PART I

       California First National Bancorp, a California corporation (the "Company"), is a bank holding company headquartered in Orange County, California with leasing and bank subsidiaries. Effective May 22, 2001, Amplicon, Inc., ("Amplicon"), reorganized itself as a holding company. In doing so, California First National Bancorp became the holding company and Amplicon became a wholly-owned subsidiary of the Company. The Company became a bank holding company on May 23, 2001 when it acquired all of the outstanding stock of California First National Bank ("CalFirst Bank" or the "Bank"). The Company has two leasing subsidiaries, Amplicon and California First Leasing Corporation ("CalFirst Leasing", collectively the "Leasing Companies"). The operations of CalFirst Leasing commenced July 2, 2001.

      The Leasing Companies focus on leasing and financing capital assets, primarily computers, computer networks and other high technology assets, through a centralized marketing program designed to offer cost-effective leasing alternatives. The Leasing Companies also re-market leased assets at lease expiration. CalFirst Bank, which commenced operations on May 23, 2001, is an FDIC-insured national bank that gathers deposits using the telephone, the Internet, and direct mail from a centralized location. The Bank leases capital assets to organizations and businesses and provides business loans to fund the purchase of assets leased by third parties.

       This Form 10-K contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated. Factors that might affect forward-looking statements include, among other things:

• General economic or industry conditions could be less favorable than expected, resulting in a reduced demand for capital assets, deterioration in credit quality, deterioration in the recoverability of our investment in leased property and lease residual values, and a change in the allowance for lease losses;


• Changes in the domestic interest rate environment could reduce net interest income and negatively effect certain lessees, which could increase lease losses;


• Over the past two years, the Company's subsidiaries have retained an increasing number of lease transactions in their own portfolios which has increased the Company's exposure to credit risk;


• CalFirst Bank may not attract or retain sufficient deposits at attractive interest rates to fund its lease portfolio, and therefore could require additional investment by the Company, produce lower lease growth and continuing losses;


• Security breaches, systems failures, computer viruses or other similar events could damage CalFirst Bank's reputation, or Internet banks in general, and inhibit the ability to raise deposits;


• The conditions of the securities markets could change, adversely affecting certain leases and the value or credit quality of the Company's assets, or the availability and terms of non-recourse financing obtained to complete certain lease transactions;


• The Company's Common Stock trades on the NASDAQ National Market System, but the volume of trading has been limited and the low volume of trading limits the liquidity of the Common Stock;


• Changes in the extensive laws, regulations and policies governing financial services companies could alter the Company's business environment or affect operations;


• Catastrophic events could impair the Company's business operations or systems, or that of its lessees, resulting in losses;


• All the above factors could impact the Company's ability to remain in compliance with commitments made to federal bank regulators in connection with the formation of CalFirst Bank.

       The result of these and other factors could cause a difference from expectations of the risk characteristics of the lease portfolio, the level of defaults and a change in the provision for lease losses. Forward-looking statements speak only as of the date made. The Company undertakes no obligations to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

       The Leasing Companies lease and re-market most capital assets used by businesses and organizations, with a focus on high technology equipment and software systems. The Leasing Companies' leases are structured individually and can provide end-of-term options to accommodate a variety of objectives. Approximately 59% and 65% of the leases originated in fiscal 2003 and 2002, respectively, involved computer workstations and networks, mid-range computers, computer automated design systems and computer software. Other major property groups included manufacturing equipment, furniture and fixtures, telecommunications systems, and point-of-sale systems.

       Computer Systems. The Leasing Companies concentrate on the market for computer servers and networks because this market is particularly receptive to leasing services. Advances in technology, including the rapidly expanding capabilities of personal computer systems and the Internet, have led to continued demand for more powerful systems and communications networks throughout the Leasing Companies' target markets. Computer networks typically consist of a central server, which may be a mid-range computer or high-end microcomputer, multiple personal computers and workstations, network communications hardware and software, printers and associated products. Computer networks generally range in cost from $100,000 to $3,000,000. The Leasing Companies' leased property is used primarily by middle-market companies for centralized data processing, by subsidiaries and divisions of large companies to supplement mainframe computer systems, and by non-profit associations and institutions.

       The Leasing Companies lease computer systems and network products manufactured by Cisco Systems, Inc. ("Cisco"), Dell Computer Corporation ("Dell"), Gateway, Inc. ("Gateway"), Hewlett-Packard Company ("HP"), International Business Machines Corporation ("IBM"), and Sun Microsystems, Inc. ("Sun"), among many others.

