chief Lending Officer
of the Bank from September 1991 to November 1992.

Paul G. Woollatt--Prior to re-joining the Bank as Executive Vice President
and Director of Retail Banking in November 1995, Mr. Woollatt was Executive
Vice President and Director of Retail Banking for First Western Bank F.S.B.
from 1991 to 1995. Mr. Woollatt previously joined the Bank in July 1979 and
held several positions including Senior Vice President, Director of Retail
Banking from 1989 to 1991.

Glenn K. Ford--Prior to joining the Bank as Senior Vice President of the
Bank and President and Chief Operating Officer of Downey Auto Finance Corp. in
1997, Mr. Ford spent 27 years at First Interstate Bank in various financial
and lending capacities, including senior management positions in First
Interstate Bank's Consumer Credit, Auto Lending, and Direct and Indirect
Lending Divisions.

Daniel D. Rosenthal--Mr. Rosenthal joined the Bank in 1975, was appointed a
director of DSL Service Company in 1991 and was appointed as DSL Service
Company's Acting President in 1993. Mr. Rosenthal was named President of DSL
Service Company in 1994 and is a Senior Vice President and Director of Major
Loans of the Bank.

Michael P. Faucher--Prior to re-joining the Bank as Senior Vice President
and Director of Commercial Banking in April 1996, Mr. Faucher was Vice
President and Relationship Manager with First Interstate Bank's Orange County
Regional Commercial Center from October 1990 to April 1996. Mr. Faucher
previously joined the Bank in May 1983 and held several positions including
Vice President and Manager of the Commercial Loan Department.

Lillian E. Gavin--Prior to joining the Bank as Senior Vice President and
Director of Compliance and Risk Management in 1997, Ms. Gavin was a senior
examiner with the Office of Thrift Supervision and its predecessor, the
Federal Home Loan Bank Board, since 1987, and was a bank liquidation
specialist with the Federal Deposit Insurance Corporation from 1984 to 1987.

Jane R. Gorby--Prior to joining the Bank as Vice President and Director of
Marketing in July 1994, Ms. Gorby was Marketing Director for First Western
Bank since 1993 and, for over ten years previously, owned J. Gorby
Communications and Word Merchant, companies which assisted savings
institutions in all areas of marketing. In May, 1997, Ms. Gorby was appointed
Senior Vice President and Director of Marketing. Ms. Gorby has over 20 years
of financial marketing and advertising experience.

Richard D. Silver--Mr. Silver joined the Bank in 1986 and was appointed
Senior Vice President and Controller of the Bank in October 1989.

JoLene M. Wryn--Prior to joining the Bank as Vice President and Director of
Human Resources in December 1991, Ms. Wryn was Vice President and Compensation
Manager with Great American Bank from

1990 to 1991 and Senior Compensation Analyst and Administration Officer from
1989 to 1990. She served as a Compensation Analyst with San Diego Gas &
Electric from 1988 to 1989. Ms. Wryn was appointed Senior Vice President and
Director of Human Resources in January 1992.

Herb Cuesta--Prior to joining the Bank as Vice President and Chief Appraiser
in March 1996, Mr. Cuesta was an independent fee appraiser and consultant from
January 1991 to March 1996. Mr. Cuesta has over 20 years of appraisal and
thrift experience, including five years with FarWest Savings and Loan
Association and nine years with Columbia Savings and Loan Association, where
he held several positions, including Vice President and Chief Appraiser.

Art J. Den-Heyer--Mr. Den-Heyer joined the Bank in August 1992 as Manager of
Corporate Audit and was appointed Vice President, Director of Internal Audit
in September 1995. Mr. Den-Heyer previously held positions from 1980 to 1992
with Guardian Federal Savings and Loan Association, Mercury Savings and Loan
Association, United California Savings Bank and the accounting firm of Arthur
Young & Company.

Jane L. Smallwood--Prior to joining the Bank as Vice President and Director
of Internal Asset Review in 1991, Ms. Smallwood spent eight years at FarWest
Savings and Loan Association in various capacities, the most recent of which
was as Senior Vice President of Major Loans. Ms. Smallwood is also Chairman of
the Bank's Internal Asset Review Committee.

Carolyn B. DiOrio--Ms. DiOrio joined DSL Service Company in November 1985 as
Assistant Controller. Ms. DiOrio was appointed as a director and Chief
Financial Officer of DSL Service Company in 1991 and is a Vice President of
the Bank.

COMPENSATION COMMITTEE REPORT

The Compensation Committee (the "Committee") of Downey's Board of Directors
establishes the overall compensation policies and programs of Downey and its
subsidiaries. In addition, the Committee establishes the specific compensation
of the Chief Executive Officer and other executive officers of Downey, the
Bank and their respective subsidiaries. All decisions of the Committee
relating to the compensation of employees with an annual salary of more than
$100,000 are reviewed by the Board of Directors of Downey. The Committee is
composed of three directors, none of whom is employed by Downey.

