The databases, combined with the respective prospect management software and an integrated in-house telecommunications system, permit 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 to be responsive to customers and prospects.

        Over the past few years, the Company has pursued a strategy of retaining lease transactions in its own portfolios. During the fiscal years ended June 30, 2004, 2003 and 2002, 88%, 91% and 71%, respectively, of the total dollar amount of new leases completed by the Company’s subsidiaries were retained in the Company’s portfolios. Approximately 12% and 9% for fiscal years 2004 and 2003, respectively, of such leases were discounted to unaffiliated financial institutions, compared to 29% in fiscal 2002. Approximately 8% and 16% of the new leases booked by the Leasing Companies were assigned to CalFirst Bank during fiscal 2004 and 2003, respectively.

        The Leasing Companies apply a portfolio management system intended to develop portfolios with different risk/reward profiles. Each lease transaction held by the Leasing Companies must meet or exceed certain credit or profitability requirements established, on a case-by-case basis, by the credit committee for the portfolio. Through the use of non-recourse financing, the Leasing Companies avoid risks that do not meet their risk/reward requirements. Certain portfolios hold leases where the credit profile of the lessee or the value of the underlying leased property is not acceptable to other financial institutions. At June 30, 2004, 2003, and 2002, the discounted minimum lease payments receivable related to leases retained in the Leasing Companies’ portfolio amounted to $99.9 million, $100.3 million and $89.4 million, respectively. Such amounts represented 71%, 76% and 87% of the Company’s total investment in discounted lease payments receivable at June 30, 2004, 2003 and 2002, respectively.

       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, 2004 and 2003, the Bank’s investment in discounted lease payments receivable amounted to $41.7 million and $32.3 million, or 29% and 24%, respectively, of the Company’s total portfolio. Of such amounts, approximately 71% and 63%, respectively, represented leases originated directly by the Bank.

       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. 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 Leasing Companies and the Bank 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 during the period that the transaction is in process, and generally is obligated to reimburse the Leasing Companies or the Bank for all disbursements under certain circumstances. At June 30, 2004, 2003, and 2002, the Company’s total investment in property acquired for transactions in process amounted to $30.5 million, $20.3 million and $20.6 million, respectively. Of such amounts, approximately 76%, 93% and 86% related to the Leasing Companies, with the balance held by CalFirst Bank.

       The Company's strategy for credit risk management includes stringent credit authority centered at the most senior levels of management. The strategy also emphasizes diversification on both a geographic and customer level, and spreading risk across a breadth of leases while minimizing the risk to any one area.

       The Bank internally funds 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. The AM group at the Leasing Companies provides servicing to the Bank. 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.

       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.

       The allowance for losses on leases is an estimate of probable and assessable losses in the Company's 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.

       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'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. As of June 30, 2004 and 2003, the Bank did not have any non-performing leases.

       The Bank is focused on gathering deposits from depositors nationwide for the primary purpose of funding its investment in capital leases. The Bank's strategy is 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

       The Bank's deposits have been gathered primarily through the Internet and print advertisements in its local market. Other strategies to identify depositors are through direct mail, telephone campaigns, purchase of leads from private sources and more extensive 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 lease portfolio. With leases generally providing for fixed rental rates, a matching fixed rate CD book is intended to allow the Bank to minimize interest rate fluctuation risk. The Bank generally offers 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 i nconvenience 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.

      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 thi rd 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.

Investments

       In addition to leases, the Company had total investments, which includes interest-bearing deposits with banks, money market securities, federal funds sold, Federal Reserve Bank stock and other investments of $68.8 million at June 30, 2004, compared to $67.3 million at June 30, 2003. The Company is also authorized to invest in high-quality United States agency obligations, mortgage pool securities, and investment grade corporate bonds