       Software. The Leasing Companies lease operating system software products and specialized application software packages. These application software packages typically range in cost from $50,000 to $1,000,000. In addition to leasing stand-alone software packages, an increasing percentage of the cost of computer systems and networks consists of operating and application software. The Leasing Companies lease software from vendors such as Microsoft Corporation, Oracle Corporation, J.D. Edwards & Company, Jenzabar, Inc., Parametric Technology Corporation, PeopleSoft, Inc., Geac Computer Corporation Limited, MSC.Software Corporation, and SAP AG.

       Other Electronic Equipment. Advances in microcomputer technology have also expanded the scope of other electronic equipment utilized by the Leasing Companies' existing and targeted customer base. Retail point-of-sale systems include those produced by IBM, Knogo Corporation, NCR Corporation ("NCR"), and Fujitsu Limited, while bank automated teller machines also have been procured from NCR. The telecommunications property leased by the Leasing Companies include digital private branch equipment, switching equipment and voice mail systems manufactured by Lucent Technologies Inc., NEC Corporation, Nortel Networks Limited, and Siemens Information and Communications Networks, Inc., as well as satellite tracking systems manufactured by QUALCOMM Incorporated. The Leasing Companies also lease imaging systems, testing equipment, and copying equipment.

       Production Equipment and Other Personal Property. The Leasing Companies lease technology-related manufacturing and distribution management systems that include complex computer controlled manufacturing and production systems, printing presses and warehouse distribution systems. In addition, the Leasing Companies lease a wide variety of personal property in the "non-high technology" area, including machine tools, trucks and office furniture.

       Marketing Strategy

       The Leasing Companies market through a centralized marketing program and direct delivery channels, including the telephone, the Internet, facsimile and express mail. The marketing program includes a confidential database of current and potential users of business property; a training program to introduce new marketing employees to the Leasing Companies' leasing techniques, and an in-house computer and telecommunications system. The Leasing Companies have augmented their marketing programs through the development of interactive web sites that enable prospective customers to review a lease agreement, calculate lease payments and submit a credit application on-line.

       The Leasing Companies implemented their current marketing systems after having determined that a centralized marketing program is more cost effective than field sales representatives. Marketing through the telephone or the Internet, rather than through field sales representatives, has enabled the Leasing Companies to limit selling, general and administrative expenses and allows the Leasing Companies to offer more competitive lease rates to customers.

       The Leasing Companies identify potential customers through a variety of methods. The Leasing Companies purchase lists of target market participants and computer users from private sources, conduct direct mail and telephone campaigns to generate sales leads, and maintain proprietary records of contacts made with potential customers by its sales professionals. The Leasing Companies utilize prospect management software to enhance the productivity of the sales force. Specific information about potential customers is entered into an on-line confidential database accessible to sales professionals and their managers. As potential customers are contacted, the database is updated and supplemented with information about what computer and other property they are using, related lease expiration dates and any future system needs or replacement plans. The database allows sales professionals to efficiently identify the most likely purchaser or lessee of capital assets and to concentrate efforts on these prospective customers.

       The Leasing Companies' databases, combined with the respective prospect management software and an integrated in-house telecommunications system, permit the Leasing Companies' sales management to monitor account executive activity, daily prospect status and pricing information. The ability to monitor account activity and offer immediate assistance in negotiating or pricing a transaction makes it possible for the Leasing Companies to be responsive to their customers and prospects.

       Leasing Activities

       The Leasing Companies' leases are generally for initial terms ranging from two to five years. Substantially all of the Leasing Companies' leases are non-cancelable "net" leases which contain "hell-or-high-water" provisions under which the lessee must make all lease payments regardless of any defects in the property, and which require the lessee to maintain and service the property, insure the property against casualty loss and pay all property, sales and other taxes. The Leasing Companies retain ownership of the property they lease, and in the event of default by the lessee, the Leasing Companies or the lender to whom the lease had been assigned may declare the lessee in default, accelerate all lease payments due under the lease and pursue other available remedies, including repossession of the property. Upon the expiration of the leases, the lessee typically has an option, which is dependent upon each lease's defined end of term options, to either purchase the property at a negotiated price, or in the case of a "conditional sales contract," at a predetermined minimum price, or to renew the lease. If the purchase option is not exercised by the original lessee, once the leased property is returned, the Leasing Companies will endeavor to locate a new lessee; however, if a new lessee cannot be located, then the Leasing Companies will seek to sell the leased property. The terms of the Leasing Companies' software leases are substantially similar to its equipment leases.