COMPENSATION PHILOSOPHY

The Committee's goal is to align compensation programs with the strategic
direction of Downey and to attract, motivate and retain the best qualified
employees. In carrying out its duties, the Committee evaluates compensation
and benefits programs including both qualified and nonqualified programs, as
well as medical, dental and other benefits programs affecting all employees.
The Committee evaluates compensation and benefits programs to ensure they are
cost effective, competitive and fair.

To ensure that pay policies are competitive, the Committee periodically
compares Downey's pay policies to peer group institutions. The Committee
strives to implement benefits programs which, based upon competitive and cost
considerations, deliver the highest level of value consistent with corporate
and shareholder interests. Total compensation (including benefits) is
established in the context of overall job responsibilities, achieving
corporate and individual performance goals and objectives, as well as
competitive compensation conditions.

1997 COMPENSATION PROGRAMS

During 1997, the components of the compensation programs included a base
salary, a bonus program ("Annual Incentive Plan"), the 1994 Long-Term
Incentive Plan, a Deferred Compensation Plan, a Section 125 Cafeteria Plan
(i.e., medical, vision, dental and life coverages) and an Employees'
Retirement and Savings Plan (401(k) Plan).

Base Salary

The Committee has developed and recommended to Downey's Board of Directors
adjustments to base salaries through a review of competitiveness, using salary
survey data supplied by outside consultants and third party nationally
recognized salary surveys, and also salary surveys in relation to those
institutions noted in the "Performance Graph" that follows.

Annual Incentive Plan

During 1997, the Committee reviewed and Downey's Board of Directors approved
an Annual Incentive Plan for Downey. Individual performance objectives were
established for participants in the Annual Incentive Plan based upon their
individual responsibilities and Downey's 1997 approved corporate performance
target for net income, which aligned each participant's compensation with
Downey's approved business plan. Bonus levels in the Annual Incentive Plan
were targeted at 30% of base salary for the Chief Executive Officer, 25% of
base salary for certain other executive officers and 20% of base salary for
all other eligible participants. Pursuant to the Annual Incentive Plan, those
targeted amounts are adjusted based upon individual and corporate performance
goals which provide for a potential bonus payment of up to 173% of the
targeted bonus amounts. However, to the extent that actual corporate
performance was 80% or below of the approved corporate performance goal, no
bonus amounts were to be paid to participants pursuant to the Annual Incentive
Plan.

After obtaining the 1997 year-end results, the Committee met with the Chief
Executive Officer and the Director of Human Resources of the Bank to review
the individual performance contribution of each participant. During 1997,
Downey achieved 102% of its corporate performance target. Based upon 1997
corporate and individual participant performance, bonuses paid, relative to
the targeted amounts for such participants, represented, on average, 111.6% of
the bonus target.

1994 Long-Term Incentive Plan

On June 14, 1994, the Bank's Board of Directors approved a 1994 Long-Term
Incentive Plan (the "LTIP"). The LTIP was submitted to the Bank's shareholders
for approval at a special meeting of shareholders held on December 21, 1994.
Thereafter, the LTIP was adopted and ratified by Downey and, pursuant thereto,
shares of Downey are to be issued upon the exercise of options or payments of
other awards for which payment is to be made in stock.

The LTIP was adopted to promote and advance the interests of Downey and its
shareholders by providing a means by which selected officers and employees
could be given an opportunity to acquire stock in Downey and other incentive-
based awards, to assist in attracting and retaining the services of employees
holding key positions and to provide incentives for such key employees to
exert maximum efforts toward results that are in the best interests of all
shareholders. Incentive stock options may be granted under the LTIP only to
officers and key employees, including directors if they are employees.
Currently, approximately 39 officers and key employees are eligible to receive
awards under the LTIP. The LTIP is administered by the Committee. During 1997,
no options were granted under the LTIP.

Deferred Compensation Plan

During 1995, the Committee reviewed and Downey's Board of Directors approved
implementation of a Deferred Compensation Plan for key management employees
and directors. The Deferred Compensation Plan is considered to be an essential
element in a comprehensive competitive benefits package designed to attract
and retain individuals who contribute to the success of Downey. Participants
are eligible to defer compensation on a pre-tax basis, including director
fees, and earn a competitive interest rate on the amounts deferred. Currently,
46 management employees and six directors are eligible to participate in the
program. During 1997, 16 management employees and one director elected to
defer compensation pursuant to the plan.

Employees' Retirement and Savings Plan

The Bank offers to its employees a 401(k) plan entitled the Downey Savings
Employees' Retirement and Savings Plan. Participants are permitted to make
contributions on a pre-tax basis, a portion of which is matched by the Bank.
In addition, a basic contribution is made on behalf of each eligible
participant, according to a formula which takes into account the age and
compensation of the participant. For 1997, total contributions, consisting of
the Bank's basic contribution and employer match, to the Downey Savings
Employees' Retirement and Savings Plan were $1,550,000.

