<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]

         FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission File Number 33-93312

                           BEAL FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

                    Texas                             75-2583551

(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)

Suite 300, LB 66, 15770 North Dallas Parkway, Dallas, Texas            75248
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code:    (972) 404-4000

          Securities Registered Pursuant to Section 12(b) of the Act:

                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:

                                      None
                                (Title of class)

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

        The aggregate market value of the voting stock held by non-affiliates of
the registrant was $0, as all shares of the Registrant were held by affiliates
of the Registrant at December 31, 1997.

        As of December 31, 1997, there were issued and outstanding 300,000
shares of the Registrant's Common Stock.

         DOCUMENTS INCORPORATED BY REFERENCE

        None.


<PAGE>



                                                 TABLE OF CONTENTS

<TABLE>



<S>                                                                                                             <C>
ITEM 1.           BUSINESS.....................................................................................  1
         General  .............................................................................................  1
         Forward-Looking Statements............................................................................  2
         Lending Activities....................................................................................  3
                  General. ...................................................................................   3
                  Loan Portfolio Composition...................................................................  4
                  Contractual Principal Repayments.............................................................  6
                  Geographic Distribution of Real Estate Secured Loans.........................................  7
         Loan Acquisition, Resolution, Origination and Sale Activities.........................................  9
                  General. ....................................................................................  9
                  Originations, Purchases and Sales of Mortgage Loans.......................................... 11
                  Acquisition of Discounted Loans.............................................................. 13
                  One- to Four-Family Residential Mortgage Lending............................................. 14
                  Multi-Family and Commercial Real Estate Lending.............................................. 14
                  Construction, Development and Land Lending................................................... 16
                  Consumer Lending............................................................................. 16
                  Commercial Business Lending.................................................................. 17
                  Foreign Lending Activities................................................................... 17
         Loan Delinquencies and Non-Performing Assets...........................................................18
                  Non-Accruing Loans........................................................................... 19
                  Accruing Loans Delinquent More than 90 Days...................................................19
                  Foreclosed Assets............................................................................ 19
                  Other Loans of Concern........................................................................20
                  Classified Assets............................................................................ 20
                  Allowance for Loan Losses.................................................................... 20
         Investment Activities..................................................................................24
                  General. .................................................................................... 24
         Sources of Funds...................................................................................... 25
                  General. .................................................................................... 25
                  Deposits..................................................................................... 25
                  Borrowings................................................................................... 27
         Subsidiaries of the Company........................................................................... 28
         Subsidiaries of the Bank...............................................................................29
                  Beal Nevada Corp., ("BNC")................................................................... 29
                  Beal Mortgage, Inc. ("BMI") and Beal Properties, Inc. ("BPI")
                     and Beal/H.S., Inc. ("BHS")............................................................... 29
                  Loan Acceptance Corp. ("LAC").................................................................30
                  BRE, Inc. ("BRE").............................................................................30
                  Beal Affordable Housing, Inc. ("BAH")........................................................ 30
                  Foreign Lending Corporation ("FLC").......................................................... 31
         Competition........................................................................................... 31
         Employees............................................................................................. 31
         Regulation............................................................................................ 32
                  General. .................................................................................... 32
                  The Conversion............................................................................... 32
                  Texas Law and Supervision by the Texas Department.............................................32
                  Federal Regulation of State-Chartered Savings Banks...........................................33
                  Insurance of Accounts and Regulation by the FDIC..............................................34
                  Regulatory Capital Requirements and Prompt Corrective Regulatory Action...................... 35
                  Limitations on Dividends and Other Capital Distributions......................................38
                  Liquidity.................................................................................... 38
                  Qualified Thrift Lender Test..................................................................38
                  Community Reinvestment Act................................................................... 38
                  Transactions with Affiliates................................................................. 39
                  Holding Company Regulation................................................................... 39
                  Federal Securities Law....................................................................... 39
                  Federal Reserve System....................................................................... 39
                  Federal Home Loan Bank System.................................................................40

</TABLE>


                                                        ii


<PAGE>

<TABLE>


<S>                                                                                                             <C>
         Federal and State Taxation............................................................................ 40
                  Federal Taxation............................................................................. 40
                  Texas State Income Taxation.................................................................. 41
                  Delaware Taxation............................................................................ 41

ITEM 2.           PROPERTIES................................................................................... 42

ITEM 3.           LEGAL PROCEEDINGS............................................................................ 43

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................43

ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 43

ITEM 6.           SELECTED FINANCIAL DATA...................................................................... 44

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS.................................................................... 46
         General  ............................................................................................. 46
         Financial Condition................................................................................... 46
         Results of Operations................................................................................. 47
                  Average Balance, Interest and Average Yields and Rates........................................48
                  Rate/Volume Analysis......................................................................... 49
         Comparison of Operating Results for the Fiscal Year Ended December 31, 1997 and the
            Twelve Months Ended December 31, 1996.............................................................. 50
                  Net Income................................................................................... 50
                  Net Interest Income.......................................................................... 50
                  Interest Income.............................................................................. 50
                  Interest Expense............................................................................. 50
                  Provision for Loan Losses.................................................................... 50
                  Non-Interest Income.......................................................................... 51
                  Non-Interest Expense......................................................................... 51
                  Income Taxes................................................................................. 51
         Comparison of Operating Results for the Fiscal Years Ended June 30, 1996 and 1995..................... 51
                  Net Income................................................................................... 51
                  Net Interest Income.......................................................................... 51
                  Interest Income.............................................................................. 51
                  Interest Expense............................................................................. 51
                  Provision for Loan Losses.................................................................... 52
                  Non-Interest Income.......................................................................... 52
                  Non-Interest Expense......................................................................... 52
                  Year 2000.................................................................................... 52
                  Income Taxes................................................................................. 53
         Liquidity and Capital Resources....................................................................... 53
         Impact of Inflation and Changing Prices............................................................... 54
         Ratios of Earnings to Fixed Charges................................................................... 54

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                   MARKET RISK................................................................................. 55

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION............................................59

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE...........................................................86

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS............................................................. 86
         Directors of Beal Financial ...........................................................................86
         Executive Officers of the Company..................................................................... 86
         Board of Directors of the Bank........................................................................ 87
         Executive Officers of the Bank.........................................................................88
         Meetings and Committees of the Board of Directors of the Company and the Bank..........................89
         Compensation Committee Interlocks and Insider Participation............................................90

</TABLE>


                                                        iii


<PAGE>

<TABLE>


<S>                                                                                                             <C>
         Compensation of Directors............................................................................. 90

ITEM 11.          EXECUTIVE COMPENSATION....................................................................... 91
         Compensation of Executive Officers.................................................................... 91
         Executive Bonus Plan.................................................................................. 91
         Benefits.............................................................................................. 92

ITEM 12.          STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS................................................. 93

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 93
         Certain Transactions.................................................................................. 93

ITEM 14.          EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
                  FORM 8-K..................................................................................... 94

</TABLE>


                                       iv


<PAGE>



                                     PART I

ITEM 1.   BUSINESS

General

         Beal Financial Corporation ("Beal Financial" and with its subsidiaries
the "Company"), a Texas corporation, was organized by the stockholders of Beal
Bank, SSB (the "Bank") for the purpose of acquiring all of the outstanding
capital stock of the Bank, which it indirectly owns through its wholly owned
subsidiary, Beal Banc Holding Company, a Delaware corporation. Beal Financial is
owned primarily by D. Andrew Beal, Chairman of the Board of the Bank. Beal
Financial, through Beal Banc Holding Company, acquired ownership of the Bank in
July 1995 and is subject to regulation by the Office of Thrift Supervision (the
"OTS"). The most significant asset of Beal Financial is its indirect ownership
of the capital stock of the Bank. At December 31, 1997, the business of the
Company consisted primarily of the business of the Bank and its subsidiaries.
All references to the Company, unless otherwise indicated, prior to July 1, 1995
refer to its subsidiaries, including the Bank and its subsidiaries on a
consolidated basis. In calendar year 1996, the Company changed its fiscal year
end from June 30 to December 31 in connection with its tax election to be
treated as a Subchapter S corporation. See "Federal and State Taxation - Federal
Taxation."

         The Bank, a privately held Texas-chartered savings bank headquartered
in Dallas, Texas, was originally chartered in 1988 as a Texas-chartered savings
and loan association. Effective December 1, 1994, the Bank converted to a Texas
savings bank charter. This conversion was made primarily to eliminate the
duplicative regulation and supervision of the Bank by the OTS and the Federal
Deposit Insurance Corporation (the "FDIC"). Prior to December 1994, the name of
the Bank was "Beal Banc, S.A." See "Regulation."

         Beal Financial is subject to regulatory oversight and examination by
the OTS and the Texas Savings and Loan Department (the "Texas Department"). The
Bank is subject to regulation by the Texas Department, as its chartering
authority, and by the FDIC as a result of its membership in the Savings
Association Insurance Fund ("SAIF") administered by the FDIC, which insures the
Bank's deposits up to the maximum extent permitted by law. The Bank also is
subject to certain regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") and currently is a member of the Federal Home
Loan Bank ("FHLB") of Dallas, one of the 12 regional banks which comprise the
FHLB System.

         The Company's primary business has historically consisted of purchasing
pools of performing and, to a lesser extent, purchasing and resolving
non-performing mortgage loans, in each case such loans are secured by
single-family (one to four units) residences, multi-family residential real
estate (over four units), commercial real estate and, to a much lesser extent,
undeveloped land and business assets. These loans are generally purchased at
discounts from the principal balances of the loans ("discounted loans")
primarily from the U.S. Department of Housing and Urban Development ("HUD"), the
FDIC and private sector sellers located nationwide. The Company had purchased a
significant amount of discounted loans from the Resolution Trust Company (the
"RTC") prior to December 31, 1995, the date of the RTC's termination. Although,
the Company's current business strategy emphasizes the ongoing identification
and purchase of discounted loans, primarily secured by real estate, which
management believes are undervalued due to market, economic and competitive
conditions; due to the termination of the RTC and increased competition for
these assets, the supply of discounted loans meeting the Company's investment
criteria has steadily decreased, resulting in a decline in discounted loan
purchases. See "- Loan Acquisition, Resolution, Origination and Sale
Activities." The Company's current business strategy is to continue to
opportunistically purchase discounted loans while attempting to leverage its
core expertise by increasing its originations of multi-family and commercial
real estate, construction, development and land loans. In this regard, the
Company recently entered into an executive bonus plan with President David C.
Meek, who has extensive experience in both asset resolution and in the
origination of commercial real estate loans. The executive bonus plan is based
upon the amount of earnings the Company derives from designated loan
originations exceeding a hurdle rate of prime plus 1.5%.  See "Item 11 - 
Incentive Compensation."

         The Company originates multi-family and commercial real estate,
construction, development and land loans within its primary market area and
other areas within the state of Texas. The Company considers its primary market
area for deposits and loan originations to consist of Collin, Dallas, Denton,
Ellis, Kaufman, Rockwall, Fort Bend, 


<PAGE>


Harris, Liberty, Montgomery and Waller counties, Texas. These counties consist
of communities comprising the Dallas and Houston metropolitan statistical areas,
respectively. See "Subsidiaries of the Bank."

         In addition to its loan purchasing and lending activities, the Company
is actively engaged in direct equity real estate investments, including the
development of residential lots through the Bank's subsidiaries, Beal Mortgage,
Inc. ("BMI"), Beal Properties Inc. ("BPI") and Beal/H.S. Inc. ("BHS") and
through various single purpose subsidiaries. At December 31, 1997, the Company's
real estate held for development totaled $23.5 million (excluding $2.6 million
sold in the first quarter of 1998). BMI and BPI also held in the aggregate $10.3
million of income producing properties (primarily consisting of the buildings
located adjacent to the Bank's corporate headquarters). See "- Subsidiaries of
the Bank."

         In addition, Beal Financial purchased from the Bank in 1996 a 45.1%
participation interest in sixteen loans for a payment of $18.5 million. The
participation agreement provides that the Company's interest in the loans will
be junior to the Bank's interest in that the principal amount of loans owed to
the Bank will be repaid prior to the principal amount owed to the Company. Beal
Financial's current interest, as of December 31, 1997, was $10.7 million and is
secured by nine foreclosed properties. See "Lending Activities General."

         In addition, the Company is engaged in the ownership of multi-family
projects that qualify for low-income housing tax credits through the Bank's
subsidiary, Beal Affordable Housing ("BAH"). BAH has invested a total of $26.0
million in three affordable housing apartment buildings at December 31, 1997.
See "Subsidiaries of the Bank" and "- Regulation - Federal Regulation of
State-Chartered Savings Banks."

         The Bank funds its discounted loan purchases, loan originations and
real estate investments primarily through the attraction of deposits from the
general public, including brokered deposits, and, to a lesser extent, borrowings
from the FHLB of Dallas and other sources. The Bank has branch offices located
in Dallas and Houston, Texas and Winnetka, Illinois. The Bank has entered into a
contract to sell the Winnetka branch. This transaction should be consummated
during the second quarter of 1998. See "Sources of Funds - Deposits."

         At December 31, 1997, the Bank was a "well capitalized institution" as
defined in FDIC regulations and had tier 1 capital to total assets ("leverage
capital ratio"), tier 1 capital to risk-weighted assets ("tier 1 capital ratio")
and total capital to risk-weighted assets ("total risk-based capital ratio") of
13.81%, 17.90% and 19.05%, respectively.

         The executive offices of the Company are located at 15770 N. Dallas
Parkway, Suite 300, Dallas, Texas 75248. Its telephone number at that address is
(972) 404-4000.

Forward-Looking Statements

         When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions or by use of the negative of such
terminology are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, particularly in the market areas the Company operates, changes in
the domestic or foreign business, financial and securities markets, financial or
legal conditions, changes in prevailing interest rates and the credit risks
related to the Company's lending activities, and in the competitive and
regulatory factors affecting financial institutions and the availability of and
costs associated with sources of liquidity, all could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.