       The Leasing Companies conduct their leasing business in a manner designed to minimize risk, however, they are subject to risks through their investment in lease receivables held in their own portfolio, lease transactions in process, and residual investments. The Leasing Companies do not purchase leased property until they have received a binding non-cancelable lease from the customer. A portion of lease originations are discounted to banks or finance companies on a non-recourse basis at fixed interest rates that reflect the customers' financial condition. During the fiscal years ended June 30, 2003 and 2002, 11% and 32%, respectively, of the total dollar amount of new leases completed by the Leasing Companies were discounted to unaffiliated financial institutions, compared to 36% in fiscal 2001. The institutional lender to which a lease has been assigned has no recourse against the Leasing Companies, unless the Leasing Companies are in default under the terms of the agreement by which the lease was assigned. The institution to which a lease has been assigned may take title to the leased property, but only in the event the lessee fails to make lease payments or otherwise defaults under the terms of the lease. If this occurs, the Leasing Companies may not realize their residual investment in the leased property.

       Over the past two years, the Leasing Companies have retained an increasing number of lease transactions in their own portfolio that meet credit standards set by their credit committees. Some of these transactions are entered into where the value of the underlying leased property, or the credit profile of the lessee, is not acceptable to other financial institutions. Each of these transactions must meet or exceed certain credit or profitability requirements established, on a case by case basis, by the Leasing Companies' credit committee. In addition, the Leasing Companies invest in lease transactions which the Leasing Companies believe could be placed at a later date with non-recourse lenders on a lease-by-lease basis or in a portfolio. At June 30, 2003 and 2002, the discounted minimum lease payments receivable related to leases retained in the Leasing Companies' portfolio amounted to $88.1 million and $79.7 million, respectively, compared to $93.5 million at June 30, 2001. Such amounts represented 75% and 86% of the Company's total investment in discounted lease payments receivable at June 30, 2003 and 2002, respectively and 100% of the Company's total investment at June 30, 2001.

       The Leasing Companies often make payments to purchase leased property prior to the commencement of the lease. The disbursements for such lease transactions in process are generally made to facilitate the property implementation schedule of the lessees. The lessee is contractually obligated to make rental payments directly to the Leasing Companies during the period that the transaction is in process, and generally is obligated to reimburse the Leasing Companies for all disbursements under certain circumstances. At June 30, 2003 and 2002, the Leasing Companies' investment in property acquired for transactions in process amounted to $18.8 million and $17.7 million, respectively, compared to $20.5 million at June 30, 2001. Such amounts represented 93% and 86% of the Company's total investment in transactions in process in at June 30, 2003 and 2002, respectively, and 100% of the Company's total investment at June 30, 2001.

       The Leasing Companies' strategy for credit risk management includes stringent credit authority centered at the most senior levels of management. The Leasing Companies apply a portfolio management system intended to develop portfolios with different risk/reward profiles. Through the use of non-recourse financing, the Leasing Companies avoid risks that do not meet their risk/reward requirements. The strategy also emphasizes diversification on both a geographic and customer level, and spreading the Leasing Companies' risk across a breadth of leases while minimizing the risk to any one area.

       The management and oversight of the Leasing Companies' portfolios is conducted on a day to day basis by an Asset Management ("AM") group that reports directly to the Chief Financial Officer. The Leasing Companies monitor the performance of all leases held in their own portfolio, transactions in process as well as lease transactions assigned to lenders, if the Leasing Companies retain a residual investment in the leased property subject to the lease. The AM Group conducts an ongoing review of all leases 10 or more days delinquent. The AM Group contacts the lessee directly and generally sends the lessee a notice of non-payment within 15 days after the due date. In the event that payment is not then received, senior management is involved. Delinquent leases are coded in the AM tracking system in order to provide management visibility, periodic reporting, and appropriate reserves. Legal recourse is considered and promptly undertaken if alternative resolutions are not obtained. At 90 days past due, leases generally will be placed on non-accrual status.

       The allowance for losses on leases is an estimate of probable and assessable losses in the Leasing Companies' lease portfolios. The allowance recorded is based on a quarterly review of all leases outstanding and transactions in process. The determination of the appropriate amount of any provision is based on management's judgment at that time and takes into consideration all known relevant internal and external factors that may affect the lease portfolio. The primary responsibility for setting reserves resides with the Chief Financial Officer, who reports quarterly to the Company's Audit Committee and Board of Directors regarding overall asset quality, problem leases and the adequacy of valuation allowances.