Employee Stock Purchase Plan

Downey offers its employees participation in Downey's Employee Stock
Purchase Plan. Downey believes that ownership of Downey's stock by employees
will foster greater employee interest in Downey's success, growth and
development and will be to the mutual benefit of the employee and Downey. The
Employee Stock Purchase Plan is designed to provide employees a continued
opportunity to purchase Downey stock through systematic payroll deductions.
Downey bears all costs of administering the Employee Stock Purchase Plan,
including broker's fees, commissions, postage and other costs incurred with
stock purchases. If an employee elects to terminate participation in the
Employee Stock Purchase Plan, or sells stock acquired through the Employee
Stock Purchase Plan, the employee is responsible for the associated costs.

Chief Executive Officer Compensation

In accordance with the Annual Incentive Plan and achievement of Downey's
1997 corporate performance target, the Committee recommended and Downey's
Board of Directors approved an incentive compensation payment to Mr. Lokey of
$82,500. That amount represents 105.6% of the targeted amount in keeping with
Downey's profit goals. For purposes of determining the amount of the incentive
compensation paid under the Annual Incentive Plan, Mr. Lokey's performance was
measured by the results of Downey's achievement of Downey's 1997 Business
Plan. See "Compensation--Employment Agreements."

The Committee believes that the management team is dedicated to achieving
significant improvement in Downey's long-term financial performance. The
Committee further believes that Downey's compensation policies are designed to
align closely the financial interests of senior executive management with the
interests of Downey's shareholders and, as administered by the Committee, will
enhance management's efforts in these areas.

Respectfully submitted,

Dr. Dennis J. Aigner, Chairman
Cheryl E. Jones
Lester C. Smull

COMPENSATION

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth all compensation paid by
Downey and its subsidiaries for services rendered during 1997, 1996 and 1995
to (i) individuals who served as Downey's Chief Executive Officer during 1997,
and (ii) each of Downey's four other most highly compensated executive
officers as of the end of 1997 (collectively, the "Named Executives").

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- ------------------------------
AWARDS PAYOUTS
--------------------- -------
NUMBER OF
OTHER RESTRICTED SECURITIES
NAME AND PRINCIPAL ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS PAYOUTS COMPENSATION
- --------------------------------------------------------------------------------------------------------------

James W. Lokey 1997 $260,384 $ 82,500 -- -- -- -- $ 1,982(1)
President and Chief
Executive Officer

Stephen W. Prough 1997 $ 50,001(2) -- -- -- -- -- $1,625,870(2)
President and Chief 1996 400,008 $ 96,336 -- -- -- -- 19,746(2)
Executive Officer 1995 395,858 102,144 -- -- -- -- 16,496(2)

Jane Wolfe 1997 $180,007(3) $ 55,435 -- -- -- -- $ 18,978(4)
Executive Vice President 1996 172,007 43,448 -- -- -- -- 14,529(4)
and Chief Lending 1995 155,256 36,960 -- -- 7,875(5) -- 13,516(4)
Officer

Thomas E. Prince 1997 $178,007(6) $ 48,886 -- -- -- -- $ 30,076(7)
Executive Vice President 1996 178,007 40,051 -- -- -- -- 19,957(7)
and Chief Financial 1995 172,007 42,761 -- -- 7,875(5) -- 51,734(7)
Officer

Donald E. Royer 1997 $179,007(8) $ 47,401 -- -- -- -- $ 24,720(9)
Executive Vice President 1996 174,006 40,742 -- -- -- -- 22,554(9)
General Counsel 1995 165,854 41,265 -- -- 7,875(5) -- 29,308(9)

Keith A. Voll 1997 $146,006 $ 40,455 -- -- -- -- $ 22,035(10)
Executive Vice President 1996 140,005 36,442 -- -- -- -- 19,341(10)
and Chief Information 1995 134,005 35,036 -- -- 7,875(5) -- 11,260(10)
Officer

(1) The amounts shown for Mr. Lokey for 1997 include flex benefit credits
contributed by Downey.

(2) The amounts shown for Mr. Prough for 1997 include salary paid through
February 14, 1997 ($50,001), flex benefit credits contributed by Downey
($539), payout of accrued Personal Time Off ($66,345), balance of deferred
wages ($173,873), severance pay ($800,000) and the value of his
exercisable Downey Common Stock options ($585,113) which were canceled in
consideration for such payment; and for 1996 include flex benefit credits
contributed by Downey ($4,308), Mr. Prough's interest ($13,140) in
Downey's 1996 401(k) plan contributions and reportable interest from
deferred compensation ($2,298); and for 1995 include flex benefit credits
contributed by Downey ($4,126), Mr. Prough's interest ($12,270) in
Downey's 1995 401(k) plan contributions and reportable interest from
deferred compensation ($100).