         The Company does not undertake, and specifically disclaims any
obligations, to revise any forward- looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.


<PAGE>



Lending Activities

         General. Commencing in 1990, the Company began purchasing pools of
performing and, to a lesser extent, non-performing discounted loans. The
discounted loans which have been acquired by the Company to date consist
primarily of single-family and multi-family residential loans, commercial real
estate loans, land, consumer and commercial business loans which have been
acquired from the RTC, the FDIC and the HUD, primarily in auctions of pools of
loans acquired by those agencies from failed financial institutions and to a
much lesser extent, private sector sellers.

         At December 31, 1997 the Company's gross loan portfolio totaled $1.1
billion. The Company's unaccreted purchase discounts and fees at December 31,
1997 totaled $231.8 million. The Company's gross loan portfolio at December 31,
1997 was comprised primarily of one- to four-family residential mortgage loans
(18.6%), commercial real estate loans (29.4%) and multi-family residential real
estate loans (28.0%). The balance of the gross loan portfolio included land
loans (6.2%), construction and development loans (8.6%), consumer loans (7.0%)
and commercial business loans (2.2%). At December 31, 1997 the Company's net
loan portfolio totaled $887.8 million. The Company's net loan portfolio at
December 31, 1997 was comprised primarily of one- to four-family residential
mortgage loans (19.9%), commercial real estate loans (29.7%) and multi-family
residential real estate loans (26.2%). The balance of the net loan portfolio
included land loans (5.8%), construction and development loans (9.0%), consumer
loans (7.6%) and commercial business loans (1.8%).

         At December 31, 1997, approximately 22.5% of the Company's gross real
estate mortgage loans (including one- to four-family junior lien loans
classified as consumer loans) were secured by real estate properties located in
Texas. The Company also has loans secured by real estate properties (including
one- to four-family junior lien loans) located in California and Florida,
representing 19.6% and 15.2% of the Company's gross loan portfolio,
respectively. At December 31, 1997, there were no other states where loans
secured by real estate properties (including one- to four-family junior lien
loans) exceeded 5%. The balance of the Company's real estate mortgage loans were
secured by properties located in the northeast, the midwest, and throughout the
rest of the United States. See "- Geographic Distribution of Real Estate Secured
Loans."

         Texas law limits the maximum amount the Bank may lend to one borrower
or group of related borrowers to the greater of $500,000, or 15%, of unimpaired
capital and surplus. At December 31, 1997, the Bank's loan to one borrower limit
was $28.2 million. At that date, the largest amount outstanding to any one
borrower or group of affiliated borrowers was $20.9 million, net and is secured
by a first lien on 720 acres of land and improvements in Harris County, Texas
and a first lien on a 27 hole golf course, restaurant, 60 room hotel plus 208
acres of land to be developed located in Southern, California. The next largest
relationship totaled $20.3 million, net and is secured by a first lien on 727
acres located in Denton County, Texas, and a pledge of a 49% partnership
interest in a partnership which owns an additional 1,490 acres in Collin County,
Texas. The Bank's third largest relationship totaled $18.3 million, net and
consisted of seven letters of credit aggregating $16.8 million, net, which, if
drawn against shall be secured by first liens on eight office buildings located
in Houston, Texas and the balance of $1.5 million, secured by first liens on
three small office buildings located in Houston, Texas. All of these loans are
performing in accordance with their respective repayment terms. See
"Multi-family and Commercial Real Estate Lending" and "Regulation - Texas Law
and Supervision by the Texas Department".

         The Company has two other loans to any borrower or group of related
borrowers in excess of $15.0 million, net (aggregating $31.6 million, net),
three such lending relationships in excess of $10.0 million, net (aggregating
$32.3 million), an additional four such lending relationships in excess of $7.5
million, net (aggregating $34.1 million), an additional eight such lending
relationships in excess of $5.0 million, net (aggregating $58.3 million) and an
additional 50 such lending relationships in excess of $2.0 million, net
(aggregating $150.3 million). At December 31, 1997, 15 of these lending
relationships in excess of $2.0 million, net, aggregating $75.7 million were
non-performing. See "- Loan Delinquencies and Non-Performing Assets."



<PAGE>



         Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Company's loan portfolio, in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.

<TABLE>
<CAPTION>

                                                                              June 30, 
                                         -----------------------------------------------------------------------------------
                                                1993                 1994                 1995                   1996       
                                         -----------------    ------------------   ------------------   -------------------- 
                                         Amount    Percent    Amount     Percent   Amount     Percent    Amount      Percent 
                                         ------    -------    ------     -------   ------     -------    ------      -------
<S>                                    <C>          <C>      <C>          <C>      <C>          <C>     <C>           <C>      
                                                                                                                            
Real Estate Loans:                                                                                                         
 One- to four-family ...............   $ 62,540     42.53%   $ 67,169     21.81    $ 237,585     35.70% $ 273,780     22.47%
 Commercial ........................     30,271     20.58      93,496     30.37      109,080     16.39    321,385     26.38 
 Multi-family ......................     20,675     14.06      55,633     18.07      124,985     18.78    341,696     28.05 
 Construction or development .......      3,893      2.65      27,100      8.80       51,284      7.71     85,133      6.99 
 Land ..............................      7,089      4.82       9,889      3.21       35,997      5.41    100,047      8.21 
                                        -------     -----      ------     -----      -------     -----  ---------     ----- 
     Total real estate loans .......    124,468     84.64     253,287     82.26      558,931     83.99  1,122,041     92.10 
                                                                                                                            
Other Loans:                                                                                                                
 Consumer Loans:                                                                                                            
                                                                                                                            
  One- to four-family - junior liens      9,993      6.79      19,549      6.35       44,999      6.77     50,146      4.12 
  Timeshares .......................      1,599      1.09      18,249      5.93       11,668      1.75      7,809       .64 
  Other ............................      3,747      2.55       7,139      2.32        4,791       .72      8,373       .69 
                                         ------     -----      ------     -----       ------      ----  ---------     ----- 
                                                                                                                            
     Total consumer loans ..........     15,339     10.43      44,937     14.60       61,458      9.24     66,328      5.45 
 Commercial business loans .........      7,253      4.93       9,662      3.14       45,060      6.77     29,886      2.45 
                                         ------     -----      ------     -----       ------      ----  ---------     ----- 
                                                                                                                            
                                                                                                        1,218,255    100.00%
     Total loans ...................    147,060    100.00%    307,886    100.00%     665,449    100.00%                     
                                                   ------                ------                 ------                      
                                                   ------                ------                 ------                      
                                                                                                                   
Less:                                                                                                              
                                                                                                                   
 Loans in process ..................      1,558                11,235                21,217                27,172           
 Deferred fees and discounts .......     43,447                73,190               144,927               281,837           
 Allowance for loan losses .........      1,245                 3,547                 6,137                11,832           
 Loans held for sale ...............         --                    --                   866                    --           
                                      ---------             ---------             ---------             ---------           
      Total loans receivable, net ..  $ 100,810             $ 219,914             $ 492,302             $ 897,414                   
                                      ---------             ---------             ---------             ---------                   
                                      ---------             ---------             ---------             ---------                   
                                                                                                        
</TABLE>



<TABLE>
<CAPTION>

                                                         December 31,
                                           -----------------------------------------
                                                  1996                   1997
                                           ------------------     ------------------
                                           Amount     Percent     Amount     Percent
                                           ------     -------     ------     -------
<S>                                     <C>           <C>      <C>          <C>   
Real Estate Loans:

 One- to four-family ...............    $ 276,591     19.37%   $ 213,584    18.60%
 Commercial ........................      388,460     27.20      337,825    29.42
 Multi-family ......................      466,697     32.68      321,423    27.99
 Construction or development .......       74,437      5.21       98,503     8.58
 Land ..............................       95,684      6.70       71,379     6.21
                                        ---------     -----    ---------    -----
     Total real estate loans .......    1,301,869     91.16    1,042,714    90.80%

Other Loans:
 Consumer Loans:

  One- to four-family - junior liens       77,528      5.43       71,465     6.22
  Timeshares .......................        6,446       .45        3,615      .31
  Other ............................        7,095       .50        5,003      .44
                                        ---------     -----    ---------    -----

     Total consumer loans ..........       91,069      6.38       80,083     6.97
 Commercial business loans .........       35,131      2.46       25,554     2.23
                                        ---------     -----    ---------    -----

     Total loans ...................    1,428,069    100.00%   1,148,351   100.00%
                                                     ------                ------ 
                                                     ------                ------ 
                                                       
Less:

 Loans in process ..................       16,364                16,806
 Deferred fees and discounts .......      344,312               231,800
 Allowance for loan losses .........       13,189                11,912
 Loans held for sale ...............           --                    --
                                      -----------             ---------
      Total loans receivable, net ..  $ 1,054,204             $ 887,833
                                      -----------             ---------
                                      -----------             ---------


</TABLE>



                                        4


<PAGE>

         The following table sets forth information concerning the composition
of the Company's loan portfolio after deduction for loans in process, deferred
fees and discounts, allowance for loan losses and loans held for sale at
December 31, 1997.


<TABLE>
<CAPTION>

                                                                         At December 31, 1997
                                           ----------------------------------------------------------------------------------
                                                                                                                   Deferred
                                                                                                                   Fees and
                                                                                                                   Discounts
                                                                                                                      as a
                                           Gross                      Deferred       Allowance                     Percentage
                                           Loan         Loans in      Fees and       for Loan                       of Gross
                                           Amount         Process      Discounts       Losses           Net          Loans
                                           ----------   ---------     ----------     ----------        --------   ----------
                                                                       (Dollars In Thousands)

<S>                                      <C>             <C>                    <C>                    <C>            <C>   
REAL ESTATE LOANS:
  One- to four-family -
     first liens.....................    $   213,584     $     ---       $ 33,098       $  4,051       $176,435       15.50%
  Commercial.........................        337,825           ---         72,170          1,986        263,669       21.36
  Multi-family.......................        321,423           ---         87,072          1,316        233,035       27.09
  Construction or development........         98,503        16,806          1,548             16         80,133        1.57
  Land...............................         71,379           ---         19,034            898         51,447       26.67
                                           ---------        ------        -------         ------        -------
       Total real estate loans.......      1,042,714        16,806        212,922          8,267        804,719       20.42


OTHER LOANS:
Consumer Loans:

  One- to four-family -

      junior liens...................         71,465           ---          7,713          1,756         61,996       10.79
  Timeshares.........................          3,615           ---            615            642          2,358       17.01
  Other..............................          5,003           ---          1,132           684           3,187      22.63
                                           ---------        ------        -------         ------        -------
  Total consumer loans...............         80,083           ---          9,460          3,082         67,541       11.81
Commercial business loans............         25,554           ---          9,418            563         15,573       36.86
                                           ---------        ------        -------         ------        -------
      Total other loans..............        105,637           ---         18,878          3,645         83,114       17.87
                                           ---------        ------        -------         ------        -------

 Total loans.........................      1,148,351        16,806        231,800         11,912        887,833       20.19
                                                                          

Less:

   Loans in process..................         16,806      (16,806)            ---             ---           ---
   Deferred fees and discounts.......        231,800           ---       (231,800)            ---           ---
   Allowance for losses..............                                                   
                                              11,912           ---            ---         (11,912)          ---
                                           ---------        ------        -------         ------        -------
      Total loans receivable,            
net..................................     $   887,833      $             $             $     --        $887,833
                                           ---------        ------        -------         ------        -------
                                           ---------        ------        -------         ------        -------

</TABLE>

                                        5

<PAGE>

         Contractual Principal Repayments. The following schedule illustrates
the contractual maturity of the Company's loan portfolio at December 31, 1997.
Loans which have adjustable or renegotiable interest rates are shown as maturing
in the period during which the contract is due. The schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>


                                                     Real Estate
                                ---------------------------------------------------
                                                                Construction
                                One- to Four- Multi-                or                           Commercial
                                   Family     family Commercial Development    Land    Consumer   Business     Total
                                ------------- ------ ---------- ------------   ----    --------  ----------    -----
                                                          (Dollars in Thousands)

           Due During
         Periods Ending
          December 31,
-----------------------------
<C>                             <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>     
1998 ........................   $  5,044   $ 30,657   $ 39,200   $ 13,326   $  8,985   $ 10,226   $  4,013   $111,451
1999 to 2002 ................     18,645     59,679    108,899     66,823     35,570      9,562      7,981    307,159
2003 and following ..........    156,797    144,015    117,556       --        7,790     50,835      4,142    481,135
                                --------   --------   --------   --------   --------   --------   --------   --------
    Total ...................   $180,486   $234,351   $265,855   $ 80,149   $ 52,345   $ 70,623   $ 16,136   $899,745

Less:

  Allowance for loan losses .      4,051      1,316      1,986         16        898      3,082        563     11,912
                                --------   --------   --------   --------   --------   --------   --------   --------

  Total loans receivable, net   $176,435   $233,035   $263,669   $ 80,133   $ 51,447   $ 67,541   $ 15,573   $887,833
                                --------   --------   --------   --------   --------   --------   --------   --------
                                --------   --------   --------   --------   --------   --------   --------   --------

</TABLE>




                                       6


<PAGE>



         The total amount of gross loans due after December 31, 1998, which have
predetermined interest rates is $474.7 million, while the total amount of gross
loans due after such date which have floating or adjustable interest rates is
$313.6 million.

         Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates. Further, as a result of the use of the level
yield method or "interest method" of accretion of the purchase discount pursuant
to generally accepted accounting principles, to the extent loan repayments
exceed scheduled loan amortizations, the accretion of the remaining purchase
discount, if any, would be accelerated.