       The Company individually analyzes the carrying value of each non-performing or problem lease to determine whether the carrying value is less than or equal to the expected recoverability anticipated to be derived from lease payments, additional collateral or residual realization. The amount estimated as unrecoverable is recognized as a reserve specifically identified for the lease. An analysis of the remaining portfolio is conducted and available reserves are compared to the Company's total exposure, recent loss experience and current and anticipated economic conditions in the market. Regardless of the extent of the Company's analysis of customer performance or portfolio evaluation, certain inherent but undetected losses are probable within the lease portfolio. This is due to several factors including inherent delays in obtaining information regarding a lessee's financial condition or change in business conditions; the judgmental nature of individual lease evaluations and the interpretation of economic trends; volatility of economic or customer-specific conditions affecting the identification and estimation of losses and the sensitivity of assumptions utilized to establish allowances for leases, among other factors. Therefore, an estimated inherent loss not based directly on the specific problem assets is recorded as unallocated allowance. The level of such unallocated reserve is determined based on a review of prior years' loss experience, and may vary depending on general market conditions. The aggregate allowance in any one period is apportioned between allowance for doubtful accounts and allowance for valuation of residual value.

       On May 23, 2001, the operations of CalFirst Bank commenced. The Bank is focused on gathering deposits from depositors nationwide for the primary purpose of funding capital assets that will be leased to small and mid-sized companies, not-for-profit organizations, associations and both private and public educational institutions. The leasing assets will be generated through direct origination of leases by the Bank's own lease organization and through the purchase of lease receivables from other lessors, including the Leasing Companies. Pursuant to the Bank's operating plan approved by regulators, no more than 50% of its lease portfolio will represent purchases of lease receivables from the Leasing Companies.

       The Bank operates in a cost-efficient way similar to the Leasing Companies, intending to be a low cost producer through marketing its products and services directly to end users. The Bank believes that its operating costs generally will be lower than those of traditional "bricks and mortar" banks because it does not have the expense of a traditional branch network to generate deposits and conduct operations.

       Deposit Products

       To date, the Bank has not aggressively sought to attract deposits, given the volume of lease originations and purchases and its available liquidity. Beginning in fiscal 2004, the Bank will more actively seek deposits. The Bank's strategy is to identify depositors through a variety of methods, including the Internet, direct mail, telephone campaigns, purchase of leads from private sources and print advertisements. The Bank offers two types of interest-bearing checking accounts, savings accounts and three (3) month to three (3) year certificates of deposit ("CDs") to taxable and IRA depositors. CDs are offered with varying maturities in order to achieve a fair approximation or match of the average life of the Bank's expected lease portfolio. With leases generally providing for fixed rental rates, a matching fixed rate CD book should allow the Bank to minimize interest rate fluctuation risk. It is expected that the Bank generally will offer interest rates on deposit accounts that are higher than the national average.

       To open a new account, a customer can complete an on-line enrollment form on the Bank's Web site, or can call the Bank's toll-free customer service number and open an account telephonically. Signature cards and deposits are then mailed to the Bank. Customers can make deposits by wire transfer, via direct deposit programs, or by mail. No teller line is maintained. The Bank's customers have 24-hour access to account information. Customers can view their banking records and current balances, and transfer funds between accounts through the use of personal computers. They can also pay bills on-line. Each customer automatically receives a free ATM card upon opening an account. In order to obtain cash, the Bank's customers use other banks' automated teller machines that are affiliated with the Plus system. The Bank generally will reimburse customers for some portion of any ATM fees charged by other financial institutions. The Bank believes that any inconvenience resulting from the Bank not maintaining automated teller machines or a local branch office will be offset by the Bank's higher investment yields and lower banking fees.

       Bank Leasing Operations

       The Bank is developing its lease portfolio through direct lease originations meeting the Bank's underwriting standards, and through offering non-recourse lease financing to the Leasing Companies and to non-affiliated leasing companies. The Bank's strategy is to develop a conservative, diversified portfolio of leases with high credit quality lessees. The Bank's loan committee has established underwriting standards and criteria for the lease portfolio and monitors the portfolio on an ongoing basis. The Bank performs an independent credit analysis and due diligence on each lease transaction originated or purchased. The committee applies the same underwriting standards to all leases, regardless of how they are sourced. At June 30, 2003 and 2002, approximately 64% and 58%, respectively, of the Bank's lease portfolio, including transactions in process, represented leases originated directly by the Bank.