       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 Leasing Companies, CalFirst Bank or unaffiliated 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 individuals from across the nation who place a substantial portion of their savings in safe, often government-insured, investments and businesses who spread their liquid investments among a breadth of banks in order to secure that they are government insured. Such depositors 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 rate, 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 secu ritization 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 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. The primary concern of banking regulation is "Safety and Soundness" with an emphasis on asset quality and capital adequacy. These laws and regulations also encompasses a broad range of other regulatory concerns including insider transactions, the adequacy of the reserve for lease losses, inter-company transactions, regulatory reporting, adequacy of systems of internal controls and limitations on permissible activities. The federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The FRB routinely examines the Company, which exam includes the Leasing Companies. The OCC, which has primary supervisory authority over the Bank, regularly examines banks in such areas as reserves, loans, inv estments, 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 th ose 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 from 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 Comp anies 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 minimum acceptable 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; a nd (v) the Bank's purchases of leases from affiliates will represent no more than 50% of the Bank's lease portfolio. Fiscal 2004 was the third year of the Bank's operations, and during such time, the Bank did not report four consecutive quarters of minimum acceptable profitability, which the OCC defined as net income in excess of $100,000 in each quarter. At the request of the OCC, the Bank has submitted a forecast for fiscal 2005 to the OCC that shows that the Bank expects to achieve four consecutive quarters of minimum profitability during fiscal 2005.

       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, 2004 and 2003, the Company exceeded all these requirements.

       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, 2004 and 2003, the Bank had capital in excess of all minimum risk-based and leverage capital requirements.

       Under the Community Reinvestment Act ("CRA"), the Bank has a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. CalFirst Bank is designated as a wholesale institution for CRA purposes. To evaluate the CRA performance of banks with this designation, regulatory agencies use the community development test. This includes an assessment of the level and nature of the Bank's community development lending, investments and services. The CRA requires the OCC, in connection with its examination of the Bank, to assess and assign one of four ratings to the Bank's record of meeting the credit needs of its community. The CRA also requires that the Bank publicly disclose their CRA ratings. During fiscal 2004, CalFirst Bank was subjected to its first CRA examination and received a "satisfactory" rating on the CRA performance evaluation.

       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 th e 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, 2004, had 197 employees, including 130 sales managers and account executives and 23 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 by link to the SEC 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 practical 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. Our Corporate Governance Guidelines and our Code of Ethics for Senior Financial Management are available for viewing and printing under the Corporate Governance section of our Internet 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 and is not incorporated by reference herein.

       At June 30, 2004, 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 2004 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 Board of Directors of the Company has adopted a policy of paying regular quarterly cash dividends, subject to an ongoing review of the Company's profitability, liquidity and future operating cash requirements. 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. For the fiscal year ended June 30, 2004, the Company declared cash dividends totaling $.40 per common share. For each of the fiscal years ended June 30, 2003 and 2002, the Company declared cash dividends totaling $.16 per common share.

       In April 2001, the Board of Directors authorized management, at its discretion, to repurchase up to 1,000,000 shares of common stock. Since this authorization has no termination date, the Board of Directors reviews the authorization to repurchase of common from time to time. During the year ended June 30, 2004, the Company did not repurchase any common stock. During the year ended June 30, 2003, the Company repurchased 268,900 shares at an aggregate cost of $3.3 million. As of September 17, 2004, 612,956 shares remain available under this authorization.

Equity Compensation Plan Information

      The Company's results include the operations of Amplicon, CalFirst Leasing, and CalFirst Bank. The Company's direct finance income includes interest income earned on the Company's investment in lease receivables and residuals. Other income primarily includes gains realized on the sale of leased property, income from sales-type and operating leases and gains realized on the sale of leases, and other fee income. Income from sales-type leases relates to the re-lease of off-lease property ("lease extensions") and new lease transactions that qualify as sales-type leases, generally where the fair value of the property subject to the lease differs from the Company's carrying cost. Income from operating leases generally involves the re-lease of off-lease property that is booked as an operating lease rather than as a sales-type lease.

       The Company's operating results are subject to quarterly and annual fluctuations resulting from a variety of factors, including the volume of new lease originations, the volume and profitability of leased property being re-marketed through re-lease or sale, variations in the mix of lease originations, the size and credit quality of the lease portfolio, interest rates and economic conditions in general. The Company has very little interest bearing liabilities, and therefore, reductions in interest rates in general can reduce the yield earned on the investment in lease receivables and on the investment in securities and other interest earning assets with little offsetting benefit from lower interest expense.