(3) Ms. Wolfe's salary for 1997 ($180,007) reflects wages paid in 1997
($173,228) and wages deferred ($6,779).

(4) The amounts shown for Ms. Wolfe for 1997 include flex benefit credits
contributed by Downey ($2,233), Ms. Wolfe's interest ($14,016) in Downey's
1997 401(k) plan contributions, reportable interest from deferred
compensation ($229) and a service award ($2,500); and for 1996 include
flex benefit credits contributed by Downey ($2,129), Ms. Wolfe's interest
($12,270) in Downey's 1996 401(k) plan

contributions and reportable interest from deferred compensation ($130); and
for 1995 include flex benefit credits contributed by Downey ($2,033), Ms.
Wolfe's interest ($11,475) in Downey's 1995 401(k) plan contributions and
reportable interest from deferred compensation ($8).

(5) The Stock Option Award (SARS) granted for 1995 reflects the amount granted
(5,000 shares), a three-for-two stock split effected in the form of a
stock dividend paid in December 1996 (2,500 shares) and a 5% stock dividend
paid in May, 1997 (375 shares).

(6) Mr. Prince's salary for 1997 ($178,007) reflects wages paid in 1997
($168,674) and wages deferred ($9,333).

(7) The amounts shown for Mr. Prince for 1997 include flex benefit credits
contributed by Downey ($2,288), cashed out Personal Time Off ($15,275), Mr.
Prince's interest ($12,240) in Downey's 1997 401(k) plan contributions and
reportable interest from deferred compensation ($273); and for 1996 include
flex benefit credits contributed by Downey ($2,233), cashed out Personal
Time Off ($6,846), Mr. Prince's interest ($10,740) in Downey's 1996 401(k)
plan contributions and reportable interest from deferred compensation
($138); and for 1995 include flex benefit credits contributed by Downey
($2,170), cashed out Personal Time Off ($13,135), relocation expenses
($26,364), Mr. Prince's interest ($10,050) in Downey's 1995 401(k) plan
contributions and reportable interest from deferred compensation ($15).

(8) Mr. Royer's salary for 1997 ($179,007) reflects wages paid in 1997
($172,017) and wages deferred ($6,990).

(9) The amounts shown for Mr. Royer for 1997 include flex benefit credits
contributed by Downey ($2,251), cashed out Personal Time Off ($13,253), Mr.
Royer's interest ($9,120) in Downey's 1997 401(k) plan contributions and
reportable interest from deferred compensation ($96); and for 1996 include
flex benefit credits contributed by Downey ($2,170) cashed out Personal
Time Off ($12,464) and Mr. Royer's interest ($7,920) in Downey's 1996
401(k) plan contributions; and for 1995 include flex benefit credits
contributed by Downey ($2,119), cashed out Personal Time Off ($19,854) and
Mr. Royer's interest ($7,335) in Downey's 1995 401(k) plan contributions.

(10) The amounts shown for Mr. Voll for 1997 include flex benefit credits
contributed by Downey ($1,942), cashed out Personal Time Off ($6,642), Mr.
Voll's interest ($10,951) in Downey's 1997 401(k) plan contributions, and
a service award ($2,500); and for 1996 include flex benefit credits
contributed by Downey ($1,887), cashed out Personal Time Off ($7,404) and
Mr. Voll's interest ($10,050) in Downey's 1996 401(k) plan contributions;
and for 1995 include flex benefit credits contributed by Downey ($1,840)
and Mr. Voll's interest ($9,420) in Downey's 1995 401(k) plan
contributions.

STOCK OPTIONS

During 1997, there were no stock options granted to the Named Executives.

OPTION EXERCISES AND HOLDINGS

The following table provides information with respect to the Named
Executives concerning the exercise of options during 1997 and unexercised
options held by the Named Executives as of December 31, 1997:

AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES

- -------------------------------------------------------------------------------------------------

VALUE OF UNEXERCISED
NUMBER OF NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 12/31/97 12/31/97(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------

James W. Lokey.......... -- -- -- -- -- --
Stephen W. Prough....... -- -- -- -- -- --
Jane Wolfe.............. 10,237 $106,446 6,103 8,073 $ 89,772 $118,096
Thomas E. Prince........ -- -- 16,340 8,073 241,006 118,096
Donald E. Royer......... -- -- 16,340 8,073 241,006 118,096
Keith A. Voll........... -- -- 16,340 8,073 241,006 118,096

- --------
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on December 31, 1997 ($28.4375 per share)
and the exercise price of the options, multiplied by the number of shares
subject to the option. The number of options and the exercise price per
share have been adjusted for a 5% stock dividend paid in December 1995, a
three-for-two stock split effected in the form of a stock dividend paid in
December 1996, and a 5% stock dividend paid in May, 1997.