         Geographic Distribution of Real Estate Secured Loans. The Company's
loans are secured by properties located throughout the United States. Some of
these loans are located in states which are reported to be experiencing adverse
economic conditions, including a general softening in real estate markets and
the local economies, which may result in increased loan delinquencies and loan
losses. The Company attempts to address this geographic risk by only purchasing
loans that meet the Company's underwriting and investment standards. Management
believes that purchasing loans secured by properties located across the country
results in a diversified loan portfolio and overall lower risk. As of December
31, 1997, the Company's gross real estate collateralized loans (excluding junior
liens secured by one- to four-family real estate totaling $71.5 million) were
geographically distributed as follows:

<TABLE>
<CAPTION>

                                                Outstanding                        Non-performing
         Total Real Estate Secured               Balance at          Percent         Balance at
             Loans By Geographic                December 31,        of Total         December 31,    Percent of
                  Location                          1997           Outstanding          1997       Non-performing
---------------------------------------------  ------------       -----------     --------------   --------------


<S>                                             <C>               <C>           <C>                <C>  
Texas.......................................    $   234,248        22.47%       $    6,290           3.28%
California..................................        204,693        19.63            34,307          17.87
Florida.....................................        158,637        15.21            54,574          28.42
Massachusetts...............................         45,377         4.35            31,271          16.29
Colorado....................................         37,548         3.60             7,637           3.98
Illinois....................................         33,645         3.23                15            ---
All others..................................        328,566        31.51            57,900          30.16
                                               ------------       ------        ----------        -------
  Total real estate loan portfolio..........     $1,042,714       100.00%         $191,994         100.00%
                                               ------------       ------        ----------        -------
                                               ------------       ------        ----------        -------
</TABLE>


         At December 31, 1997, there were no other loan concentrations in any
other state which exceeded three percent of the total real estate loan
portfolio.

                                       7


<PAGE>



         The following tables set forth the geographic distribution of the
Company's real estate loans by loan type at December 31, 1997.


<TABLE>
<CAPTION>

                                                      Outstanding                  Non-performing
                                                       Balance at     Percent       Balance at
             One- to Four-Family                      December 31,   of Total       December 31,    Percent of
        Loans By Geographic Location                    1997        Outstanding       1997        Non-performing
--------------------------------------------          -----------   -----------    -------------- --------------

<S>                                                   <C>             <C>           <C>             <C>  
Florida.....................................          $  58,604       27.44%        $ 1,287         7.03%
Texas.......................................             36,060       16.88           4,320        23.62
California..................................             31,944       14.96           4,412        24.12
Massachusetts...............................             10,551        4.93           1,476         8.07
Alabama.....................................              6,676        3.13             157          .86
Virginia....................................              6,610        3.10             316         1.73
All others..................................             63,139       29.56           6,324        34.57
                                                       --------      ------         -------       ------ 
  Total One- to Four- Family Loans..........           $213,584      100.00%        $18,292       100.00%
                                                       --------      ------         -------       ------ 
                                                       --------      ------         -------       ------ 
</TABLE>


<TABLE>
<CAPTION>

                                                    Outstanding                    Non-performing
                                                     Balance at      Percent        Balance at
           Commercial Real Estate                   December 31,    of Total        December 31,   Percent of
        Loans By Geographic Location                   1997       Outstanding         1997       Non-performing
--------------------------------------------        -----------   -----------      ------------- --------------
<S>                                                    <C>           <C>            <C>          <C>    
California..................................          $  72,946       21.59%        $15,004       38.39%
Texas.......................................             64,588       19.12             537        1.37
Florida.....................................             46,794       13.85          10,814       27.67
Illinois....................................             24,999        7.40             ---         ---
Tennessee...................................             12,438        3.68             144         .37
Virginia....................................             11,778        3.49             252         .64
All others..................................            104,282       30.87          12,334       31.56
                                                       --------      ------         -------       ------ 
  Total Commercial Real Estate Loans........           $337,825      100.00%        $39,085      100.00%
                                                       --------      ------         -------       ------ 
                                                       --------      ------         -------       ------ 

</TABLE>

<TABLE>
<CAPTION>

                                                     Outstanding                      Non-performing
                                                      Balance at      Percent        Balance at
            Multi-Family                             December 31,     of Total       December 31,        Percent of
        Loans By Geographic Location                     1997        Outstanding        1997           Non-performing
--------------------------------------------         ------------    -----------   --------------   -----------------
<S>                                                   <C>                <C>         <C>                <C>  
California..................................          $  52,866          16.45%      $  12,044            9.68%
Florida.....................................             47,873          14.89          38,152           30.67
Texas.......................................             32,691          10.17             699             .56
Massachusetts...............................             30,907           9.62          29,643           23.83
Colorado....................................             24,036           7.48           7,637            6.14
Louisiana...................................             14,747           4.58           6,660            5.35
South Carolina..............................             14,097           4.39          12,018            9.66
Missouri....................................             13,484           4.19           7,657            6.16
Kansas......................................             13,469           4.19              36             .03
Arkansas....................................             12,478           3.88           1,829            1.47
Georgia.....................................             10,767           3.35             ---             ---
Connecticut.................................             10,146           3.16             ---             ---
All others..................................             43,862          13.65           8,019            6.45
                                                     ----------         ------      ----------        --------
  Total Multi-Family........................           $321,423         100.00%       $124,394          100.00%
                                                     ----------         ------      ----------        --------
                                                     ----------         ------      ----------        --------

</TABLE>


                                       8

<PAGE>

<TABLE>
<CAPTION>



                                                     Outstanding                        Non-performing
                                                      Balance at          Percent          Balance at
        Construction and Development                 December 31,         of Total         December 31,           Percent of
        Loans By Geographic Location                     1997            Outstanding          1997              Non-performing
--------------------------------------------         -----------         -----------    ---------------         --------------
<S>                                                     <C>                   <C>              <C>                 <C>      
Texas.......................................            $82,672               83.93%           $ ---                 ---%
California..................................             15,390               15.62              ---                  ---
All others..................................                441                 .45              ---                  ---
                                                      ---------            --------           ------                -----
  Total Construction and Development

     Loans..................................            $98,503              100.00%           $ ---                 ---%
                                                      ---------            --------           ------                -----
                                                      ---------            --------           ------                -----
</TABLE>


<TABLE>
<CAPTION>

                                                     Outstanding                     Non-performing
                                                      Balance at       Percent          Balance at
                 Land Loans                          December 31,      of Total         December 31,     Percent of
           By Geographic Location                        1997         Outstanding           1997        Non-performing
--------------------------------------------         ------------     -----------    ---------------    --------------
<S>                                                     <C>               <C>          <C>                  <C>   
California..................................            $31,547           44.20%       $  2,848             27.86%
Texas.......................................             18,237           25.55             735              7.19
Florida.....................................              5,366            7.52           4,321             42.27
Colorado....................................              3,207            4.49             ---               ---
New Mexico..................................              3,162            4.43              19               .18
All others..................................              9,860           13.81           2,300             22.50
                                                       --------          ------        --------            ------
  Total Land Loans..........................            $71,379          100.00%        $10,223            100.00%
                                                       --------          ------        --------            ------
                                                       --------          ------        --------            ------
</TABLE>


         The following table sets forth the geographic distribution of the
Company's junior lien loans secured by one- to four-family real estate at
December 31, 1997.

<TABLE>
<CAPTION>
                                                 Outstanding                       Non-performing
                                                 Balance at          Percent         Balance at
       One- to Four-Family Junior Lien          December 31,        of Total        December 31,          Percent of
        Loans By Geographic Location                1997           Outstanding          1997            Non-performing
--------------------------------------------    ------------       -----------     --------------       --------------
<S>                                              <C>                   <C>            <C>                   <C>  
California..................................     $15,583               21.81%         $ 2,585               22.78
Texas.......................................      13,679               19.14            1,407               12.40
Louisiana...................................       7,916               11.08              381                3.36
New York....................................       5,644                7.92              929                8.19
Connecticut.................................       5,122                7.17              971                8.56
New Jersey..................................       4,455                6.23            2,398               21.13
Florida.....................................       3,849                5.38              375                3.30
Arizona.....................................       2,514                3.52              ---                 ---
All others..................................      12,683               17.75            2,301               20.28
                                                 -------               -----          -------               -----
                                                                                                          
  Total One- to Four- Family Junior
     Lien Loans.............................     $71,465              100.00%         $11,347              100.00%
                                                 -------               -----          -------               -----
                                                 -------               -----          -------               -----
</TABLE>


Loan Acquisition, Resolution, Origination and Sale Activities


         General. The Company historically has invested and intends to continue
to invest a significant amount of its assets in discounted loans. The Company
believes that under appropriate market conditions the acquisition of discounted
loans offers a better return than the origination of mortgage loans.
Historically, discounted loans purchased by the Company generally have
collateral coverage which is substantially in excess of the purchase price of
the loan. In addition, the Company believes that discounted loans can be
purchased on terms which result in the investment having a total return which is
substantially in excess of an equivalent investment in originated mortgage
loans.

                                       9

<PAGE>

         It should be noted, however, that the acquisition of discounted loans
has become more competitive in the marketplace, in part because of the presence
of additional competitors for discounted loans offered by the HUD, the FDIC and
private sector sellers and because the HUD and the FDIC generally sought to
increase the number of purchasers of assets sold by them. The Company continues
to review and bid to acquire a substantial amount of performing discounted loans
and, to a lesser extent, non-performing discounted loans. There can be no
assurance, however, that the Company will be able to continue to acquire
discounted loans in the future at either the same volumes or the same level of
discounts as experienced in the past. Moreover, the significant earnings
achieved by the Company on the discounted loan portfolio in recent periods may
be attributable in part to early resolution of the least difficult
non-performing loans in acquired pools. As a result, there can be no assurance
that the level of earnings on discounted loans experienced by the Company to
date are necessarily indicative of the results to be experienced in future
periods or that there will not be substantial periodic variations in the results
from such activities.

         Prior to entering the discounted loan business, management of the
Company, particularly, Chairman D. Andrew Beal, had loan acquisition and
resolution and real estate management experience. His experience assisted the
Company in developing the procedures and systems which are necessary to evaluate
and acquire discounted loans and to resolve such loans in a timely and
profitable manner.

         All reviews of discounted loans are initially performed through Loan
Acceptance Corporation ("LAC"), a wholly owned subsidiary of the Bank, of which
D. Andrew Beal is President. LAC places bids on pools of discounted loans in
anticipation of assigning its interest in the loan pool to the Bank following
acceptance of its bid. All purchases by the Bank are made within the parameters
set by the Board of Directors of the Bank for loan purchases and originations,
as discussed below.

         Although the Company has focused in prior years on the acquisition of
discounted loans, in 1998 the Company began focusing on increasing its
origination of multi-family and commercial real estate, as well as construction,
development and land loans. This effort is being managed by President Meek.
President Meek is a former executive officer of a real estate management company
responsible for a national portfolio of income producing properties. Previously,
he also had served in various executive capacities with large financial
institutions with responsibility for the origination of multi-family and
commercial real estate loans, as well as real estate development and sales
activities. Since joining the Company in 1996, Mr. Meek has focused on the
resolution of non-performing discounted loans. Consistent with the intent of the
executive bonus plan entered into between Mr. Meek and the Company in February,
1998, Mr. Meek is focusing on the Company's multi-family and commercial real
estate, construction, development and land lending origination platform in order
to increase the Company's loan originations. The Company believes that the
expertise of Mr. Meek and its other officers with respect to these higher
yielding loans may result in the origination of loans where the Company may
receive not only a stated fixed or adjustable interest rate, but, especially
with respect to construction, development and land loans, also a percentage of
gross revenues or a percentage of the proceeds received upon the sale of the
property securing repayment of the loan. See also "- Multi-Family and Commercial
Real Estate Lending" and "Construction, Development and Land Lending."

         The Bank's Junior Loan Committee, comprised of President Meek,
Executive Vice President Farmer, Senior Vice President-Lending Saurenmann,
Senior Vice President - Commercial Loans Enright and Vice President - Loan
Servicing O'Neal may approve loan originations and purchases when the net book
value is $250,000 or less. With respect to a modification or extension of any
existing loans, the Junior Loan Committee may approve when the (total amount due
from the borrower including accrued but unpaid interest, and related fees and
expenses) (the "Borrower Balance") is $250,000 or less. (Any three members shall
constitute a quorum.)

         The Bank's Senior Loan Committee, comprised of Chairman Beal, President
Meek, Executive Vice President Farmer, Senior Vice President - Lending
Saurenmann and Senior Vice President - Commercial Loans Enright, may approve all
loan purchases and originations from $250,000 to $1.0 million in net book value.
In addition, this committee may approve a modification or extension of an
existing loan when the Borrower Balance is from $250,000 to $1.0 million. (Any
three members shall constitute a quorum.)


                                       10


<PAGE>

         The Bank's Executive Loan Committee, comprised of Chairman Beal,
President Meek and Directors Blanton, Fults, Goldstein and Weinstein (with
Directors Farmer, Arnold and Eastland substituting for a missing member) may
approve, with at least three affirmative votes, all loan purchases and
originations in excess of $1.0 million in net book value. In addition, this
committee may approve a modification or extension of an existing loan with a
Borrower Balance, in excess of $1.0 million. Notwithstanding the above, full
Bank Board approval is required for all purchases of non-performing assets which
would result in the Bank's ratio of classified assets to total capital exceeding
or projected to exceed 70% at any month-end. (A quorum is defined as four
members, two of which must be non-officer Directors.)

         Loan sales, sales of foreclosed assets and other significant loan
related transactions are approved in accordance with written policies requiring
approval by a designated officer, two officers or by an appropriate Committee
based on the type of transaction and the Borrower Balance of the asset.