       The Bank's lease origination strategy, including marketing, target leased property types and terms are similar to that established in the Leasing Companies. Approximately 88% and 85% of the leases originated in fiscal 2003 and 2002, respectively, involved computer workstations and networks, mid-range computers, computer automated design systems and computer software. Unlike the Leasing Companies, however, the Bank does not discount lease receivables related to Bank lease originations to other financial institutions, but will retain all lease receivables in its own portfolio. The Bank owns the underlying assets for these leases, and therefore retains all residual interests related to lease originations.

       Through its lease purchase operations, the Bank purchases lease receivables on a non-recourse basis at fixed interest rates that reflect the proposed lessee's financial condition and current market conditions. The Bank does not assume any obligations as lessor for these transactions, and the original lessor retains ownership of any underlying asset, with the Bank taking a priority first lien position. The Bank verifies the completeness of all lease documentation prior to purchase, to confirm that all documentation is correct and held, that liens have been perfected, and legal documentation has been filed as appropriate.

       The Bank funds internally all Bank originations and lease purchases, and consequently, the Bank retains the credit risk on such leases. The Bank's credit process includes a policy of classifying all leases in accordance with a risk rating classification system approved by its primary regulator, monitoring changes in the risk ratings of leases, identification of problem leases and special procedures for the collection of problem leases. At June 30, 2003 and 2002, the Bank's investment in discounted lease payments receivable amounted to $29.8 million and $13.2 million, or 25% and 14%, respectively, of the Company's total portfolio. As of June 30, 2003 and 2002, the Bank did not have any non-performing leases.

       The Bank has a policy of maintaining an allowance for losses on leases to provide for losses inherent in the lease portfolio. The adequacy of the allowance is evaluated monthly and Bank management reports monthly to the Bank's Board of Directors regarding overall asset quality, the adequacy of valuation allowances and adherence to policies and procedures regarding asset classification and valuation. A key component to the evaluation is the internal lease classification process. The Bank has been in business less than three years and does not have any historical data to use as a basis of comparison. The Bank's classification of its assets and the amount of its valuation allowances are subject to review by regulators who can order the establishment of additional loss allowances.

       The Bank has developed policies and procedures for identifying and qualifying third-party lessors. In sourcing third-party lease originations, the Bank will target those seasoned leasing companies whose principals are determined to be reputable, ethical and experienced with positive leasing operations histories. The Bank's due diligence, including background checks, qualifications verification and credit evaluation of the lessor firm and its principals, is considered to be as important as that conducted for each lessee.

       In addition to leases, the Bank will invest deposit funds in various investment securities. The securities portfolio will be comprised of federal funds sold, high-quality securities including United States agency obligations, mortgage pool securities, collateralized mortgage obligations, investment grade corporate bonds, and United States Treasury securities.

       Bank Operations

       The Bank's operations have been developed by outsourcing certain principal operational functions to leading bank industry service providers and by sharing established systems utilized by the Leasing Companies or the Company. Outsourced systems include the Bank's core processing and electronic banking system, electronic bill payment systems and depositary services, including item processing. The Bank believes it benefits from the service provider's expertise and investments in developing technology. A critical element to the Bank's success is the ability to provide secure transmission of confidential information over the Internet. The Bank's service providers utilize sophisticated technology to provide maximum security. All banking transactions are encrypted and all transactions are routed from the Internet server through a "firewall" that limits access to the Bank's and service provider's systems. Systems are in place to detect attempts by third parties to access other users' accounts and feature a high degree of physical security, secure modem access, service continuity and transaction monitoring.

       The Leasing Companies provide certain services to the Bank pursuant to formal agreements, including servicing the Bank's lease portfolio on the Bank's behalf. The Leasing Companies, as servicer, and the Bank maintain a delinquency reporting and monitoring system to identify potential problems in the lease portfolio early and address them in a timely manner.

       Leasing customers are primarily middle-market companies, subsidiaries and divisions of Fortune 1000 companies and organizations and institutions located throughout the United States with credit ratings acceptable to the Company's subsidiaries or lenders providing non-recourse loans. The Company does not believe that the loss of any one customer would have a material adverse effect on all of its operations taken as a whole.

       The Bank's deposit customers are expected to be primarily individuals from across the nation who place a substantial portion of their savings in safe, often government-insured, investments. Such individuals are seeking to maximize their interest income and, therefore, are more inclined to move their investments to a bank that offers the highest yield regardless of the geographic location of the depository.