       The Company conducts its business in a manner designed to mitigate risks. However, the assumption of risk is a key source of earnings in the leasing and banking industries and the Company is subject to risks through its investment in lease receivables held in its own portfolio, lease transactions in process, and residual investments. The Company takes steps to manage risks through the implementation of strict credit management processes and on-going risk management review procedures.

       The preparation of the Company's financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management's judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The following is a description of the most critical accounting policies management applies, all of which require the use of accounting estimates and management's judgment, based on the relevant information available at the end of each period. The preparation of the Company's financial statements requires management to make certain critical accounting estimates that impact the stated amount of assets and liabilities at a financial statement date and the reported amount of income and expenses during a reporting period. These accounting estimates are based on management's judgment and are considered to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments, or that the use of different assumptions could result in materially different estimates. The following is a description of the most critical accounting policies management applies, all of which require the use of accounting estimates and management's judgment, based on the relevant information available at the end of each period.

       Residual Values -- For capital leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded on the balance sheet, net of unearned income and allowances, as net investment in capital leases. Of the volume of capital leases booked during the fiscal years ended June 30, 2004, 2003 and 2002, approximately 47%, 47% and 53%, respectively, were structured as "true leases," where the Company owns the leased asset at the end of the term and therefore, the Company recorded a residual value. The residual value is an estimate for accounting purposes of the fair value of the leased property at lease termination and is determined at the inception of the lease based on the property leased and the terms and conditions of the underlying lease contract. The realizability of any estimated residual value depends on future collateral values, contractual options available to the lessee, the credit of the lessee, market conditions and other subjective and qualitative factors. The estimated residual values established at lease inception are periodically reviewed to determine if values are realizable and any identified losses are recognized at such time.

       Allowance for Lease Losses -- The allowance for lease losses provides coverage for probable and estimatable losses in the Company's 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, including levels of non-performing leases, lessees' financial condition, leased property values as well as general economic conditions and credit quality indicators. The Company's allowance includes an estimate of reserves needed to cover specifically identified lease losses and certain unidentified but inherent risks in the portfolio.

       Income Taxes -- Deferred tax assets and liabilities result from temporary differences between the time income or expense items are recognized for financial statement purposes and for tax reporting. Such amounts are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversals of temporary differences and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.

       The Company's estimates are reviewed continuously to ensure reasonableness. However, the amounts the Company may ultimately realize could differ from such estimated amounts.

       The following discussion is provided in addition to the required analysis of earnings in order to discuss trends in our business. We believe this analysis provides additional meaningful information on a comparative basis.

       The results for fiscal 2004 reflect primarily the negative impact of lower yields on earning assets, which was not offset by a sufficient increase in volume. The decrease in part relates to the lower interest rate environment that has prevailed for the last two years, and the run off of higher yielding leases booked during prior periods. The early termination of certain leases also decreased direct finance income. In addition to the lower interest rate environment, increased competition in certain markets reduced the spreads earned on certain capital leases, when compared to yields obtained in fiscal 2003 and before. As a higher percentage of the Company's investment in capital leases relates to lessees with higher credit ratings, the Company generally will not earn as high yields. Offsetting this reduction in direct finance income, the Company incurred significantly lower credit losses over the past year, which has allowed for a significantly lo wer provision for lease losses. The provision for lease losses decreased to $164,000 in fiscal 2004, compared to $554,000 in fiscal 2003 and $5.4 million in the year end June 30, 2002. The decline in provision relates in part to reserves established in 2002 for problem credits which were more favorably resolved than expected, but also is believed to relate to improved credit quality

       A second factor that has impacted the Company's results over the past few years is the lower volume of leases reaching the end of term, and on which the Company recognizes income from the re-lease or sale of property subject to such leases. The investment in lease residuals realized declined from $13.2 million in the year ended June 30, 2002 to $6.2 million in fiscal 2003 and $6.5 million in fiscal 2004.

       The Company's objective over the past three years has been to increase its investment in capital leases. Significant investments have been made in the development of the lease origination organizations of the Bank and CalFirst Leasing. Total sales, general and administrative expenses ("SG&A") increased by 30%, or $4.5 million, between fiscal 2002 and fiscal 2004. Given the nature of the Company's leasing activities, we believe such investment in the organization precedes the resulting growth in revenues by twelve to twenty-four months. While the volume of new leases booked during the fiscal 2004 did not increase significantly, the volume of lease proposals obtained and approved ("Originations") during fiscal 2004 was up about 42% when compared to the comparable period of the prior year.