         Originations, Purchases and Sales of Mortgage Loans. For the year ended
December 31, 1997, the Company purchased $130.4 million of loans, net of
discount compared to $308.0 million, $524.7 million, and $346.2 million net of
discounts, during the twelve months ended December 31, 1996 and the years ended
June 30, 1996 and 1995, respectively, and originated $76.6 million of loans for
the year ended December 31, 1997, compared to $132.5 million, $138.4 million and
$76.4 million during the twelve months ended December 31, 1996 and the year
ended June 30, 1996 and 1995, respectively.

         The Company services $838.5 million of its gross loan portfolio
directly, including virtually all of its multi-family and commercial real estate
loans, construction and land loans. The Company relies on approximately 140
other entities to service the remaining $309.5 million of its gross loans. Of
this amount, at December 31, 1997, six entities individually service loans in
excess of $9.8 million, aggregating $213.0 million, or 68.8% of the Company's
loans serviced by others. No other entity services individually in excess of
$6.4 million of the Company's gross loan portfolio. The Company attempts to
consolidate the loan servicing when feasible, taking into consideration the
relative costs and performance of the servicing entity.

                                       11


<PAGE>



         The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
                                                                                 Twelve Months
                                                              Year Ended             Ended          Year Ended
                                                               June 30,           December 31,     December 31,
                                                          -------------------    -------------     ------------
                                                           1995       1996            1996            1997
                                                         ---------  ---------    -------------     ------------
<S>                                                      <C>        <C>             <C>            <C>          
Originations by type:
 Adjustable rate:
  Real estate - one- to four-family..................    $     240  $      --       $   2,013      $      ---
                - multi-family.......................          529      2,452           4,835           4,684
                - commercial.........................        9,687      3,942           4,438           4,651
                - construction or development........       53,840     97,887          97,174          47,342
                - land...............................        5,625     17,534           7,700             ---
   Commercial Business...............................        3,400        780             ---           5,000
                                                          --------   --------        --------         --------
         Total adjustable-rate.......................       73,321    122,595         116,160          61,677
 Fixed rate:
  Real estate - one- to four-family..................          ---        ---             ---             ---
                - multi-family.......................          ---      1,236             485             ---
                - commercial.........................          ---     10,198          12,369           2,147
                - land...............................          ---      1,312             ---          10,785
  Consumer - one- to four-family junior liens........          ---         42              42             ---
                - other..............................          ---      3,032           2,935           1,984
  Commercial Business................................        3,093         17            517             ---

         Total fixed-rate............................        3,093     15,837          16,348          14,916

         Total loans originated......................       76,414    138,432         132,508          76,593
Purchases:
  Real estate - one- to four-family..................      253,107     82,291          40,095           9,166
                - multi-family.......................       68,512    314,616         206,066          24,740
                - commercial.........................       52,474    226,495         100,978         112,873
                - construction.......................          ---        ---             ---             716
                - land...............................       25,563     62,074          10,412           8,233
  Consumer  - one- to four-family - junior liens.....       21,251     34,947          38,829             520
                - other..............................        1,123      5,105             116              14
  Commercial business................................       33,426      7,223          12,418           1,447
                                                           -------    -------         -------           ------
         Total loans purchased, gross................      455,456    732,751         408,914         157,709
  Purchase discounts.................................      109,284    208,078         100,900          27,291
                                                           -------    -------         -------          ------

         Total loans purchased, net..................      346,172    524,673         308,014         130,418

  Percentage of purchase discounts 
    to total gross loans purchased...................        24.0%      28.4%           24.7%            17.3%
                                                           -------    -------         -------             -----
Sales and Repayments:
  Real estate - one- to four-family..................       52,257      1,886           1,002              ---
                - multi-family.......................        7,283      5,644           9,698              ---
                - commercial.........................        2,616      3,102           2,498              ---
  Consumer  - one- to four-family - junior liens.....        5,007        ---               3              ---
  Commercial business................................          ---        ---             ---              ---
                                                           -------    -------         -------         --------
         Total loans sold............................       67,163     10,632          13,201              ---
   Principal repayments..............................       70,131    258,197         330,819          333,592
                                                          --------   --------         --------        --------- 
         Total sales and repayments..................      137,294    268,829         344,020          333,592
  Other reductions:
         Transfers to real estate owned..............        7,725     22,118          41,876           83,144
         Unearned discounts..........................     (19,327)   (38,926)         (52,946)         (44,673)
         Decrease in other items, net................       24,506       277            1,734            2,596
                                                          --------   --------         --------        ---------
   Net Increase (decrease)...........................     $272,388   $410,807        $105,838        $(167,648)
                                                          --------   --------         --------        --------- 
                                                          --------   --------         --------        --------- 
</TABLE>
                                       12

<PAGE>

         Acquisition of Discounted Loans. Many of the discounted loans purchased
by the Company are performing loans. In order to determine the amount that it
will bid to acquire performing discounted loans, the Company considers, among
other factors, the yield expected to be earned, the geographic location of the
loans, servicing restrictions, if any, the type and value of the collateral
securing the loan and the length of time during which the loan has performed in
accordance with its repayment terms. In order to determine the amount that it
will bid to acquire non-performing discounted loans, in addition to the factors
stated above, the Company estimates the amounts it will realize through its
collection efforts or foreclosure and sale of the security property, net of
expenses, and the length of time and costs required to complete the collection
or foreclosure process.

         Prior to acquiring a pool of loans, LAC utilizes primarily third-party
subcontractors to conduct an acquisition review of each loan pool. This review
includes an evaluation of the seller's representations and warranties and of the
adequacy of the applicable loan documentation (e.g., the existence of a note,
including confirmation of the interest rate and outstanding loan balance,
mortgage, title policy, borrower financial statements, tax returns,
environmental reports, etc.). The current value of the security property is
estimated utilizing various methods, considering, among other factors, the type
of property, the loan balance, the recourse nature of the debt, the age and
performance of the loan, and the resources of the borrower. For example, a
performing, well seasoned pool of single family loans may receive a relatively
limited collateral value review consisting of a drive by appraisal of select
properties by a local broker, or in some cases, obtaining multiple broker
opinions of value on all loans in the pool. As the value and complexity of the
property increases, LAC's efforts to value the property also increase. For
larger, more complex loans, LAC personnel may visit the collateral property,
conduct an internal rental analysis of competing properties, or order asset
searches on the borrowers and/or guarantors to identify other sources of
repayment. New title searches and tax reports may also be obtained. LAC may also
retain environmental consultants to review potential environmental issues. The
amount of resources devoted to valuing collateral property is determined on a
case by case basis for each pool acquired.

         An estimated value is prepared for each loan or pool of loans. The
factors considered by LAC include the current status of the loan and the
borrower (including payment history, bankruptcy and litigation considerations)
taxes due, and, if non-performing, estimated foreclosure costs and length of
time to conduct a foreclosure sale in the applicable state, estimated current
market value of the property based on a limited marketing period, costs of taxes
and insurance and maintenance of the property during the marketing period and
fees and other costs incurred in connection with the sale of the property. The
resulting price to be bid by LAC is generally at a discount from both the
principal balance of the loan and the estimated value of the underlying
collateral. All bids are prepared by or subject to the approval of LAC's
President, D. Andrew Beal.

         If LAC is the successful bidder, a bid deposit, if required, will be
forwarded to the selling entity. Prior to a loan being acquired, the Company's
lending personnel, supplemented if necessary or appropriate by subcontractors,
(generally different than the ones who conducted the initial evaluation review)
perform a more in-depth review of the loan documents to determine and categorize
the extent of loan documentation deficiencies and review LAC's analysis of
value. The Company reviews loans by conducting a comprehensive inspection of all
documentation relating to the loans and by obtaining current credit reports,
when appropriate. Depending on the circumstances, the Company's due diligence
team may use local counsel and engineering and environmental experts, to assist
in the evaluation and verification of this information and the gathering of
other information not previously made available by the seller. For example,
there may be maintenance and occupancy problems associated with the collateral
which this additional review may reveal. Based upon the review performed by the
Company's lending personnel, a recommendation is made to the
appropriate Company loan committee which determines whether the Company should
purchase the loans covered by the bid. In the event that the Company's
applicable loan committee declines to purchase the loans, the right to purchase
may be sold to a third party or LAC may forfeit its deposit or be subject to
additional penalties as set forth in the contract, including the remedy of
specific performance.

         Upon purchase, each loan file is then reviewed by the loan servicing
department to ensure the adequacy and completeness of the documentation securing
the Company's interest in the underlying collateral and to correct loan
documentation, and as appropriate, other file deficiencies. Large loans are
assigned to a loan officer. Loan resolution alternatives for non-performing
loans consist primarily of the following: (i) the borrower brings the loan
current in accordance with original or modified terms, (ii) the borrower repays
the loan, (iii) the Company sells the loan to a 

                                       13

<PAGE>

third party to resolve, (iv) the borrower agrees to deed the property to the
Company in lieu of foreclosure, in which case it is classified as a foreclosed
asset and held for sale by the Company, and (v) the Company forecloses on the
loan and the property is either acquired at the foreclosure sale by a third
party or by the Company, in which case it is classified as a foreclosed asset
owned and held for sale by the Company. The loan officer evaluates all available
information and pursues the best expected means of resolving the loan on the
Company's behalf. In this regard, because the Company generally acquires the
loan at a substantial discount from the outstanding principal balance of the
loan and the value of the underlying collateral, the Company has the ability to
modify the loan terms or otherwise make concessions to a borrower in the loan
resolution process and still meet or exceed the targeted return to the Company.

         In the event of the bankruptcy of the borrower, the loan officer works
closely with the Company's outside counsel. The loan officer determines the
appropriate course of action, such as filing a proof of claim, moving to have
the stay lifted or establishing procedures for monitoring the bankruptcy plan.
The loan officer may also order property inspections and ensures that a current
broker's opinion or appraisal is in the loan file. Property inspections continue
until the loan is brought current or refinanced or the property is sold. A
current broker's opinion of value is confirmed or an appraisal is also obtained
prior to any foreclosure sale for bidding purposes.

         If a security property becomes a foreclosed asset, the Company obtains
a new appraisal unless a current acceptable appraisal is available. The Company
then determines whether any repairs should be made to the property and the
initial price to list the property under circumstances which are intended to
result generally in a quick sale of the property. The Company then markets the
property and supervises the management of the property until it is sold. The
Company also generally retains a management firm to manage its commercial and
multi-family foreclosed assets. For information about the Company's foreclosed
assets, see "- Loan Delinquencies and Non-Performing Assets."

         The Company generally anticipates a three to eighteen month period to
resolve large non-performing commercial and multi-family real estate loans,
which is longer than it generally takes to resolve the Company's discounted
non-performing single-family residential loans due to the complexity and wide
variety of issues that may occur with respect to a delinquent commercial or
multi-family real estate loan. Unlike single-family residential loans, however,
commercial and multi-family real estate loans frequently provide some income to
the Company, which may be the case even in a bankruptcy situation if a receiver
has been appointed for the property.

         One- to Four-Family Residential Mortgage Lending. At December 31, 1997,
the Company's one- to four-family residential mortgage loans totaled $213.6
million, or 18.6% of the Company's gross loan portfolio. At that date, the
Company's net one- to four-family residential mortgage loan portfolio totaled
$176.4 million, or 19.9% of the Company's net loan portfolio. The Company
generally does not originate one- to four-family residential loans other than
loans made to facilitate the sale of foreclosed assets, however, the Company has
purchased such loans from correspondent financial institutions and brokers.
Consistent with its asset/liability objectives, the Company may sell a portion
of the purchased one- to four-family residential mortgage loans to the FNMA and
other secondary market purchasers after the loan files have been reviewed and
deficiencies corrected by Bank personnel to ensure loan documentation complies
with the purchaser's standards.

         Multi-Family and Commercial Real Estate Lending. Although the Company
has historically originated a limited amount of loans for the purchase,
construction, refurbishing and development of commercial and multi-family real
estate, the Company has recently begun to focus on increasing originations of
these loans. Substantially all of the multi-family and commercial real estate
loans originated by the Company are secured by properties located in the
Company's primary market area and within the state of Texas. At December 31,
1997, $337.8 million, or 29.4% of the Company's gross loan portfolio, consisted
of 855 loans secured by commercial real estate and $321.4 million, or 28.0% of
the Company's gross loan portfolio, consisted of 478 loans secured by
multi-family residential properties. At that date, $263.7 million, or 29.7% of
the Company's net loan portfolio, consisted of loans secured by commercial real
estate and $233.0 million, or 26.3% of the Company's net loan portfolio,
consisted of loans secured by multi-family residential properties.


                                       14



<PAGE>

         Included in the multi-family residential portfolio are 56 loans
aggregating $164.0 million in gross principal amount at December 31, 1997
($103.9 million net of purchase discount). These loans were purchased from HUD
primarily in three purchases occurring in October 1995, September 1996 and
December 1996. All of these HUD Loans are secured by first mortgage liens. In
addition, the Company has second mortgage liens on two of these properties.
Properties which secure the HUD loans are located in 22 states throughout the
country.

         The HUD Loans were acquired by HUD pursuant to various insurance
programs of the FHA. Under programs of the FHA, a lending institution may assign
a defaulted FHA-insured loan to HUD because of an economic hardship on the part
of the borrower which precludes the borrower from making the scheduled principal
and interest payment on the loan. Once a loan is assigned to HUD, the FHA
insurance is paid and the loan is no longer insured. As a result, none of the
HUD Loans are insured by the FHA.

         HUD assistance to borrowers is provided in the form of Provisional
Workout Agreements ("PWA") which are forbearance agreements under which the
borrower either makes a monthly payment less than or equal to the original
monthly payment or makes a monthly payment more than the original monthly
payment to make up for arrearages. These agreements vary in duration. Under the
terms of the contract governing the sale of the HUD Loans, the Company is
obligated to comply with the terms of any PWA until the term of the agreement
expires or is canceled pursuant to its terms or there is a default under the
PWA.