       The Company competes for the lease financing of capital assets with other independent leasing companies, commercial finance companies, banks and other financial institutions, credit companies affiliated with equipment manufacturers, such as IBM, Dell, and HP, and equipment brokers and dealers. Many of the Company's competitors have substantially greater resources, capital, and more extensive and diversified operations than the Company. The Company believes that the principal competitive factors are price, responsiveness to customer needs, flexibility in structuring lease financing arrangements, financial technical proficiency and the offering of a broad range of lease financing options. The level of competition varies depending upon market and economic conditions, the interest rate environment, and availability of capital. Competition has increased in recent years as developments in the capital markets, and particularly the expansion of the securitization market, has increased access to capital to certain lenders that offer aggressive lease rates. Competition has also been heightened as credit companies affiliated with manufacturers have become more aggressive with respect to the financing terms offered.

       The Bank competes with other banks and financial institutions to attract deposits. As a new entity, the Bank faces competition from established local and regional banks and savings and loan institutions. Many of them have larger customer bases, greater name recognition and brand awareness, greater financial and other resources and longer operating histories. Additionally, new competitors and competitive factors are likely to emerge, particularly in view of the rapid development of Internet banking.

       The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and examined by the Board of Governors of the Federal Reserve System (the "FRB"). In addition to the regulation of the Company, the Bank is subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency ("OCC"). The Bank's deposits are insured up to $100,000 by the Federal Deposit Insurance Corporation ("FDIC") and the Bank is a member bank within the San Francisco Federal Reserve district.

       The Bank Holding Company Act, the Federal Reserve Act, and the Federal Deposit Insurance Act subject the Company and the Bank to a number of laws and regulations. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The OCC, which has primary supervisory authority over the Bank, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. These examinations are designed for the protection of the Bank's depositors rather than the Company's shareholders. The Bank must furnish annual and quarterly reports to the OCC, which has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Many of these laws and regulations have undergone significant change in recent years. Future changes to these laws and regulations, and other new financial services laws and regulations are likely, and cannot be predicted with certainty.

       Under FRB policy, the Company is expected to serve as a source of financial and managerial strength to the Bank and, under appropriate circumstances, to commit resources to support the Bank. Certain loans by the Company to the Bank would be subordinate in right of payment to deposits in, and certain other indebtedness of, the Bank.

       Among the regulations that affect the Company and the Bank are provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of loans or extensions of credit the Bank may make to affiliates and the amount of assets purchased from affiliates, except for transactions exempted by the FRB. The aggregate of all of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank's capital and surplus and, as to all affiliates combined, to 20% of a bank's capital and surplus. The Bank and the Company must also comply with certain provisions designed to avoid the Bank buying low-quality assets. The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated companies. All services provided by the Company or its subsidiaries to the Bank are in accordance with this provision.

       In December 2002, the FRB approved Regulation W ("Reg W") which implements, interprets and applies statutory provision in sections 23A and 23B, and became effective April 1, 2003. Under Reg. W, a bank does not have to comply with the quantitative limits of Section 23A when making a loan or extension of credit to an affiliate if 1) the extension of credit was originated by the affiliate; 2) the bank makes an independent evaluation of the creditworthiness of the borrower and commits to purchase the extension of credit before the affiliate makes or commits to make the extension of credit; 3) the bank does not make a blanket advance commitment to purchase loans form the affiliate and 4) the dollar amount of all purchases over any 12 month period by the bank from an affiliate does not represent more than 50% of that affiliate's credit extensions during such period. The Company believes the Bank's purchase of lease receivables from the Leasing Companies conform to the requirements of Reg. W. In addition, the Company has agreed with the FRB that the Bank's purchase of leases from the Leasing Companies will not exceed 50% of the Bank's lease portfolio.

       At the time that Reg. W was published in December 2002, the FRB proposed for public comment an amendment to Reg. W that would limit the amount of extensions of credit that a bank could purchase from an affiliate to 100% of the bank's capital and surplus. If Reg. W is amended in accordance with this proposal, the ability of the Bank to purchase lease receivables from the Leasing Companies would be impacted. The final structure of Reg. W cannot be determined at this time, and there are no assurances that future regulations or interpretations from the FRB will not limit further or prohibit the Bank's purchases of leases from the Leasing Companies.