        Summary -- For fiscal year ended June 30, 2004, net earnings decreased 9% to $9.8 million, compared to $10.7 million for fiscal 2003. Diluted earnings per share decreased 8% to $0.88 for fiscal year ended June 30, 2004, compared to $0.96 per share for fiscal 2003. The volume of new lease transactions booked during the year ended June 30, 2004 was approximately $126 million, compared to $118 million in fiscal 2003. Of the new leases booked during fiscal 2004, approximately 94% were retained in the Company's own portfolios, compared to 92% in the prior year. The net investment in capital leases increased 5% from $146.4 million at June 30, 2003 to $153.9 million at June 30, 2004. An increase in income from end of term transactions and the benefit from a reduction in the provision for lease losses were offset by a decrease in direct finance income, lower interest rates earned on a continued high level of liquid investments and higher expense levels.

        Net Direct Finance and Interest Income -- Net direct finance and interest income is the difference between interest earned on the investment in capital leases, securities and other interest earning investments and interest paid on deposits or other borrowings. Net direct finance and interest income is affected by changes in the volume and mix of interest earning assets and liabilities, the movement of interest rates, and funding and pricing strategies.

        Net direct finance and interest income was $18.8 million for the fiscal year ended June 30, 2004 compared to $20.5 million for fiscal 2003 and $18.9 million in fiscal 2002. The decrease in fiscal 2004 was due to a decrease of $956,000 in direct finance income, a decline of $490,000 in interest income on investments and a $193,000 increase in interest expense on deposits. The decrease in direct finance income reflects an increase in the average investment in capital leases directly held by the Company, offset by a decrease in yields on such investment. The decrease in interest income on investments resulted from the decline in interest rates earned, as the level of average balances of cash and cash equivalents increased slightly.

        The increase in net direct finance income in fiscal 2003 was due to an increase of $2.2 million in direct finance income, offset by a decline of $484,000 in interest income on investments and a $108,000 increase in interest expense on deposits. The increase in direct finance income reflected an increase in the average investment in capital leases directly held by the Company, together with a slight increase in yields on such investment. The decrease in interest income on investments resulted from the decline in interest rates earned, as the level of average balances of cash and cash equivalents increased slightly.

The following table presents the components of the increases (decreases) in net direct finance and interest income by volume and rate:

       The following table presents the Company's average balance sheets, direct finance income and interest earned or interest paid, the related yields and rates on major categories of the Company's interest-earning assets and interest-bearing liabilities.

        Provision for Lease Losses -- The Company's provision for lease losses in fiscal 2004 was $164,000, compared to $554,000 in fiscal 2003 and $5.4 million in 2002. The decline in the provision in fiscal 2004 and 2003 largely relates to the fact that the overall level of reserves required against problem leases remained relatively unchanged during those fiscal periods. This stability largely relates to the continued paydown on existing problem leases, along with no significant new problem leases being identified. In fiscal 2002, the $5.4 million provision was due in large part to the deterioration in the underlying credit of two large lease transactions, which subsequently performed better than expected and contributed to the lower reserve requirements required in later periods.

       Other Income -- Other income is a significant source of income for the Company, accounting for 47% of the Company's gross profit during the year ended June 30, 2004, 43% during fiscal 2003 and 65% during 2002. Total other income for the year ended June 30, 2004 increased by $1.4 million, or 9%, to $16.5 million, compared to $15.2 million in 2003 and $25.2 million in 2002. The increase in other income during fiscal 2004 is due to an increase of $1.7 million, or 21%, in gain on sale of leases and leased property, as the volume of lease property sold on leases coming to end of term increased during the period, which amount was offset in part by a $399,000 decrease in operating and sales-type lease income as the volume of leases renewed declined during the year.