EMPLOYMENT AGREEMENTS

In connection with the February 17, 1997 retention of Mr. Lokey as President
and Chief Executive Officer of Downey and the Bank, Downey's Board of
Directors offered a compensation package which included a monthly salary of
$25,000, plus for 1997, pro-rated participation at 30% of Mr. Lokey's base
salary in the 1997 Annual Incentive Plan. In addition, Mr. Lokey was eligible,
as an employee, to participate in Downey's employee benefit programs. The
Board of Directors agreed that prior to the expiration of one year from the
date of employment, the Board of Directors would review Mr. Lokey's
performance and the terms of his employment.

With the completion of one year of service as President and Chief Executive
Officer of Downey and the Bank, the Board of Directors reviewed Mr. Lokey's
performance in connection with reviewing the financial results obtained for
1997 and agreed to modify Mr. Lokey's employment relationship. Mr. Lokey's
employment was extended for an additional term of one year to serve at the
pleasure of the Board of Directors. Mr. Lokey was considered and nominated by
the Downey Board of Directors for election as a director at the 1998 Annual
Meeting of Shareholders. For 1998, Mr. Lokey's annual salary was maintained at
$300,000 and Mr. Lokey's participation in the 1998 Annual Incentive Plan was
increased to 50% of annual base salary. In addition, Mr. Lokey, as an
employee, will continue to participate in Downey's employee benefit programs.
The Board of Directors further agreed to an employment agreement pursuant to
which Mr. Lokey would receive six months of salary and health benefits from
the date of separation in the event that Mr. Lokey's employment is terminated
other than for cause. In addition, Mr. Lokey would receive an adjusted pro-
rata share of the 1998 Annual Incentive Plan target award. During 1998,
Downey's Board of Directors agreed to review Downey's policy for implementing
Downey's Long Term Incentive Plan for key executives, including Mr. Lokey,
appropriate for companies in Downey's peer group and to review the Annual
Incentive Plan target participation level applicable for key executives of
Downey and the Bank.

DIRECTOR COMPENSATION

Annual Compensation

Directors who are not employees receive (i) an annual retainer of $24,000
payable monthly or quarterly, at the director's option, (ii) an attendance fee
of $750 for each meeting held on a regular Board of Directors meeting

day, and (iii) an attendance fee of $500 for each meeting of a Downey or Bank
committee or $500 for each meeting of DSL Service Company's Board of Directors
held on a day other than a regular Board of Directors meeting day. Nonemployee
directors who review the Thrift Financial Reports and Consolidated
Maturity/Rate Reports, required to be filed quarterly with the Office of
Thrift Supervision, also receive a $500 fee per quarter in connection with the
review and execution of those regulatory reports. The Chairmen of Downey's
Audit and Compensation Committees each receive an additional annual retainer
of $5,000 and $3,000, respectively. The Chairman of Downey's and the Bank's
Boards of Directors is entitled to receive an additional annual retainer of
$2,500, respectively. Downey's and the Bank's Chairman has declined to accept
these additional annual retainers. Directors are reimbursed for reasonable
out-of-pocket expenses incurred in the performance of their duties.
Furthermore, directors are entitled to participate in and receive the medical
benefit coverages provided to the Bank's employees, or payment in lieu
thereof.

Director Retirement Benefit

A retirement benefit (the "Director Retirement Benefit") will be paid to
each nonemployee director or his or her designated beneficiary, in equal
monthly installments for a period of 60 months beginning the month following
his or her retirement. The aggregate Director Retirement Benefit for each
director will equal one-third of the number of months of service as a director
by such individual (up to a maximum of 15 years of service) multiplied by the
average monthly qualified (nonemployee) director compensation paid to such
individual during the three years preceding cessation of service as a
director. Qualified director compensation includes the annual retainer plus
all meeting fees for the Boards of Directors and committees of Downey, the
Bank and their respective subsidiaries. The right of each director to begin to
receive such Director Retirement Benefit is subject to the individual director
having (i) ceased serving as a director of Downey and the Bank, and (ii)
served as a director for at least three years. If a majority interest of
Downey's outstanding stock is transferred or acquired (other than by will or
by the laws of descent and distribution), then the entire earned Director
Retirement Benefit becomes payable immediately, and the three-year minimum
service requirement described above does not apply. If a retired director so
requests, Downey, at its option, may make a single lump-sum payment of the
Director Retirement Benefit. Any such accelerated payment would be discounted
at the interest rate then in effect for the Bank's five-year certificate of
deposit.

Founder Retirement Agreement

On December 21, 1989, the Bank entered into a retirement agreement (the
"Founder Retirement Agreement") with Mr. McAlister. Under the Founder
Retirement Agreement, monthly compensation is paid to Mr. McAlister, or his
beneficiaries, for 120 months following cessation of employment. Pursuant to
the Founder Retirement Agreement, Mr. McAlister's compensation was $32,167 per
month, which payments commenced upon Mr. McAlister's retirement as President
of DSL Service Company in 1993. The Founder Retirement Agreement provides for
adjustments to compensation payments every three years, such adjustments to be
based on the Consumer Price Index, as defined under the Founder Retirement
Agreement. Pursuant to these adjustments, Mr. McAlister's compensation was
adjusted to $33,820 per month, effective as of July 1, 1996. If a majority
interest of Downey's Common Stock is transferred or acquired, then such
compensation shall continue as scheduled or, at Downey's option, a lump-sum
payment equal to the then present value of any remaining compensation shall be
paid. During 1997, Mr. McAlister received $405,841 under the Founder
Retirement Agreement.