       In connection with its approval of the Company's purchase of the stock of the Bank, the FRB and the OCC required the Company and the Bank to make certain commitments with respect to the operation of the Bank. These commitments included: (i) the Bank and the Company entering into a binding written agreement setting forth the Company's obligations to provide capital maintenance and liquidity support to the Bank, if and when necessary; (ii) the Bank's Board of Directors executing a binding written agreement with the OCC setting forth certain actions that the Bank would take if the Bank did not achieve certain operating results; (iii) during the first three years of operation, or until the Bank has reported four consecutive quarters of profitability, the Bank must obtain prior approval from the OCC before implementing any significant deviation or change from its original operating plan; (iv) the Company must comply with Reg. W; and (v) the Bank's purchases of leases from affiliates will represent no more than 50% of the Bank's lease portfolio.

       Bank holding companies are subject to risk-based capital guidelines adopted by the FRB. The Company currently is required to maintain (i) Tier 1 capital equal to at least six percent of its risk-weighted assets and (ii) total capital (the sum of Tier 1 and Tier 2 capital) equal to ten percent of risk-weighted assets. The FRB also requires the Company to maintain a minimum Tier 1 "leverage ratio" (measuring Tier 1 capital as a percentage of adjusted total assets) of at least five percent. At June 30, 2003 and 2002, the Company exceeded all these requirements by a significant amount.

       The Bank is also subject to risk-based and leverage capital requirements mandated by the OCC. In general, banks are required to maintain a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, banks are generally required to maintain a minimum ratio of Tier 1 capital to adjusted total assets, referred to as the leverage ratio, of 4%. As a condition of the approval to commence banking operations, for the first three years of the Bank's existence, the Bank is required to maintain a Tier 1 capital to adjusted total assets ratio, or leverage ratio, of not less than 8%. At June 30, 2003 and 2002, the Bank had significant capital in excess of all minimum risk-based and leverage capital requirements.

       The principal source of cash flow to the Company, including cash flow to pay dividends on its common shares, is dividends from its subsidiaries and fees for services rendered to its subsidiaries. Various statutory and regulatory provisions limit the amount of dividends or fees that may be paid to the Company by the Bank. The Company does not depend on the Bank for such amounts, and believes the Leasing Companies have sufficient cash flow and assets to meet the Company's requirements.

       On November 12, 1999, the Gramm-Leach-Bliley Act ("Gramm-Leach") became law. Gramm-Leach significantly changed the regulatory structure and oversight of the financial services industry. Most importantly for the Company and the Bank, Gramm-Leach established new requirements for financial institutions to provide new privacy protections to consumers. In June of 2000, the Federal banking agencies jointly adopted a final regulation providing for the implementation of these protections. It requires a financial institution to provide notice to customers about its privacy policies and practices, describes under what conditions a financial institution may disclose nonpublic personal information about consumers to non-affiliated third parties, and provides an "opt-out" method for consumers to prevent the financial institution from disclosing that information to non-affiliated third parties. Financial institutions were required to be in compliance with the final regulation by July 1, 2001, and the Bank and the Company believe that they were in compliance at such date, and continue to be in compliance.

       On October 26, 2001, the USA Patriot Act became law. The USA Patriot Act requires financial institutions, including the Bank, to help prevent, detect and prosecute international money laundering and the financing of terrorism. With its existing systems and controls required as an Internet bank, the Bank believes it complies with the USA Patriot Act. The Secretary of the Treasury has proposed additional regulations to implement the USA Patriot Act. Although the Company cannot predict when and in what form these regulations will be adopted, the Company believes that the cost of compliance with the USA Patriot Act is not likely to be material to it.

       The laws, regulations and policies affecting financial services businesses are continually under review by Congress and state legislatures and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory agencies and other professional agencies. Changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, and they may have a material effect on the business and earnings of the Company.

       The Company and its subsidiaries, as of June 30, 2003, had 195 employees, including 139 sales managers and account executives and 18 professionals engaged in finance and credit. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are satisfactory.

Available Information

       Our Internet address is www.calfirstbancorp.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the Investor Information section of our Web site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.

       At June 30, 2003, the Company and its subsidiaries occupied approximately 43,000 square feet of office space in Irvine, California leased from an unaffiliated party. The lease provides for monthly rental payments that average $75,060 from July 2003 through August 2009.

       The Company is sometimes named as a defendant in litigation relating to its business operations. Management does not expect the outcome of any existing suit to have a material adverse effect on the Company's financial condition or results of operations.

       None.