       During year ended June 30, 2003, other income decreased by $10.1 million, or 40%, to $15.2 million, compared to $25.2 million in 2002. The decrease in other income during fiscal 2003 is primarily due to a decrease of $7.2 million, or 48%, in gain on sale of leases and leased property and a $2.4 million, or 28%, decrease in operating and sales-type lease income. Both decreases were due to a lower volume of leases reaching their end of term during fiscal 2003 as compared to the prior year.

        Income Taxes -- Income taxes were accrued at a tax rate of 38.5% for each of the fiscal years ended June 30, 2004, 2003 and 2002, representing the Company's estimated annual tax rates for each respective year.

       The Company often makes payments to purchase leased property prior to the commencement of the lease. The disbursements for these lease transactions in process are generally made to facilitate the lessees' property implementation schedule. The lessee is contractually obligated by the lease to make rental payments directly to the Company during the period that the transaction is in process, and the lessee is generally obligated to reimburse the Company for all disbursements under certain circumstances. At June 30, 2004, the Company's investment in property acquired for transactions in process was $30.5 million, an increase of $10.2 million from $20.3 million at June 30, 2003, and $20.6 million at June 30, 2002.

       The Company's risk assets are comprised almost exclusively of leases for capital assets to businesses and other commercial or non-profit organizations. All leases are secured by the underlying property being leased. The Company's strategy is to develop lease portfolios with risk/reward profiles that meet its objectives. Through the use of non-recourse financing, the Company avoids risks that do not meet these requirements. The strategy also emphasizes diversification on both a geographic and customer level, and spreading the Company's risk across a breadth of leases while minimizing the risk to any one area. At June 30, 2004, no lessee accounted for more than 5% of the Company's net investment in capital leases, and two lessees combined represented approximately 6% of the Company's net investment in capital leases. The investment in capital leases is diversified by geographic regions, with the Company's portfolio spread across all fifty states. At June 30, 2004, California (16%) and New York (10%) were the only states that represented more than 10% of the Company's net investment in capital leases. The Company has no exposure to foreign lessees. The Company's leases are with lessees in a wide spectrum of industries, however, at June 30, 2004 approximately 41% of the Company's net investment in capital leases was with public and private colleges, universities, elementary and secondary schools located throughout the United States. The educational portfolio includes over 700 leases with over 360 different lessees, and none of these leases are included among the Company's non-performing leases. One university represented approximately 4% of the Company's net investment in capital leases. The Company believes the exposure to this sector is warranted based on the historically good credit profile of this group.

       The Company monitors the performance of all leases held in its own portfolio, transactions in process, as well as lease transactions assigned to lenders, if the Company retains a residual investment in the leased property subject to those leases. An ongoing review of all leases ten or more days delinquent is conducted. Lessees who are delinquent with the Company or an assignee are coded in the Company's accounting and tracking systems in order to provide management visibility, periodic reporting, and appropriate reserves. The accrual of interest income on leases will generally be discontinued when the lessee becomes ninety days or more past due on its lease payments with the Company, unless the Company believes the investment is otherwise recoverable. Leases may be placed on non-accrual earlier if the Company has significant doubt about the ability of the lessee to meet its lease obligations, as evidenced by consistent delinquency, deterioratio n in the lessee's financial condition or other relevant factors.

        The following table summarizes the Company's non-performing capital leases:

       Non-performing assets decreased during fiscal 2004 due in part to positive results from the workout of leases in bankruptcy and in part to the write-off of other non-performing assets. Direct finance income that would have been recorded had non-performing leases at each respective fiscal year end been current in accordance with their original terms would have been $320,609, $325,338 and $45,238 during fiscal 2004, 2003 and 2002, respectively. The amount of direct finance income actually recorded on non-performing capital leases was $150,983, $322,614 and $112,997 during fiscal 2004, 2003 and 2002, respectively.

       In addition to the non-performing capital leases identified above, there were $1.5 million of investment in capital leases at June 30, 2004 for which management has concerns regarding the ability of the lessees to continue to meet existing lease obligations, compared with $2.8 million at June 30, 2003. This amount consists of leases classified as substandard or doubtful, or with lessees that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. The decline reflects the benefits of rental payments received related to earlier problem leases, without any significant additions to this category.