PERFORMANCE GRAPH

The table below compares the performance of Downey with that of the S&P 500
composite index and the selected peer group ("Peer Group"). The Peer Group
consists of all California-based thrifts followed by Merrill Lynch & Co.,
except for Downey. The thrifts and the thrift holding companies included in
the Peer Group may change from time to time as Merrill Lynch & Co. makes
adjustments in the institutions it follows. As of the date hereof, this Peer
Group consists of the following six California-based thrifts and thrift
holding companies: H. F. Ahmanson & Company (Home Savings of America, FA), Bay
View Capital Corporation (Bay View Federal Bank, A FSB), CENFED Financial
Corporation (CenFed Bank, A Federal Savings Bank), Coast Savings Financial,
Inc. (Coast Federal Bank, FSB), Golden State Bancorp (Glendale Federal Bank,
F.S.B.), and Golden West Financial Corp. (World Savings & Loan Association, A
Federal Savings & Loan Association). This Peer Group was selected because it
has a representative number of publicly held thrifts and thrift holding
companies which are competitors in Downey's market areas. The following table
assumes $100 invested on December 31, 1992 in Downey, the S&P 500 and equally
in the thrifts and thrift holding companies in the Peer Group, and assumes a
reinvestment of dividends on a daily basis.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
DOWNEY, S&P 500 INDEX AND PEER GROUP

[PERFORMANCE GRAPH APPEARS HERE]

Measurement Period
(Fiscal Year Covered) DOWNEY S&P 500 PEER GROUP
- ------------------------- ------- --------- ----------

Measurement Pt-12/31/1992 $100.00 $100.00 $100.00
FYE 12/31/1993 $135.03 $110.08 $ 98.13
FYE 12/31/1994 $105.55 $111.53 $ 90.12
FYE 12/31/1995 $163.38 $153.45 $152.37
FYE 12/31/1996 $225.57 $188.68 $185.18
FYE 12/31/1997 $348.00 $251.63 $331.64

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT AND CERTAIN BUSINESS RELATIONSHIPS

The Bank has entered into a commercial lease with Business Properties #18, a
California General Partnership ("BP #18"), pursuant to which the Bank leases
its Dana Point branch office. Lester C. Smull, a director of Downey and the
Bank, is the managing general partner of BP #18. The lease, which runs from
October 1, 1997 through October 1, 2002, provides that the Bank will pay rent
to BP #18 at the rate of $3,630 per month, with annual rent increases of 2.5%
during the initial five-year term. The lease provides for two consecutive
five-year options to extend, with annual rent increases of 3%. Management
believes that the terms of the lease arrangement, including the monthly rent,
are at least as favorable to the Bank as prevailing terms that could be
obtained from a nonaffiliated person.

The Bank has also entered into a commercial lease for its Mission Viejo
branch office with the Lester C. and Jimmy L. Smull Family Trust dated
December 7, 1984 (the "Trust"), wherein Mr. Smull acts as trustee. A lease was
entered into on December 14, 1996 for a one year term, with three consecutive
five-year options to extend. The Bank will pay rent of $4,835.25 per month for
the first year, $5,560.53 per month during the first option term, $6,394.60
per month during the second option term and $7,353.79 per month during the
third option term. Management believes that the terms of the lease
arrangement, including the monthly rent, are at least as favorable to the Bank
as prevailing terms that could be obtained from a nonaffiliated person.

During 1997, employees of Downey and the Bank provided accounting and
related services to Maurice L. McAlister, Chairman of Downey's Board of
Directors, certain members of Mr. McAlister's family and certain of his
controlled affiliates. The aggregate value of these services was approximately
$70,537. Downey and the Bank have been fully reimbursed for the services
provided.

INDEBTEDNESS OF MANAGEMENT

The Bank offers loans to directors, officers and employees of Downey, the
Bank and their respective subsidiaries. These loans are made in the ordinary
course of business and, in the judgment of management, do not involve more
than the normal risk of collectability or present other unfavorable features.
The loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
involving nonaffiliated persons.