         The terms of commercial and multi-family real estate loans originated
by the Company are individually negotiated on a case by case basis, however,
these loans generally have terms ranging up to seven years with adjustable rates
of interest. Rates on these loans generally float with changes in the prime
rate. Such loans generally do not contain caps on the maximum amount of interest
which may be charged over the term of the loan but may contain a floor below
which the interest rate on the loan may not fall. In addition to the payment of
principal and interest on these loans, the Company may receive an additional fee
or a share in the profits from the project upon the completion of the
construction or refurbishment of the underlying property. The Company's
commercial and multi-family real estate loans provide for recourse against the
security property and, in most circumstances, require the borrower to be
personally liable for all or a portion of the loan.

         Multi-family and commercial real estate loans are generally
underwritten in amounts of up to 85% of the lesser of cost or the appraised
value of the underlying property. Appraisals on properties securing multi-family
and commercial real estate loans originated by the Company are generally
performed by an independent fee appraiser designated by the Company before the
loan is made. All appraisals on multi-family and commercial real estate loans
are reviewed by the Company's management. In addition, the Company's
underwriting procedures require verification of the borrower's credit history,
financial statements, references and income projections for the property.

         While the Company continues to monitor both purchased and originated
multi-family and commercial real estate loans through its semi-annual asset
review process, updated appraisals are not normally obtained after loan purchase
or origination unless the Company's asset review process raises questions
regarding the value of the collateral. In order to monitor the adequacy of cash
flows on income-producing properties, the borrower is notified semi-annually,
requesting financial statements and other information from the borrower
and guarantor, including but not limited to information pertaining to rental
rates and income, maintenance costs and an update of real estate property tax
payments.

         Multi-family and commercial real estate loans generally present a
higher level of risk than do loans secured by one- to four-family residences.
This greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic conditions on commercial properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. Commercial
real estate loans also involve many of the same risks discussed below regarding
construction loans. The Company has attempted to minimize these risks through
its underwriting and investment standards and by lending primarily on existing
income-producing properties. At December 31, 1997, $163.5 million, or 24.8% of
the multi-family and commercial real estate gross loan portfolio, 

                                       15

<PAGE>

was delinquent 90 days or more, substantially all of which was purchased
non-performing. At that date, net non-performing multi-family and commercial
real estate loans totaled $145.8 million.

         Construction, Development and Land Lending. The Company initiated a
single-family construction and development lending program in January 1993. In
August 1996, the Company decided to cease single-family construction lending
while continuing development lending. The Company originates development loans
to developers, based on demonstrated experience and financial condition,
primarily for the development of single family lots. These loans increase the
yield on, and the proportion of interest rate sensitive loans in, the Company's
portfolio. At December 31, 1997, development loans totaled $97.6 million or 8.5%
of its gross loan portfolio and $79.3 million, net, or 8.9% of the Company's net
loan portfolio. At December 31, 1997 the Bank had 11 development loans in excess
of $2.0 million, all of which are to develop properties located in Texas, except
for one development property located in Southern California. See "Lending
Activities General." All of these loans are performing in accordance with their
respective repayment terms. At December 31, 1997, the Company's single-family
construction loan portfolio totaled approximately $861,000.

         In addition to development loans, the Company originates and has
purchased land loans secured by residential lots and land held for the
development of single-family lots and, to a much lesser extent, loans secured by
land utilized for agricultural or ranching purposes. As of December 31, 1997,
land loans totaled $71.4 million, or 6.2% of the Company's gross loan portfolio.
At that date, net land loans totaled $51.4 million, or 5.8% of the Company's net
loan portfolio. At December 31, 1997 the Bank has four land loans in excess of
$2.0 million, with net balances of $10.6 million, $5.6 million, $4.5 million and
$4.1 million, secured by land in the metropolitan areas of Los Angeles and
Dallas. All of these loans are performing in accordance with their respective
repayment terms. Land loans originated by the Company are generally underwritten
in amounts up to 65% of appraised value and typically have terms that are
individually negotiated on a case-by-case basis. The majority of land loans have
adjustable rates of interest and some may have a profit participation interest.

         Development and land lending is generally considered to involve a
higher level of credit risk than permanent one- to four-family residential
lending, due to the concentration of principal in a limited number of loans and
borrowers and/or the effects of general economic conditions on development
projects, real estate developers, managers or homebuilders. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor. These loans also involve many of the same risks discussed regarding
commercial and multi-family loans and tend to be more sensitive to general
economic conditions than many other types of loans. The Company's risk of loss
on a development loan is dependent largely upon the accuracy of the initial
estimate of the property's value upon completion of the project and the
estimated cost (including interest) of the project. Because of the uncertainties
inherent in estimating developmental costs and the market for the project upon
completion, it is relatively difficult to evaluate accurately the total loan
funds required to complete a project, the related loan-to-value ratios and the
likelihood of ultimate success of the project. If the estimate of development
cost proves to be inaccurate, the Company may be required to advance funds
beyond the amount originally committed in order to permit completion of the
project. If the estimate of value proves to be inaccurate, the Company may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment. When loan payments become
due, borrowers may experience cash flow from the property which is not adequate
to service total debt. In such cases, the Company may be required to modify the
terms of the loan. The Company attempts to mitigate these risks by dealing
primarily with experienced developers. In addition the Company monitors the
development's progress prior to each draw against the loan. See "- Loan
Delinquencies and NonPerforming Assets."

         At December 31, 1997, there were no single-family construction loans,
no development loans and 34 land loans with aggregate gross principal balances
of $10.2 million delinquent 90 days or more. At that date, net non-performing
land loans totaled $6.2 million.

         Consumer Lending. The Company's consumer loan portfolio primarily
consists of purchased one-to four family junior lien loans, and to a much lesser
extent, loans secured by timeshare agreements and other collateral. At December
31, 1997, the gross consumer loan portfolio totaled $80.1 million, or 7.0% of
the gross loan portfolio, and was predominately comprised of fixed-rate loans.
At that date, net consumer loans totaled $67.5 million, or 7.6% of the Company's
net loan portfolio.

                                       16

<PAGE>

         Prior to May, 1996, the Company indirectly originated and purchased
one- to four-family junior lien loans from correspondent financial institutions,
brokers and home improvement contractors. Although the loan documentation
utilized was the seller's, the Company approved the loan prior to purchase
utilizing the Company's underwriting standards and, in the case of home
improvement contractors, funded the loan upon assignment. The underwriting
standards employed included a determination of the applicant's payment history
on other debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant was a
consideration, because these loans were generally made to credit-impaired
borrowers, the primary consideration in the underwriting process was a
comparison of the value of the security in relation to the proposed loan amount.

         One- to four-family junior lien loans were generally made at fixed
rates for terms of up to 15 years. Generally, such loans did not exceed 90% of
the property's appraisal value less the amount owed, if any, on any other
mortgages or liens. One- to four-family junior lien loans are secured by a lien
on the underlying real estate. The Company required a title search on all one-
to four-family junior lien loans.

         Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured. In some
cases, the collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which may be recovered on
such loans. At December 31, 1997, there were 981 consumer loans with aggregate
gross principal balances of $12.9 million delinquent in excess of 90 days.

         Commercial Business Lending. At December 31, 1997, the Company had
$25.6 million in commercial business loans outstanding, or 2.2% of the Company's
gross loan portfolio, all of which were purchased discounted loans. At that
date, the Company had $15.6 million of net commercial business loans
outstanding, or 1.8% of the Company's net loan portfolio. The Company's loans
include loans to finance accounts receivable, inventory and equipment.
Management does not currently contemplate any significant increase in the ratio
of this portfolio to the Company's total loan portfolio.

         Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.

         Foreign Lending Activities. The Company primarily conducted its foreign
lending in a subsidiary, 100% owned by Beal Bank, known as Foreign Lending
Corporation ("FLC"). As of December 31, 1997, FLC held one loan with a principal
balance of $4.6 million. This loan was originated in 1997 under the Company's
now discontinued Mexican lending program and is performing in accordance with
its loan repayment terms.

         The Company is not currently seeking any foreign lending opportunities.
Should the Bank decide to pursue in the future any foreign lending
opportunities, it will require prior written approval from the Texas Department.

         At December 31, 1997, the Company had less than $1.8 million in
principal balance of loans that were originated in the United States which are
primarily secured by the right to use time-share properties located in various
countries.

                                       17

<PAGE>

Loan Delinquencies and Non-Performing Assets

         When a borrower fails to make a required payment on a loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. A past
due notice is sent when the loan is 10 days past due. A delinquency notice is
sent 15 days after the due date and a late charge is assessed in accordance with
the loan terms. If the delinquency is not cured by the 30th day, a default
warning is sent to the borrower. Other written and verbal contacts may be made
with the borrower between five and 90 days after the due date. If the
delinquency continues for a period of 90 days, the Company usually institutes
appropriate action to foreclose on the property. If foreclosed, the property is
sold and may be purchased by the Company. Delinquent consumer loans are handled
in a generally similar manner. The Company's procedures for repossession and
sale of consumer collateral are subject to various requirements under the
consumer protection laws of the applicable state.

         The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at December 31, 1997.


<TABLE>
<CAPTION>

                                               Loans Delinquent For:
                               --------------------------------------------------------------
                                     60-89 Days                     90 Days and Over               Total Delinquent Loans
                               --------------------------------   ---------------------------   ------------------------------
                                                       Percent                      Percent                           Percent
                                                       of Loan                     of Loan                            of Loan
                               Number      Amount      Category   Number  Amount   Category   Number     Amount     Category
                               ------      ------      --------   ------  ------  --------    ------     ------     ---------
                                                                  (Dollars in Thousands)

<S>                            <C>       <C>          <C>       <C>    <C>          <C>       <C>      <C>            <C>   
Real Estate:
  One- to four-family -
    first liens .......        104       $  3,281     1.54%     495    $ 18,292     8.56%     599      $ 21,573       10.10%
  Commercial ..........         12          2,725      .81       81      39,085    11.57       93        41,810       12.38
  Multi-family ........          4            901      .28       54     124,394    38.70       58       125,295       38.98
  Construction or                                                                                   
    development .......          1            365      .37     --          --        --         1           365         .37
  Land ................          5            780     1.09       34      10,223    14.32       39        11,003       15.41
                               ---          -----      ---      ---     -------    -----      ---       -------       -----
    Total real estate .        126          8,052      .77      664     191,994    18.41      790       200,046       19.19
Other Loans:                                                                                        
                                                                                                    
 Consumer Loans:                                                                                    
  One- to four-family -
    junior lien .......         57            861     1.20      595      11,347    15.88      652        12,208       17.08
  Timeshares ..........         11             26      .72      355       1,026    28.38      366         1,052       29.10
  Other ...............          5             30      .60       31         519    10. 37      36           549       10.97
                               ---          -----      ---      ---     -------    -----      ---       -------       -----
   Total consumer loans         73            917     1.15      981      12,892    16.10    1,054        13,809       17.24
Commercial business ...          4             78      .31       51       7,554    29.56       55         7,632       29.87
   Total other loans ..         77            995      .94    1,032      20,446    19.35    1,109        21,441       20.30
                                                                                                    
   Total loans ........        203          9,047      .79    1,696     212,440    18.50    1,899       221,487       19.29
Less:                                                                                            
Unearned discounts ....                     1,536                        82,508                          84,044
    Total Loans, net ..                  $  7,511      .85%         $   129,932   14.63%               $137,443       15.48%
                                         --------                   -----------                        --------      
                                         --------                   -----------                        --------      
</TABLE>


         At December 31, 1997, the Company's non-performing loans included 229
loans aggregating $18.0 million for which foreclosure proceedings had been
commenced. At that date, 439 loans involved borrowers involved in bankruptcy
proceedings representing approximately $73.5 million of delinquent loans in the
Company's loan portfolio.


                                       18

<PAGE>

         The following table sets forth the amounts and categories of
non-performing assets in the Company's loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful. Such loans remain on non-accrual status until the earlier of legal
foreclosure, or relinquishment of control of the collateral by the borrower, or
the collection of principal or interest is no longer doubtful. For all years
presented, the Company has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans below net book value
or making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.

<TABLE>
<CAPTION>


                                                                 June 30,                          December 31,
                                                                 --------                          ------------
                                                  1993       1994        1995        1996        1996         1997
                                                  ----       ----        ----        ----        ----         ----
                                                                   (Dollars in Thousands)
<S>                                            <C>        <C>         <C>       <C>        <C>            <C>     
Non-accruing loans:
Real estate:
  One- to four-family.....................     $ 1,732    $ 3,185     $11,093   $      --   $       --    $ 18,292
  Commercial..............................         248     14,492      16,816      35,004       59,903      37,345
  Construction or development.............         ---        ---          93         156          ---         ---
  Multi-family............................         580      4,883       9,507      51,934      174,046     108,493
  Land....................................       2,433      3,282       8,056       7,961        4,687       6,245
Consumer:

  One- to four-family - junior liens......         193      1,185       2,850      10,157       13,863      11,347
  Timeshares..............................         554      1,019       1,673       1,630        1,624       1,026
  Other consumer..........................         525        476         545         641        1,835         519
Commercial business.......................          78      2,320       7,357       7,777        9,562       7,554
  Purchase discounts......................      (1,864)   (14,063)    (22,011)    (59,978)    (122,283)    (77,827)
                                               -------    -------     -------    --------     --------    --------
      Total (net).........................       4,479     16,779      35,979      55,282      143,237     112,994

Accruing loans delinquent more than 90 days:

Real estate:

  One- to four-family.....................         ---        583         ---      21,159       30,382         ---
  Multi-family............................         ---        106         ---      55,247       30,318       1,740
  Commercial..............................         200         77         ---      17,811       23,818      15,901
  Land....................................         ---        ---         ---       5,444        4,760         ---
Consumer:
  One to four-family - junior liens.......         ---         80         ---         ---          ---       3,978
  Purchase discounts......................        (62)      (347)         ---    (32,363)     (29,221)     (4,681)
                                               -------    -------     -------    --------     --------    --------
      Total (net).........................         138        499         ---      67,298       60,057      16,938

Foreclosed assets:
Real estate:

  One- to four-family.....................         651        481       1,525       1,799        4,858       5,379
  Commercial..............................         302      1,456       3,026       9,148       13,466      41,341
  Multi-family............................         ---        ---       3,633      15,010       24,781      64,461
  Construction or development.............       1,987        ---         ---         300          250         245
  Land....................................         ---        365         570       1,456          872       2,867
Consumer:

  Timeshares..............................         ---        ---          36          32          402          21
                                                                                       --                       --
                                                                                                              
                                                                                                              
      Total (net).........................       2,940      2,302       8,790      27,745       44,629     114,314
                                               -------    -------     -------    --------     --------    --------
Total non-performing assets...............     $ 7,557    $19,580     $44,769    $150,325     $247,923    $244,246
                                               -------    -------     -------    --------     --------    --------
                                               -------    -------     -------    --------     --------    --------
Total as a percentage of total assets.....       6.36%      7.95%       7.07%      11.84%       17.77%      17.88%
                                               -------    -------     -------    --------     --------    --------
                                               -------    -------     -------    --------     --------    --------

</TABLE>




                                       19


<PAGE>



         For the year ended December 31, 1997 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $13.6 million. The amount that was included in
interest income on such loans was $8.8 million for the year ended December 31,
1997.