       The allowance for lease losses provides coverage for probable and estimatable losses in the Company's lease portfolios. The allowance recorded is based on a quarterly review of all leases outstanding and transactions in process. Lease receivables or residuals are charged off when they are deemed completely uncollectible. 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 Company funds its operating activities through internally generated funds, bank deposits and non-recourse debt. At June 30, 2004 and 2003, the Company's cash and cash equivalents were $64.9 million and $67.3 million, respectively. Stockholders' equity at June 30, 2004 was $203.8 million, or 74% of total assets, compared to $197.3 million, or 71% of total assets, at June 30, 2003. At June 30, 2004, the Company and the Bank exceed their regulatory capital requirements and are considered "well-capitalized" under guidelines established by the FRB and the OCC.

       Deposits at CalFirst Bank totaled $24.6 million at June 30, 2004, compared to $7.6 million at June 30, 2003. The $17.0 million increase was used to fund leases and maintain liquidity at the Bank. The following table presents average balances and average rates paid on deposits for years ended June 30, 2004 and 2003:

       The Leasing Companies' capital expenditures for leased property purchases are sometimes financed by assigning certain base lease term payments to banks or other financial institutions, including CalFirst Bank. The assigned lease payments are discounted at fixed rates such that the lease payments are sufficient to fully amortize the aggregate outstanding debt. At June 30, 2004, the Company had outstanding non-recourse debt aggregating $17.5 million relating to property under capital leases. In the past, the Company has been able to obtain adequate non-recourse funding commitments, and the Company believes it will be able to do so in the future.

       Contractual Obligations and Commitments

1. Disbursements to purchase property on approved leases are estimated to be completed within one year, but it is likely that some portion could be deferred to fiscal 2006.
2. Based upon contractual cash flows; amounts could differ due to prepayments, lease restructures, charge-offs and other factors.

      The need for cash for operating activities will increase as the Company expands. The Company believes that existing cash balances, cash flow from operations, cash flows from its financing and investing activities, and assignments (on a non-recourse basis) of lease payments will be sufficient to meet its foreseeable financing needs.

       Inflation has not had a significant impact upon the operations of the Company.

       At June 30, 2004, the Company had $64.9 million invested in securities of very short duration, including $3.5 million in federal funds sold and securities purchased under agreements to resell. The Company's investment in capital leases of $153.9 million consists of leases with fixed rates, however, $99.3 million of such investment is due within one year of June 30, 2004. This compares to the Bank's interest earning deposit liabilities of $23.2 million, 72% of which mature within one year. 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. Based on the foregoing, at June 30, 2004, the Company had assets of $164.2 million subject to changes in interest rates over the next twelve months, compared to repricing liabilities of $13.1 million. As interest rates decrease, interest income on the Company's large short-term inve stment position decreases, and future lease rates from direct financing leases, which often are based on United States Treasury rates, tend to be lower. Conversely, as interest rates rise, the Company's earnings will benefit as yields on cash investments and lease investments improve, with little offsetting impact from rising interest expense.

       As the banking operations of the Company grow and the Bank's deposits represent a greater portion of the Company's assets, the Company will be subject to increased interest rate risk. The Bank has an Asset/Liability Management Committee and policies established to manage its interest rate risk. The Bank measures its asset/liability position through duration measures and sensitivity analysis, and calculates the potential effect on earnings using maturity gap analysis. The interest rate sensitivity modeling includes the creation of prospective twelve month "baseline" and "rate shocked" net interest income simulations. After a "baseline" net interest income is determined, using assumptions that the Bank deems reasonable, market interest rates are raised or lowered by 100 to 300 basis points instantaneously, parallel across the entire yield curve, and a "rate shocked" simulation is run. Interest rate sensitivity is then measured as the difference betwe en calculated "baseline" and "rate shocked" net interest income. At this time, the results of the Bank's analysis are not material to the Company as a whole.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and supplementary financial information are included herein at the pages indicated below:

To the Board of Directors and Stockholders of California First National Bancorp

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of California First National Bancorp and subsidiaries, at June 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the consolidated financial statement schedule listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
July 30, 2004

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

The accompanying notes are an integral
part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)

The accompanying notes are an integral
part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share amounts)

The accompanying notes are an integral
part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral
part of these consolidated financial statements.