Over a period of approximately 23 years, the Bank has made various loans to
Mr. Smull, a director, in his individual capacity, to the Trust and to a
number of California partnerships as to which Mr. Smull is a general partner.
As of December 31, 1997, the Bank had loans outstanding to Mr. Smull or his
related partnerships in an aggregate amount of approximately $27 million. Each
of the loans to Mr. Smull or his related partnerships (i) was made in the
ordinary course of business, (ii) was made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions involving nonaffiliated persons, and (iii) did not
involve more than the normal risk of collectability or present other
unfavorable features.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

At the close of business on February 27, 1998, the record date for the
Annual Meeting, there were outstanding and entitled to vote 26,755,938 shares
of Downey's Common Stock, all of one class and each having one vote. The
holders of a majority of the shares outstanding and entitled to vote, present
in person or represented by proxy, constitute a quorum for the Annual Meeting.

PRINCIPAL SHAREHOLDERS

Information concerning the owners of more than 5% of the outstanding Common
Stock as of the record date for the Annual Meeting follows:

PERCENT OF
AMOUNT/NATURE OF OUTSTANDING
NAME/ADDRESS BENEFICIAL OWNERSHIP STOCK
- ------------ -------------------- -----------

McAlister Family Trust(1)..................... 5,368,430 20.1%
3501 Jamboree Road
Newport Beach, CA 92660

Gerald H. McQuarrie
Family Trusts(2).............................. 1,978,266 7.4%
34 South 300 East
Provo, UT 84606

- --------
(1)See footnote 2 on Page 6.

(2) Oneida B. McQuarrie-Gibson serves as Trustee for the Gerald H. McQuarrie
Family Trusts. Includes 673,656 shares held by the Survivor Trust of the
Gerald H. McQuarrie Family Trusts; 6,517 shares held by the By-Pass Trust
of the Gerald H. McQuarrie Family Trusts; 71,520 shares held by the Exempt
Marital Trust of the Gerald H. McQuarrie Family Trusts; and 1,138,086
shares held by the Non-Exempt Marital Trust of the Gerald H. McQuarrie
Family Trusts.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires Downey's and,
as may be determined, the Bank's and their respective subsidiaries' executive
officers, directors and holders of more than 10% of the Common Stock to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of the Common Stock and other equity
securities of Downey. Such persons and holders are required to furnish Downey
with copies of all reports filed pursuant to such requirement.

Based solely on review of the copies of such forms furnished to Downey and
written representations from certain reporting persons that no Forms 5 were
required, except as noted for those persons, Downey believes that during the
period January 1, 1997 to December 31, 1997, all Section 16 filing
requirements were complied with, except as follows: Rosemarie Willock filed a
late Form 3 with respect to her appointment as Corporate Secretary of Downey
Auto Finance Corp.

PROPOSALS OF SHAREHOLDERS

It is presently anticipated that the 1999 Annual Meeting of Shareholders
will be held in April 1999. Shareholders desiring to exercise their rights
under the proxy rules to submit shareholder proposals are advised that their
proposals must be received by Downey no later than November 21, 1998, in order
to be eligible for inclusion in Downey's proxy statement relating to that
meeting. Shareholders desiring to submit proposals pursuant to the proxy rules
should submit their proposals to the Corporate Secretary, Downey Financial
Corp., 3501 Jamboree Road, Newport Beach, California 92660.

RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS

In 1989, the Board of Directors engaged KPMG Peat Marwick LLP as Downey's
independent auditors, and the relationship which has existed has been the
customary relationship between an independent accountant and client. Downey's
auditors for 1998 have not been engaged by the Audit Committee nor approved by
Downey's Board of Directors. Downey's Audit Committee will make a
recommendation to the Board of Directors with respect to the 1998 audit upon
the completion of its review of the accounting services rendered during 1997,
the cost thereof and available alternatives.

Representatives of KPMG Peat Marwick LLP are scheduled to be present at the
Annual Meeting, will have an opportunity to make a statement if they so
desire, and will be available to answer questions.

ANNUAL REPORT TO SHAREHOLDERS

Downey's Annual Report to Shareholders, which includes the consolidated
financial statements and related notes thereto, accompanies this Proxy
Statement.

SINGLE COPIES OF DOWNEY FINANCIAL CORP.'S ANNUAL REPORT ON FORM 10-K
(WITHOUT EXHIBITS) MAY BE OBTAINED, FREE OF CHARGE, UPON WRITTEN REQUEST TO:
DOWNEY FINANCIAL CORP., 3501 JAMBOREE ROAD, NEWPORT BEACH, CALIFORNIA, 92660,
ATTENTION: CORPORATE SECRETARY.

OTHER BUSINESS

PRESENTED BY MANAGEMENT

As of the date of this Proxy Statement, the management of Downey does not
know of any other matters that are to be presented for action at the Annual
Meeting. Should any other matters come before the Annual Meeting or any
adjournment thereof, the persons named in the enclosed proxy will have
discretionary authority to vote all proxies with respect to such matters in
accordance with their judgment. Additional business may be properly brought
before the Annual Meeting by or at the direction of a majority of Downey's
Board of Directors.