         Other Loans of Concern. In addition to the non-performing assets set
forth in the previous table, as of December 31, 1997 the Company had
approximately 16 loans totaling $10.7 million of net loans, of which $10.3
million, net, are commercial and multi-family real estate loans, with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused management to have concern
as to the ability of the borrowers to comply with present loan repayment terms
and which may result in the future inclusion of such items in the non-performing
asset categories. The largest other loan of concern totaled $1.6 million, net,
at December 31, 1997.

         Classified Assets. The FDIC requires the classification of a savings
bank's problem assets. Management of the Company classifies all problem assets
as "substandard," "doubtful" or "loss." An asset is considered "substandard" if
it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. An asset may also be
classified substandard if no loss is expected, however, the time it will take to
resolve the deficiency is uncertain. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.

         When the Company classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Company classifies problem assets as "loss,"
it will charge off such amount. The Company reviews its asset portfolio and
classifies certain assets semi-annually. In addition, the Company's
determination as to the classification of its assets and the amount of its
valuation allowances is reviewed by the Texas Department and the FDIC during
their examinations of the Company, which may result in the establishment of
additional general or specific loss allowances.

         The Company reviews the problem loans and other assets to determine
whether any loans or other assets require classification on a monthly basis. Net
classified assets of the Company as of the date indicated were as follows:

<TABLE>
<CAPTION>

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

<S>                                                             <C>     
Substandard .........................................           $102,699
Doubtful ............................................              1,525
                                                                --------
     Total Classified Assets ........................           $104,224
                                                                --------
                                                                --------
</TABLE>


         Allowance for Loan Losses. The allowance for loan losses is established
through provisions for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation includes a review of the loan portfolio including
those loans of which full collectibility may not be reasonably assured, current
economic conditions, historical loan loss experience, loan volume and growth,
the composition of the loan portfolio and other factors that warrant recognition
in providing for an adequate allowance for loan losses. The Company also
developed certain asset review policies and procedures which established minimum
general loan loss reserves for all types of loans. In determining the general
reserves under these policies historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, fair values,

                                       20

<PAGE>

the current loan portfolio and current economic conditions are considered. These
policies also require additional reserves for all delinquent and classified
loans. See "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations."

         The Company establishes a specific allowance against a given loan when
management perceives a problem in that loan that may result in a loss. The
Company continues to monitor and modify its allowances for general and specific
loan losses as economic conditions dictate. Although the Company maintains its
allowance for loan losses at a level which it considers to be adequate to
provide for potential losses, there can be no assurances that such losses will
not exceed the estimated amounts. In addition, various regulatory agencies
periodically review the allowance for loan losses and may require that additions
be made based upon their judgment of information available to them at the time
of their examination.

         Real estate properties acquired through, or in lieu of loan foreclosure
are initially recorded at fair value less estimated cost to sell at date of
foreclosure. Valuations are periodically performed by management and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.

                                       21

<PAGE>



         The following table sets forth an analysis of the Company's allowance
for loan losses at the dates indicated.

<TABLE>
<CAPTION>
                                                                                         Twelve
                                                                                          Months           Year
                                                                                           Ended           Ended
                                                         Year Ended June 30,            December 31,    December 31,
                                                  --------------------------------      ------------    ------------
                                                  1993     1994     1995      1996          1996            1997
                                                  ----     ----     ----      ----          ----            -----  
<S>                                               <C>    <C>       <C>       <C>          <C>             <C>   
Balance at beginning of period..............      $550   $1,245    $3,547    $ 6,137      $ 10,406        $13,189

Charge-offs:

  One- to four-family.......................        30      174       440        845         1,366          2,177
  Commercial................................       ---       36       534         28           232            740
  Multi-family..............................       ---      ---       ---         80            90            ---
  Construction and development..............       ---      ---       ---         35           ---            ---
  Land......................................       ---      203        39        362            60            687
  Consumer..................................        59      173       449        858           805          1,169
  Commercial business.......................       ---      ---       ---      1,177         1,121            183
                                               -------   ------  --------    -------    ----------      ---------
                                                    89      586     1,462      3,385         3,674          4,956
Recoveries:

  One- to four-family.......................       ---      ---         2          1           ---            112
  Consumer..................................       ---      ---         5         18            32            157
  Commercial business.......................       ---      ---       ---         17             3            ---
                                              --------   ------  --------   --------   -----------     ----------

Net charge-offs.............................        89      586     1,455      3,349         3,639          4,687
Additions charged to operations.............       784    2,888     4,045      9,044         6,422          3,410
                                               -------  -------   -------   --------     ---------       --------
Balance at end of period....................    $1,245  $ 3,547    $6,137    $11,832       $13,189        $11,912
                                                ======  =======    ======    =======       =======        =======
Ratio of net charge-offs during the
 period to average loans outstanding
 during  the period.........................      .11%     .40%      .40%       .44%          .38%           .49%

Ratio of net charge-offs during the             
period to average non-performing assets.....     1.80%    4.32%     4.52%      2.95%         1.84%          1.96%
</TABLE>

                                       22
<PAGE>



         The distribution of the Company's allowance for loan losses at the
dates indicated is summarized as follows:


<TABLE>
<CAPTION>
                                                                            June 30,                                            
                                -----------------------------------------------------------------------------------------------
                                             1993                           1994                            1995                  
                                ------------------------------  ------------------------------  -------------------------------
                                                       Percent                        Percent                         Percent     
                                                      of Loans                        of Loans                        of Loans    
                                             Loan      in Each               Loan     in Each               Loan      in Each     
                                Amount of   Amounts   Category  Amount of   Amounts   Category  Amount of   Amounts   Category    
                                Loan Loss     by      to Total  Loan Loss     by      to Total  Loan Loss     by      to Total    
                                Allowance  Category     Loans   Allowance  Category    Loans    Allowance  Category     Loans     
                                ---------  --------   --------  ---------  --------   --------  ---------  --------   --------
                                                                    (Dollars In Thousands)
<S>                             <C>         <C>         <C>    <C>         <C>         <C>        <C>      <C>         <C>   

One- to four-family ........    $    114    $ 62,540    42.52% $     90    $ 67,169    21.81%     $1,881   $237,585    35.70%
Multi-family ...............         110      20,675    14.06       139      55,633    18.07         604    109,080    16.39
Commercial real estate .....         216      30,271    20.58       303      93,496    30.37       1,276    124,985    18.78
Construction and development          17       3,893     2.65        50      27,100     8.80          88     51,284     7.71
Land .......................         101       7,089     4.82        81       9,889     3.21         474     35,997     5.41
One- to four-family junior      
liens .....................           92       9,993     6.80        29      19,549     6.35         577     44,999     6.76
Timeshares .................        --         1,599     1.09      --        18,249     5.93         595     11,668     1.75
Other consumer .............         200       3,747     2.55       151       7,139     2.32         266      4,791      .72
Commercial business ........         200       7,253     4.93       151       9,662     3.14         376     45,060     6.78
Unallocated ................         195        --                                        --       2,553         --       --   
                                --------    --------   ------     --------  -------    -----      ------    -------    -----
     Total .................    $  1,245     147,060   100.00  $  3,547     307,886   100.00%     $6,137    665,449   100.00%
                                --------               ------  --------               ------      ------              -------
                                --------               ------  --------               ------      ------              -------

Less:
  Loans in process .........                   1,558                         11,235                         21,217 
  Loans held for sale, net .                      --                             --                            866 
  Deferred fees and                                                                                             
    discounts ..............                  43,447                         73,190                        144,927 
  Allowance for loan losses                    1,245                          3,547                          6,137                
                                               -----                          -----                          -----                
     Total loans 
       receivable, net .....                $100,810                       $219,914                      $ 492,302
                                            --------                       --------                      ---------
                                            --------                       --------                      ---------
                                                                                                                
</TABLE>

<TABLE>
<CAPTION>


                                            June 30,                                        December 31,                  
                                --------------------------------  ----------------------------------------------------------------
                                             1996                                1996                               1997 
                                --------------------------------  -------------------------------  -------------------------------
                                                        Percent                          Percent                         Percent
                                                        of Loans                         of Loans                        of Loans
                                              Loan       in Each               Loan      in Each                Loan     in Each
                                Amount of    Amounts    Category   Amount of  Amounts    Category  Amount of   Amounts   Category
                                Loan Loss      by       to Total   Loan Loss    by       to Total  Loan Loss     by      to Total
                                Allowance   Category     Loans     Allowance  Category    Loans    Allowance  Category    Loans
                                ---------   --------    --------   ---------  --------   --------  ---------  --------   ---------
<S>                              <C>        <C>          <C>        <C>       <C>          <C>      <C>      <C>           <C>   
One- to four-family ........     $ 3,153    $ 273,780    22.47%     $  3,183  $ 276,591    19.37%   $ 4,051  $ 213,584     18.60%
Multi-family ...............         239      341,696    28.05         1,157    466,697    32.68      1,316    321,423     27.99
Commercial real estate .....       2,788      321,385    26.38         2,706    388,460    27.20      1,986    337,825     29.42
Construction and development          19       85,133     6.99             7     74,437     5.21         16     98,503      8.58
Land .......................         752      100,047     8.21           596     95,684     6.70        898     71,379      6.22
One- to four-family junior 
liens ......................       1,873       50,146     4.12         1,680     77,528     5.43      1,756     71,465      6.22
Timeshares .................         374        7,809      .64           372      6,446      .45        642      3,615       .31
Other consumer .............       1,138        8,373      .69         1,135      7,095      .50        684      5,003       .43
Commercial business ........       1,496       29,886     2.45         2,353     35,131     2.46        563     25,554      2.23  
Unallocated ................          --          --        --            --         --       --         --         --        --  
                                  -------   ---------   ------       -------  ---------    ------   ------- ----------    ------ 
   Total ....                     $11,832   1,218,255   100.00%      $13,189  1,428,069    100.00%  $11,912 $1,148,351    100.00%
                                 --------               ------      --------               ------    ------              -------
                                 --------               ------      --------               ------    ------              -------

Less:
  Loans in process .........                   27,172                            16,364                        16,806
  Loans held for sale, net .                       --                                --                            --
  Deferred fees and
    discounts ..............                  281,837                           344,312                        231,800
  Allowance for loan losses                    11,832                            13,189                         11,912
                                             --------                        ----------                     -----------
    Total loans
       receivable, net .....                 $897,414                        $1,054,204                     $   887,833
                                             --------                        ----------                     -----------
                                             --------                        ----------                     -----------
</TABLE>


                                       23
<PAGE>



Investment Activities

         General. The investment policy of the Company, which is established by
the Investment Committee and approved by the Company's and Bank's Board of
Directors, is designed primarily to provide a portfolio of high quality,
diversified instruments while seeking to optimize net interest income within
acceptable limits of interest rate risk, credit risk and liquidity.

         Generally, the investment policy of the Company is to invest funds in
interest-bearing deposits in banks, FHLB overnight deposits, FHLB of Dallas
stock and Government National Mortgage Association ("GNMA") securities based
upon the Company's liquidity needs and performance objectives. It is the
Company's general policy to purchase investment securities which are U.S.
Government securities and federal agency obligations and other issues rated
investment grade.

         The Bank must maintain minimum levels of investments that qualify as
liquid assets under the Texas Department regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. The Bank maintains its liquidity
at a level believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. At December 31, 1997, the Bank's liquidity ratio was 19.1%. See
"Regulation Liquidity."

         Texas-chartered savings banks have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, Texas- chartered savings
banks may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a Texas- chartered savings bank is otherwise authorized to make
directly.

         The following table sets forth the composition of the Company's
investment in FHLB Stock, interest-bearing deposits with banks and
mortgage-backed securities at the dates indicated.