       The common stock of California First National Bancorp trades on the NASDAQ National Market System under the symbol CFNB. The following high and low closing sale prices for the periods shown reflect inter-dealer prices without retail markup, markdown or commissions and may not necessarily reflect actual transactions.

       The Company had approximately 55 stockholders of record and in excess of 400 beneficial owners as of September 19, 2003.

      The Board of Directors of the Company has adopted a policy of paying a regular quarterly cash dividends, subject to an ongoing review of the Company's profitability, liquidity and future operating cash requirements. For each of the fiscal years ended June 30, 2003, 2002 and 2001, the Company declared cash dividends totaling $.16 per common share. In August 2003, following changes in tax laws and based on the strength on the Company's financial position, the Board of Directors approved an increase in the quarterly dividend on the Company's common stock to $.10 a share from $.04 a share.

Equity Compensation Plan Information

       The following table sets forth selected financial data and operating information of the Company and its subsidiaries. Certain reclassifications have been made to the fiscal years prior to 2002 to conform with this year's financial statement presentation. The selected financial data should be read in conjunction with the Financial Statements and notes thereto and Management's Discussion and Analysis of Results of Operations and Financial Condition contained herein.

1. 1. Direct finance income and interest expense on discounted lease rentals and non-recourse debt of $52,576,413 and $93,709,555 at June 30, 2003 and 2002, respectively, offset each other and do not contribute to the Company's net interest and finance income.
2. Average balance is based on quarter-end balances, includes non-accrual leases, and is presented net of unearned income.

        Selling, General, and Administrative Expenses -- The Company's selling, general and administrative expenses ("SG&A") increased $2.9 million, or 20%, to $17.7 million for the year ended June 30, 2003. This compared to SG&A expenses in fiscal 2002 of $14.7 million, which had decreased by $4.0 million, or 21%, from $18.7 million in fiscal 2001. The increase in SG&A expenses during fiscal 2003 is primarily the result of the expansion of the sales organization, which almost doubled its headcount over the year. The decrease in SG&A expenses during fiscal 2002 was the result of steps taken to reduce sales and overhead expenses during a period of economic uncertainty.

       The allowance for lease losses decreased to $4.3 million (3.2% of net investment in capital leases) at June 30, 2003 from $5.5 million (5.1% of net investment in capital leases) at June 30, 2002. The allowance at June 30, 2003 consisted of $2.5 million allocated to specific accounts and $1.8 million that was unallocated. This compared to $3.7 million allocated to specific accounts at June 30, 2002 and $1.8 million that was unallocated at such date. The decrease in the 2003 allowance relates to a reduction in specific non-performing or problem leases, and the write-off of non-performing leases. The Company considers the allowance for doubtful accounts of $4.3 million at June 30, 2003 adequate to cover losses specifically identified as well as inherent in the lease portfolios. However, no assurance can be given that the Company will not, in any particular period, sustain lease losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the lease portfolio, in light of factors then prevailing, including economic conditions and the on-going credit review process, will not require significant increases in the allowance for lease losses. Among other factors, a continued economic slowdown may have an adverse impact on the adequacy of the allowance for lease losses by increasing credit risk and the risk of potential loss even further. As the Company has retained a significantly greater percentage of leases in its own portfolio, this creates increased exposure to delinquencies, repossessions, foreclosures and losses than the Company has historically experienced.

       The Company's exposure to market risk related to interest rate risk is currently not material because it does not have any interest bearing recourse debt and at June 30, 2003, the Bank's deposits were not material. Non-recourse debt does not represent an interest rate risk to the Company because it is fully amortized through direct payments from lessees to the purchaser of the lease receivable. The Company's cash and due from banks is invested in securities of very short duration, and therefore, any immediate 10% change in interest rates would not have a material effect on the fair market value of the portfolio. The Company is exposed to some interest rate risk, because as interest rates decrease, interest income on its cash will decrease, and future lease rates from direct financing leases, which often are based on United States Treasury rates, may be lower. Conversely, as interest rates rise, the Company's earnings will benefit as yields on cash investments and lease investments improve. The only other interest rate risk the Company currently faces relates to the Bank's investment in federal funds sold and securities purchased under agreements to resell. This investment matures in less than ninety days and therefore, the fair value approximates the carrying value. The interest rate on this investment was 1.28% at June 30, 2003. As the banking operations of the Company grow, and the Bank is more active in raising deposits, the Company will be subject to increased interest rate risk. The Bank has an Asset/Liability Management Committee and policies established for managing its interest rate risk.