California First National Bancorp, a California corporation (the "Company") and its subsidiaries have two principal lines of business, leasing and banking. The Company leases high-technology and other capital assets to customers located throughout the United States. The Company is also engaged in the re-marketing of leased assets at lease expiration. The Company's banking subsidiary, California First National Bank ("CalFirst Bank") is an FDIC-insured national bank that gathers deposits using the telephone, the Internet, and direct mail from a centralized location and leases capital assets to businesses and organizations and provides business loans to fund the purchase of assets leased by third parties.

The consolidated financial statements include the accounts of California First National Bancorp and its wholly owned subsidiaries, Amplicon, California First Leasing Corporation ("CalFirst Leasing"), and CalFirst Bank. All intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

For purposes of these statements, cash and cash equivalents include cash in banks, cash in demand deposit accounts, money market accounts and federal funds sold, all of which have initial maturities of less than ninety days. Included in cash and cash equivalents at June 30, 2004 and 2003 was $3,575,000 and $6,055,000, respectively, that was held by the Bank and was not available to fund the Company's other operations.

Investment securities that the Company has the intent and ability to hold until maturity are classified as "held-to-maturity" and are stated at cost adjusted for amortization of premium or accretion of discount under criteria established with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Investment securities held with the intent to sell are classified as "available-for-sale" and are stated at fair value. Unrealized gains and losses on available-for-sale investment securities, net of taxes, are reported as a separate component of stockholders' equity until realized.

     Capital Leases

New lease transactions are generally structured as direct financing leases or sales-type leases. The re-lease of property that has come off lease may be accounted for as a sales-type lease or as an operating lease, depending on the terms of the re-lease. Leased property that comes off lease and is re-marketed through a sale to the lessee or a third party is accounted for as sale of leased property.

For capital leases that qualify as direct financing leases, the aggregate lease payments receivable and estimated residual value, if any, are recorded on the balance sheet net of unearned income as net investment in capital leases. The unearned income is recognized as direct finance income over the lease term on an internal rate of return method. There are no costs or expenses related to direct financing leases since lease income is recorded on a net basis.

For capital leases that qualify as sales-type leases, the Company recognizes profit or loss at lease inception to the extent the fair value of the property leased differs from the Company's carrying value. The difference between the discounted value of the aggregate lease payments receivable and the property cost, less the discounted value of the residual, if any, and any initial direct costs is recorded as sales-type lease income. For balance sheet purposes, the aggregate lease payments receivable, and estimated residual value, if any, are recorded on the balance sheet net of unearned income as net investment in capital leases. Unearned income is recognized as direct finance income over the lease term on an internal rate of return method.

The residual value is an estimate for accounting purposes of the fair value of the lease property at lease termination. The estimates are reviewed continuously to ensure reasonableness; however the amounts the Company may ultimately realize could differ from the estimated amounts.

The Company assigns, on a non-recourse basis, the minimum lease payments receivable related to certain leases to financial institutions at fixed interest rates. When leases are assigned to unaffiliated financial institutions without recourse, the discounted value of the minimum lease payments receivable is recategorized on the balance sheet as discounted lease rentals assigned to lenders. The related obligations resulting from the discounting of the leases are recorded as non-recourse debt. The unearned income related to the lease is reduced by the interest expense from the non-recourse debt. In the event of default by a lessee, the lender has a first lien against the underlying leased property with no further recourse against the Company. If this occurs, the Company may not realize its residual investment in the leased property.

A portion of the Company's selling, general and administrative costs directly related to originating direct financing lease transactions is deferred as an increase to direct finance income and amortized over the lease term as a reduction to direct finance income utilizing the effective interest method.

     Operating Leases

Lease contracts, which do not meet the criteria of capital leases, are accounted for as operating leases. Property on operating leases is recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value at the termination of the lease. Most operating leases involve the re-lease of off-lease property and the associated cost is the Company's previously booked residual. Rental income is recorded monthly or quarterly when due. Selling costs directly associated with operating leases are deferred and amortized over the lease term.