PRESENTED BY SHAREHOLDERS

Pursuant to Downey's Bylaws, only such business shall be conducted, and only
such proposals shall be acted upon at the Annual Meeting as is properly
brought before the Annual Meeting. For any new business proposed by management
to be properly brought before the Annual Meeting such new business shall be
approved by the Board of Directors, either directly or through its approval of
proxy solicitation materials related thereto, and shall be stated in writing
and filed with the Corporate Secretary of Downey at least 60 days before the
date of the Annual Meeting, and all business so stated, proposed and filed
shall be considered at the Annual Meeting. Any shareholder may make any other
proposal at the Annual Meeting and the same may be discussed and considered,
but unless properly brought before the Annual Meeting such proposal shall not
be acted upon at the Annual Meeting. For a proposal to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Corporate Secretary of Downey. To be
timely, a shareholder's notice must be delivered to or received at the
principal executive offices of Downey, not less than 120 calendar days in
advance of the date of Downey's proxy statement released to shareholders in
connection with the previous year's annual meeting of shareholders, except
that, if no annual meeting was held in the previous year or if the date of the
annual meeting has been changed by more than 30 calendar days from the date
contemplated at the time of the previous year's proxy statement, notice by the
shareholder to be timely must be so received no later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed. A shareholder's notice to the Corporate
Secretary shall set forth as to each matter the shareholder proposes to bring
before the annual meeting (i) a brief description of the proposal desired to
be brought before the annual meeting, (ii) the name and address of the
shareholder proposing such business, and (iii) the class and number of shares
of Downey which are owned of record by shareholders. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in Downey's Bylaws.

/s/ Donald E. Royer

DONALD E. ROYER
Corporate Secretary

REVOCABLE PROXY

DOWNEY FINANCIAL CORP.

ANNUAL MEETING OF SHAREHOLDERS - APRIL 22, 1998
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

The undersigned shareholder(s) of Downey Financial Corp. (the "Company")
hereby nominates, constitutes and appoints Maurice L. McAlister and Cheryl E.
Jones, and each of them, the attorney, agent and proxy of the undersigned, with
full power of substitution, to vote all stock of the Company which the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the
Company (the "Annual Meeting") to be held at The Irvine Marriott, 18000 Von
Karman Avenue, Irvine, California, on April 22, 1998 at 10:00 a.m., local time,
and any adjournments thereof, as fully and with the same force and effect as the
undersigned might or could do if personally thereat, as follows:

PLEASE SIGN AND DATE ON REVERSE SIDE

Please date, sign and mail your
proxy card back as soon as possible!

Annual Meeting of Shareholders
DOWNEY FINANCIAL CORP.

April 22, 1998

Please Detach and Mail in the Envelope Provided

A [X] Please mark your votes as in this example.

1. Election of Directors

For all the Company
nominees listed at right Withhold Authority
(except as marked to to vote for all nominees
the contrary below) listed at right

[_] [_]

(Instructions: To withhold authority to vote for any one or more nominees, write
that nominee's or nominees' name(s) in the space provided below)
________________________________________________________________________________

Nominees:
Class 3 Directors (for a three-year term of office, which term shall expire when
his successor is elected and qualified at the 2001 Annual Meeting of
Shareholders):

Dr. Paul Kouri
Brent McQuarrie

Class 1 Director (for a one-year term of office, which term shall expire when
his successor is elected and qualified at the 1999 Annual Meeting of
Shareholders):

James W. Lokey

2. Other Business. In their discretion, the proxyholders are authorized to
transact such other business as may properly come before the Annual Meeting and
any adjournment or adjournments thereof.

This proxy will be voted "FOR" the election of all nominees unless authority to
do so is withheld for all nominees or for any individual nominee. PLEASE SIGN,
DATE, AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE PREPAID
ENVELOPE PROVIDED.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE OF "FOR" THE ELECTION OF EACH OF THE
NOMINEES LISTED AT LEFT. ALL PROPOSALS TO BE ACTED UPON ARE PROPOSALS OF THE
COMPANY. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING, THIS PROXY SHALL BE
VOTED BY THE PROXYHOLDERS IN ACCORDANCE WITH THE RECOMMENDATIONS OF A MAJORITY
OF THE BOARD OF DIRECTORS.

The undersigned hereby ratifies and confirms all that said attorneys and
proxyholders, or either of them, or their substitutes, shall lawfully do or
cause to be done by virtue hereof, and hereby revokes any and all proxies
heretofore given by the undersigned to vote at the Meeting. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting and the Proxy
Statement accompanying said notice.

I (We) do [_] I (We) do [_]
expect not expect
to attend to attend
the meeting the Meeting

Number of Shares ________________

Date
- ---------------------------- ------------------------ ---------------------------- ------------------------ ----------

Name of Shareholder, Printed Signature of Shareholder Name of Shareholder, Printed Signature of Shareholder

Note: (Please date this Proxy and sign your name as it appears on your stock
certificate(s). Executors, administrators, trustees, etc., should give their
full titles. All joint owners should sign.)