<TABLE>
<CAPTION>

                                               June 30,                                    December 31,
                                 --------------------------------------         ---------------------------------------
                                      1995                  1996                      1996                  1997
                                 ---------------      -----------------         -----------------       ---------------
                                 Book      % of       Book         % of         Book         % of       Book      % of
                                 Value     Total      Value        Total        Value        Total      Value     Total
                                 -----     -----      -----        -----        -----        -----      ------    -----
                                                                         (Dollars in Thousands)
<S>                             <C>        <C>      <C>            <C>        <C>            <C>      <C>       <C>    
FHLB stock .................    $ 7,475    100.0%   $   9,340      100.00%    $    9,618     100.00%  $10,203   100.00%
                                -------    -----    ---------      ------     ----------     ------   -------   ------ 
                                -------    -----    ---------      ------     ----------     ------   -------   ------ 
Interest-bearing deposits
   with banks ..............    $31,044    100.00   $  54,838      100.00%     $  65,491     100.00%  $150,219  100.00%
                                -------    ------   ---------      ------      ---------     ------   --------  ------ 
                                -------    ------   ---------      ------      ---------     ------   --------  ------ 

Mortgage-backed securities:
GNMA .......................    $40,184     98.70%  $ 199,429      102.43%     $ 125,386     101.17%  $110,079   98.84%
Gross unrealized gain (loss)        --        --       (1,328)       (.68)         1,090        .88      3,722    3.34
Unamortized premium
   (discount) ..............        530      1.30      (3,402)      (1.75)        (2,537)     (2.05)    (2,425)  (2.18)
                                -------    ------   ---------      ------      ---------     ------   --------  ------ 
Total mortgage-backed
      securities ...........    $40,714    100.00%  $ 194,699      100.00%     $ 123,939     100.00%  $111,376  100.00%
                                -------    ------   ---------      ------      ---------     ------   --------  ------ 
                                -------    ------   ---------      ------      ---------     ------   --------  ------ 
</TABLE>


         The Company's investment securities portfolio at December 31, 1997,
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Company's stockholders' equity,
excluding those issued by the United States Government, or its agencies.


                                       24
<PAGE>


Sources of Funds

         General. Beal Financial's primary source of funds are dividends which
may be paid by the Bank. In addition, Beal Financial has the ability to access
the capital markets, if necessary.

         The Bank's primary sources of funds are deposits, amortization and
prepayment of loan principal, borrowings, and funds provided from operations
and, from time to time, sales of assets. Management of the Bank closely monitors
rates and terms of competing sources of funds on a regular basis and generally
utilizes the sources which are the most cost effective.

         Borrowings, predominantly from the FHLB of Dallas, may be used on a
short-term basis to compensate for reductions in deposits or deposit inflows at
less than projected levels, and may be used on a longer-term basis to support
expanded purchasing activities.

         Deposits. The Bank's deposits consist of statement savings accounts,
commercial demand deposit accounts, money market and certificate accounts.
Certificates of deposit are the primary source of deposits because they
generally are more responsive to market interest rates than other types of
deposits, and thus more attractive to depositors. The Bank relies primarily on
competitive pricing policies, advertising, and customer service to attract and
retain these deposits. In this regard, the Bank generally prices its deposits at
or above the highest rates offered by its competitors.

         In addition to retail deposits, from time to time the Bank obtains
wholesale deposits through deposit brokers which solicit funds from their
customers for deposit with the Bank. Brokered deposits amounted to $140.8
million or 14.1% of deposits at December 31, 1997. Brokered deposits generally
are more responsive to changes in interest rates than retail deposits and, thus,
are more likely to be withdrawn from the Bank upon maturity as changes in
interest rates and other factors are perceived by investors to make other
investments more attractive. Although, the Bank currently does not have any
plans to increase its brokered deposits, the amount may vary depending on the
Bank's need for liquidity and loan purchase activity.

         The Bank believes that it competes effectively for deposits; however,
the Bank's ability to attract and retain deposits and the Bank's cost of funds
have been, and will continue to be, significantly affected by general economic
conditions, changes in money market and prevailing interest rates and
competition.

         The rates paid on deposit accounts offered by the Bank have allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its statement savings and money market
accounts are relatively stable sources of deposits. However, the ability of the
Bank to attract and maintain certificate accounts, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions.


                                       25
<PAGE>


         The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank at the dates
indicated.

<TABLE>
<CAPTION>


                                                         June 30,                            December 31,
                                        ----------------------------------------   --------------------------------------
                                               1995                1996                1996                 1997
                                        -------------------  -------------------   ----------------   -------------------
                                                    Percent              Percent           Percent               Percent
                                         Amount    of Total  Amount     of Total   Amount  of Total   Amount     of Total
                                        --------   --------  ------     --------   ------  --------   ------     --------
                                                                         (Dollars in Thousands)
<S>                                     <C>        <C>       <C>        <C>     <C>        <C>       <C>   
Transactions and
Savings Deposits:
Money Market Accounts.................  $ 57,616     12.58%  $159,689    17.92$   188,468    18.06%   $169,321    16.91%
Commercial Demand.....................     1,522       .33      2,813      .31      2,871      .28      14,272     1.42
Savings Deposits......................       827       .18        893      .10        653      .06       1,193      .12
                                        --------     ----- ----------   ------  ---------  -------    --------    -----

Total Non-Certificates................    59,965     13.09    163,395    18.33    191,992    18.40     184,786    18.45%
                                        --------    ------  ---------   ------  ---------  -------     -------    -----
Certificates:
 2.01 -  4.00%........................       152       .03        ---      ---       ---       ---           2      ---
 4.01 -  6.00%........................    95,473     20.84    658,279    73.86    687,755    65.91     785,865    78.47
 6.01 -  8.00%........................   301,981     65.91     69,630     7.81    163,688    15.69      30,823     3.08
 8.01 -  10.00%.......................       594       .13        ---      ---        ---      ---         ---      ---
                                       ---------     ----------------   ------- ---------  -------   ---------  -------

Total Certificates....................   398,200     86.91    727,909    81.67    851,443    81.60     816,690   81.55
                                        --------    ------  ---------   ------- ---------  -------   ---------   -----
Total Deposits(1).....................  $458,165    100.00%  $891,304   100.00% $1,043,435  100.00  $1,001,476  100.00%
                                        --------    ------  ---------   ------- ---------  -------   ---------   -----
                                        --------    ------  ---------   ------- ---------  -------   ---------   -----

</TABLE>

(1)      At December 31, 1997, the average rates paid on non-certificate deposit
         accounts and certificate accounts were 4.7% and 5.7%, respectively.


         The following table sets forth the savings flows at the Bank during the
periods indicated. New deposits, net refers to the amount of deposits during a
period less the amount of withdrawals during the period.

<TABLE>
<CAPTION>
                                                                                 Twelve
                                                                                 Months     Year Ended
                                                                                 Ended      December 31,
                                                   Year Ended June 30,        December 31,  ------------
                                                   -------------------       -------------
                                                   1995           1996            1996          1997
                                                   ----           ----            ----          -----
                                                                    (Dollars in Thousands)
<S>                                              <C>            <C>          <C>             <C>       
Opening balance.............................     $186,048       $458,165     $   985,961     $1,043,435
New deposits, net...........................      267,454        407,482          26,406        (70,120)
Interest credited...........................        4,663         25,657          31,068         28,161
                                                 --------       --------      ----------     ----------
Ending balance..............................     $458,165       $891,304      $1,043,435     $1,001,476
                                                 --------       --------      ----------     ----------
                                                 --------       --------      ----------     ----------

Net increase (decrease).....................     $272,117       $433,139    $     57,474       $(41,959)
                                                 --------       --------      ----------     ----------
                                                 --------       --------      ----------     ----------

Percent increase (decrease).................      146.26%         94.54%           5.83%          (4.02)%
                                                 --------       --------      ----------     ----------
                                                 --------       --------      ----------     ----------
</TABLE>



                                       26
<PAGE>



         The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997.

<TABLE>
<CAPTION>


                                          4.00-        6.00-                        Percent
                                          5.99%        7.99%          Total        of Total
                                          -----        -----          -----        --------
<S>                                     <C>           <C>            <C>            <C>   
Certificate accounts maturing
 in quarter ending:
March 31, 1998....................      $246,983      $41,140        $288,123       35.28%
June 30, 1998.....................       268,205        8,052         276,257       33.83
September 30, 1998................       145,199        2,832         148,031       18.13
December 31, 1998.................        65,498          446          65,944        8.07
March 31, 1999....................         4,972        3,152           8,124         .99
June 30, 1999.....................         1,456          426           1,882         .23
September 30, 1999................         3,333          798           4,131         .51
December 31, 1999.................         2,948        2,520           5,468         .67
March 31, 2000....................           195        4,046           4,241         .52
June 30, 2000.....................            58        1,004           1,062         .13
September 30, 2000................           888          772           1,660         .20
December 31, 2000.................         6,610        4,009          10,619        1.30
Thereafter........................         1,146            2           1,148         .14
                                         -------    ---------        --------      ------

   Total..........................      $747,491      $69,199        $816,690      100.00%
                                        --------      -------        --------      ------ 
                                        --------      -------        --------      ------ 

   Percent of Total...............        91.53%        8.47%         100.00%
                                                                      ------
                                                                      ------

</TABLE>

         The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1997.

<TABLE>
<CAPTION>


                                                                                 Maturity
                                                     --------------------------------------------------------------------
                                                                    Over           Over
                                                     3 Months        3 to 6         6 to 12        Over
                                                     or Less        Months         Months       12 months         Total
                                                     --------       -------        ---------    ----------       -------
                                                                              (In Thousands)
<S>                                                  <C>            <C>            <C>            <C>           <C>     

Certificates of deposit less than $100,000.......     $134,747       $221,227       $171,228       $25,134       $552,336
Certificates of deposit of $100,000 or more......      155,050         55,322         40,780        13,202        264,354
                                                     ---------     ----------      ---------      --------       --------
Total certificates of deposit....................    $ 289,797       $276,549       $212,008       $38,336       $816,690
                                                     ---------     ----------      ---------      --------       --------
                                                     ---------     ----------      ---------      --------       --------

</TABLE>

         Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds. In addition, the Bank has relied upon selective borrowings for
liquidity needs. The Bank obtains FHLB advances upon the security of certain of
its residential first mortgage loans, and other assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Bank have been
met. At December 31, 1997, advances were secured by stock in the FHLB totaling
$10.2 million, qualifying first mortgage loans of approximately $132.0 million,
other real estate of $3.9 million and GNMA securities of $50.0 million. FHLB
advances are available for investment, purchasing and lending activities and
other general business purposes. FHLB advances are made pursuant to several
different credit programs, each of which has its own interest rate, which may be
fixed or adjustable, and range of maturities. At December 31, 1997, the Bank's
other borrowings consisted primarily of loans to the Bank's subsidiaries from
unaffiliated third party lenders secured by certain real estate held for
development or sale.

         On August 9, 1995, Beal Financial issued $57.5 million of 12.75% Senior
Notes due on August 15, 2000 (the "Senior Notes"). Of this amount, $46.3 million
was contributed to the Bank in the form of paid in capital. The

                                       27
<PAGE>


remaining net proceeds of the Senior Notes were retained by Beal Financial 
for the maintenance of a reserve equal to the annual interest expense on the 
Senior Notes and general operating expenses. Interest on the Senior Notes is 
payable semi-annually on February 15 and August 15 of each year. The Senior 
Notes are redeemable, in whole or in part at the option of Beal Financial. 
See Note H to the Notes to Consolidated Financial Statements of the Company.

         For additional information relating to borrowings, see Notes G and H to
the Notes to Consolidated Financial Statements of the Company.

         At December 31, 1997, FHLB advances totaled $110.0 million,
representing 8.1% of total assets. FHLB advances were used for liquidity and
loan investment purposes.

         The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.


<TABLE>
<CAPTION>

                                                 Twelve
                                                 Months
                                                  Ended       Year Ended
                         Year Ended  June 30,   December 31,  December 31,
                         --------------------   ------------  ------------
                         1995         1996         1996          1997
                         ----         ----         ----          ----
                                  (Dollars In Thousands)     
<S>                    <C>         <C>           <C>           <C>     
Maximum Balance:                                             

  FHLB advances ...    $182,173    $185,000      $185,000      $146,000
  Senior notes, net        --        57,051        57,094        57,188
  Other borrowings        5,059      61,326        21,756        14,748
                                                             
Average Balance:                                             
                                                             
  FHLB advances ...    $123,184    $ 45,052      $ 41,146      $ 19,181
  Senior notes, net        --        50,093        57,042        57,141
  Other borrowings        2,803      25,894        28,931        10,401


</TABLE>
                                                             
                                                             
         The following table sets forth certain information as to the Company's
borrowings at the dates indicated.


<TABLE>
<CAPTION>

                                                              June 30,              December 31,
                                                       ---------------------    -----------------------
                                                          1995        1996        1996          1997
                                                          ----        ----        ----          ----
                                                                          (Dollars in Thousands)
<S>                                                    <C>          <C>          <C>          <C>    
FHLB advances .....................................    $111,000     $185,000     $146,000     $110,000
Senior notes, net .................................        --         57,051       57,094       57,188
Other borrowings ..................................       4,898       21,468       14,748        7,599
                                                       --------     --------     --------     --------
     Total borrowings .............................    $115,898     $263,519     $217,842     $174,787
                                                       --------     --------     --------     --------
                                                       --------     --------     --------     --------

Weighted average interest rate of FHLB advances ...        6.67%        5.55%        6.33%        6.65%

Weighted average interest rate of Senior notes, net        ---%        13.00%       13.00%       13.00%

Weighted average interest rate of other borrowings         9.54%        8.44%        8.24%        8.03%

</TABLE>

Subsidiaries of the Company

         In addition to the Bank, Beal Financial's organized subsidiaries
include Beal Banc Holding Company, a Delaware corporation, which was organized
for tax purposes by the Company in 1993 to hold all of the outstanding stock of
the Bank in connection with its reorganization into the holding company form.
This corporation is not


                                       28
<PAGE>



expected to engage in any activities other than holding the stock of the Bank.
The sole director and president of this corporation is D. Andrew Beal.

         During calendar year 1996, the Company purchased the inactive Bank
subsidiaries Beal Delaware Corp. and its subsidiary BBT from the Bank and
invested, through BBT, $2.6 million in a joint venture to develop 533 acres of
land located in Austin, Texas zoned for light industrial and commercial/retail
use. In addition, the Company formed a new single purpose subsidiary to invest
approximately $575,000 in a limited partnership to develop property in McKinney,
Texas.