Reserve for Lease Losses

The reserve for lease losses and residual valuation allowance is periodically reviewed for adequacy considering levels of past due leases and non-performing assets, lessees' financial condition, leased property values as well as general economic conditions and credit quality indicators. The need for reserves is subject to future events, which by their nature are uncertain. Therefore, changes in economic conditions or other events affecting specific lessees or industries may necessitate additions or deductions to the reserve for lease losses or the residual valuation allowance.

Property acquired for transactions in process primarily represents partial deliveries of property which the lessee has accepted on in-process lease transactions. Such amounts are stated at cost.

Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share includes the effect of the potential shares outstanding, including dilutive stock options, using the treasury stock method. The following table reconciles the components of the basic net income per share calculation to diluted net income per share.

Capital Structure

At June 30, 2004, the Company had two stock option plans that are more fully described below. The Company accounts for these Plans under APB Opinion No. 25, "Accounting for Stocks Issued to Employees," under which no compensation cost has been recognized. In accordance with Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," (SFAS No. 148), the Company adopted the disclosure requirements of SFAS No. 148.

At June 30, 2004, the Company has 20,000,000 authorized shares of Common Stock and is authorized to issue 2,500,000 shares of preferred stock, from time to time, in one or more series and to fix the voting powers, designations, preferences and the relative participating, optional or other rights, if any, of any wholly unissued series of preferred stock.

In August 1985, the Company's stockholders approved a Stock Option Plan (the "1985 Plan"). Stock options that were granted entitled the recipient to purchase shares of the Company's common stock at prices greater than, equal to or less than the estimated fair market value at the date of the grant. Under the 1985 Plan, stock options become exercisable over a three or five year period, commencing with the first anniversary of the date of the grant, and expire ten years from the date of the grant. The Company had reserved 1,300,000 shares of common stock for issuance under the 1985 Plan. No further grants will be made under the 1985 Plan.

In November 1995, the Company's stockholders approved the 1995 Equity Participation Plan (the "1995 Plan"), which succeeds the 1985 Plan. The 1995 Plan provides for the granting of options, restricted stock and stock appreciation rights ("SARs") to key employees, directors and consultants of the Company. Under the 1995 Plan, the maximum number of shares of Common Stock that may be issued upon the exercise of options or SARs, or upon the vesting of restricted stock awards, is 1,000,000. The maximum number of available shares of Common Stock will increase by an amount equal to 1% of the total number of issued and outstanding shares of Common Stock as of June 30 of the fiscal year immediately preceding such fiscal year. Each grant or issuance under the 1995 Plan will be set forth in a separate agreement and will indicate, as determined by the stock option committee, the type, terms, vesting period and conditions of the award.

The following table summarizes the activity in the 1985 Plan and 1995 Plan (the "Plans") for the periods indicated:

The Company accounts for these Plans under APB Opinion No. 25, "Accounting for Stocks Issued to Employees," under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure an Amendment to FASB No 123, Accounting for Stock-Based Compensation" (SFAS No. 148), the Company's net income and earnings per share would have been reduced to the following proforma amounts:

Since the SFAS No. 123 method of accounting, as amended by SFAS No. 148, has not been applied to options granted prior to July 1, 1995, the resulting proforma compensation cost may not be indicative of that to be expected in future periods.

The fair value of each grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002.

In March, the Emerging Issues Task Force ("EITF") ratified its consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment" ("EITF 03-1"). EITF 03-1 requires certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held to maturity under SFAS 115. The disclosure provisions of EITF 03-1 are effective for fiscal years ending after December 15, 2003. The implementation of the disclosure provisions of EITF 03-1 did not have a material impact on the Company's consolidated financial statements. The implementation of the evaluation provisions of EITF 03-1 is not expected to have a material impact on the Company's consolidated financial statements.

In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132"). The revised Statement retains the disclosure requirements contained in SFAS 132, but requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS 132 is effective for financial statements for fiscal years ending after December 15, 2003. Implementation of the revision of SFAS 132 did not have a material impact on the Company's consolidated financial statements.

Certain reclassifications have been made to the fiscal 2003 and 2002 financial statements to conform to the presentation of the fiscal 2004 financial statements.

At June 30, 2003, investment securities consisted of Federal Reserve Bank Stock of $552,750, which was being held to maturity and had no unrealized gains or losses.

The amortized cost and estimated fair value of investment securities at June 30, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.