Subsidiaries of the Bank

         As a Texas-chartered savings bank, the Bank is permitted by federal
regulations to have subsidiaries engage only in those subsidiary activities
which are permissible for a subsidiary of a national bank. The FDIC may approve
other activities for a subsidiary provided that the Bank meets its applicable
minimum capital standards and the FDIC determines that the conduct of the
activity of the subsidiary will not pose a significant risk to the SAIF. Under
state law, a Texas-chartered savings bank is permitted to invest an unlimited
amount in operating subsidiaries which are engaged solely in activities
permissible for the Bank to engage in directly. The amount which a
Texas-chartered savings bank may invest in other service corporation
subsidiaries may not exceed 10% of the savings bank's total assets without the
prior approval of the Texas Department. At December 31, 1997, the net book value
of the Bank's investment in its subsidiaries was approximately $507.1 million
(including $29.5 million invested in other service corporation subsidiaries).

         Under FDIC regulations, if a savings bank's subsidiary is engaged in
activities not permissible for a national bank subsidiary, it may only engage in
such activities with the approval of the FDIC. In the absence of such approval,
the subsidiary must be divested. The Company has received regulatory approval
for its real estate investment and development activities to date. See "-
Regulation - Federal Regulation of State-Chartered Savings Banks."

         The activities of the Bank's principal operating subsidiaries are
briefly described below.

         Beal Nevada Corp., ("BNC"). During the fourth quarter of 1997, the Bank
formed BNC, a Nevada corporation for tax planning purposes. BNC is a 99% limited
partner in Loan Participant Partners, Ltd., with Property Acceptance Corp.
("PAC"), a wholly-owned subsidiary of the Bank, as the 1% general partner. This
partnership owns an interest in a pool of loans transferred from the Bank. The
Bank's investment in BNC and PAC was $388.6 million and $3.9 million,
respectively, at December 31, 1997.

         Beal Mortgage, Inc. ("BMI"), Beal Properties, Inc. ("BPI") and
Beal/H.S., Inc ("BHS"). BMI and BPI are Texas corporations and BHS is a Nevada
corporation. These corporations were organized to engage in certain real estate
development activities including the acquisition and development of land and
direct investments in real estate development projects. At December 31, 1997,
the Bank's investment in BMI, BPI and BHS totaled $9.0 million, $6.2 million and
$14.3 million, respectively.

         BMI, BPI and BHS are engaged in holding real estate held for investment
and in real estate development projects. The purchase and development of
property may be financed by the Bank or an unrelated third party. Once
developed, the lots are sold to builders primarily for the construction of
single-family dwellings. The Company intends to expand its direct investment
activities in the future, subject to market conditions and regulatory approval.
The Board of Directors of the Bank has determined to limit the Bank's investment
in real estate development and investment activities to an amount which would
enable the Bank to maintain capital, as calculated in accordance with generally
accepted accounting principles, at 6% of total assets, after deduction of its
investment in real estate. In addition, the Bank's individual investment in BMI,
BPI and BHS is limited by the FDIC to 10% of Tier I capital and 20% of Tier 1
capital on an aggregate basis, provided that Tier I capital is at least 6% after
deduction of the Bank's investment in its real estate subsidiaries. See "
Regulation - Federal Regulation of State-Chartered Savings Bank" and "Regulatory
Capital Requirements and Prompt Corrective Regulatory Action." A description of
their real estate investment activities is briefly described below.


                                       29
<PAGE>



         BHS through a Texas limited partnership owned with other affiliates of
the Company, purchased in July, 1997 for $12.2 million, 204 lots plus
approximately 135 acres (to be developed into an additional 225 lots) located in
Highland Village, Texas. Since the purchase, 26 lots have been sold for
approximately $1.9 million.

         BMI's Coppell, Texas development, was purchased in May 1995 for
approximately $4.8 million, and originally consisted of approximately 200 acres.
When BMI purchased the property, the sales contract included an option to one of
the sellers to repurchase approximately 50 acres of the land for $2.2 million.
This option was exercised in January, 1997 with the Bank providing an
acquisition and development loan to the purchaser for $5.3 million. BMI also
sold an additional 65.5 acres of single family land to the same purchaser for
$2.1 million in cash in June, 1997. In addition, 27 acres were sold to the State
of Texas for a freeway right of way for $1.7 million. After these three sale
transactions, BMI currently retains two commercial tracts of approximately 21
and 10 acres, respectively, located at the intersection of the future freeway
and a major local thoroughfare.

         BMI also has invested in a single family real estate development
consisting of 68 acres located in Mesquite, Texas platted for 302 lots. The land
was purchased in July, 1995 for $1.1 million. Since purchase, Phase I has been
fully developed with 119 of 123 total lots under contract to a national
homebuilder. This national home builder has an option to purchase all lots to be
developed in Phases II and III. Phase II is currently in pre-construction, with
Phase III preliminary platted and engineered.

         BMI also has invested in a single-family development located in
Corinth, Texas. BMI's original investment of $914,000 has been reduced to
$58,000 as of December 31, 1997 and consists of three remaining lots. This
investment was initially Phase III of a BMI development which originally
contained 32 acres with 127 lots. BPI also has a $1.4 million investment in
Phases IV, VII and VIII of the same development, containing a total of 88 acres.
Phase IV development has been completed with 115 of 145 lots sold to one
national home builder. Phases VII and VIII of this development have been
preliminary platted for 189 lots, plus five acres of commercial frontage on a
state highway.

         BMI also holds $10.3 million in the aggregate of other real estate for
investment, the largest component of which is Beal Bank Center II, an office
building purchased in March 1995 and located adjacent to the Company's
headquarters. At December 31, 1997, Beal Bank Center II had a book value of $8.4
million (subject to a $6.0 million first mortgage lien from an unaffiliated
lender) and was 83% occupied. Two remaining properties held by BMI for
investment had book values of $1.0 million and $860,000, respectively, at
December 31, 1997.

         BPI also has $3.4 million invested through a Texas limited partnership
to own a 229 acre commercial/industrial park in Houston, Texas. At December 31,
1997, BPI had an additional investment in land with a book value of
approximately $1.0 million.

         Loan Acceptance Corp. ("LAC"). LAC was formed in July 1994 to bid on 
third-party loan pools, the majority of which are sold by the FDIC or the 
RTC. This activity was formerly conducted through BMI. At December 31, 1997, 
the Bank's investment in LAC totaled $992,000. See "- Lending Activities - 
Loan Acquisition, Resolution, Origination and Sale Activities."

         BRE, Inc. ("BRE"). BRE is a Texas corporation organized to hold loans
and other assets which management of the Bank believes bear more than the normal
risk of exposure to litigation. The most common problems with these assets
include environmental contingencies and litigious histories of certain
borrowers. At December 31, 1997, BRE held 16 mortgage loans (11 single-family
and five multi-family and commercial real estate loans) totaling $2.2 million
and 10 foreclosed real estate properties (one land and nine multi-family and
commercial properties) totaling $11.0 million. BRE has performed full
environmental reviews on all of its properties with minimal environmental
problems found. The properties are operational and BRE plans to actively market
the properties for sale. At December 31, 1997, the Bank's investment in BRE
totaled $13.6 million.

         Beal Affordable Housing, Inc. ("BAH"). BAH was organized in November
1994 to develop affordable housing apartment buildings to take advantage of
certain tax benefits under Section 42 of the Internal Revenue Code. BAH owns a
98% limited partnership interest in the three limited partnerships described
below. BMI owns a 1% 

                                       30
<PAGE>


interest in and serves as the managing general partner for each limited 
partnership and a Texas-based, non-profit organization owns the remaining 1% 
interest in each limited partnership. The limited partners will receive 100% 
of any profits or cash distributions on their respective projects and will 
incur 100% of any cash related operating deficiencies and losses. Each of the 
projects is managed by a non-affiliated fee management company which 
specialize in the management of affordable housing properties. At December 
31, 1997, the Company's investment in BAH totaled $26.7 million.

         It is anticipated that BAH will receive tax credits of approximately
$2.4 million per year for the next nine years. The limited partnerships are
required to maintain minimum occupancy levels of qualified low-income tenants
continuously throughout the 15-year compliance period beginning in the year the
first low-income housing credit is claimed. Failure to comply with this
occupancy requirement will result in recapture of all or part of the credits
previously claimed. Each of the limited partnerships are in compliance with the
required occupancy levels at December 31, 1997.

         Foreign Lending Corporation ("FLC"). FLC was established by the Bank
for the purpose of originating, servicing or holding loans made to foreign
borrowers with assets or collateral outside the United States, and/or domestic
borrowers with collateral in foreign countries. FLC will also hold and manage to
disposition any assets acquired in satisfaction of debt as a result of this
lending activity. At December 31, 1997, the Bank's investment in FLC totaled
$5.1 million which was invested in one loan. The Bank is not currently seeking
new foreign lending activities. See "- Foreign Lending."

         Lending and purchasing loans on properties outside the United States is
subject to risks, including exposure to currency fluctuations, the imposition of
government controls, the need to comply with a wide variety of foreign laws,
political and economic instability, changes in tariffs and taxes, the greater
difficulty of administering business overseas and general economic conditions.
In addition, the laws of certain foreign countries may not protect the Company's
property interests to the same extent as do the laws of the United States.

         The Company also owns other single purpose subsidiaries formed to hold
foreclosed property for tax planning purposes. The Company's net investment in
such subsidiaries at December 31, 1997 was $39.4 million.

Competition

         The Company faces strong competition, both in purchasing discounted
loans and originating real estate and other loans and in attracting deposits.
Competition in purchasing discounted loans and originating real estate loans
comes primarily from other savings institutions, commercial banks, mortgage
bankers, real estate brokers and other private investors. Commercial banks and
finance companies provide vigorous competition in consumer lending. The Company
competes for real estate and other loan originations principally on the basis of
the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers. Some of the Company's
competitors, however, have higher lending limits than does the Company.

         The Company attracts substantially all of its deposits through
newspaper advertisements and its branch offices, within the States of Texas.
Competition for those deposits is principally from other savings institutions
and commercial banks and other financial intermediaries. The Company competes
for these deposits by offering deposit accounts at very competitive rates.

Employees

         At December 31, 1997, the Company, including its subsidiaries, had a
total of 106 employees. The Company's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.


                                       31
<PAGE>



Regulation

         General. The Bank is a Texas-chartered savings bank and is subject to
broad regulation and oversight by the Texas Department extending to all its
operations. The Bank is also a member of the FHLB of Dallas and is subject to
certain limited regulation by the Federal Reserve Board. The Bank is a member of
the SAIF, which together with the BIF are the two deposit insurance funds
administered by the FDIC. Accordingly, the deposits of the Bank are insured by
the FDIC up to applicable limits and such insurance is backed by the full faith
and credit of the United States Government. As a result, the FDIC has certain
regulatory and examination authority over the Bank. As the savings and loan
holding company of the Bank, the Company is also subject to regulation and
oversight by OTS and the Texas Department. The purpose of the regulation of the
Company and other holding companies is to protect the subsidiary savings bank.

         Certain of these regulatory requirements and restrictions are discussed
below. See "- Federal Regulation of State Chartered Savings Banks" and "-
Insurance of Accounts and Regulation by the FDIC."

         Insured depository institutions, such as the Bank, and their
institution-affiliated parties, which include the Company, may be subject to
potential enforcement actions by the FDIC and the Texas Department for unsafe or
unsound practices in conducting their businesses or for violations of any law,
rule, regulation or any condition imposed in writing by such agencies or any
written agreement with such agencies. See "- Texas Law and Supervision by the
Texas Department." The OTS may also bring enforcement actions due to its
supervision of the Company.

         The Conversion. Effective December 1, 1994, the Bank converted from 
a Texas-chartered savings and loan association to a Texas-chartered savings 
bank. As a result, the FDIC replaced the OTS as the Bank's primary federal 
regulator. In connection with the Bank's reorganization to the holding 
company form, effective July 1, 1995, OTS approved the Company's application 
to become a savings and loan holding company. See "- Qualified Thrift Lender 
Test and "- Holding Company Regulation."

         Texas Law and Supervision by the Texas Department. As a state-chartered
savings bank, the Bank is governed by the provisions of the Texas Savings Bank
Act (the "Texas Act") and rules and regulations of the Texas Department. The
Texas Act and regulations of the Texas Department are administered by the
Commissioner. Certain of these rules and regulations are discussed below.

         The Bank is required to file reports with the Texas Department 
concerning its financial condition and activities in addition to obtaining 
regulatory approval prior to engaging in certain transactions. The Texas 
Department conducts periodic examinations of the Bank in order to assess its 
compliance with regulatory requirements. As a result of such examinations, 
the Texas Department may require various corrective actions. See "Risk 
Factors - Capital and Other Regulatory Matters."

         The Texas Act and the regulations promulgated pursuant thereto impose
restrictions on the amount and types of loans that may be made by a state
savings bank, which in some cases, are slightly broader than those applicable to
federally chartered savings associations; however, the Texas statute also
permits a state savings bank to engage in any activity permissible for national
banks. Under the Texas Act, however, the Bank must devote a majority of its
assets to residential real estate lending.

         The Commissioner has general supervisory authority over savings banks
and their holding companies. Upon his finding that a savings bank is engaging in
or is about to engage in unsafe or unsound practices, or is engaging in or is
about to engage in a violation of its articles of incorporation or bylaws, or is
engaging in or is about to engage in a violation of any law, rule or supervisory
order applicable to the savings bank or a violation of any condition that the
Commissioner or the Finance Commission of the State of Texas has imposed upon
the savings bank by written order, directive or agreement, or has filed
materially false or misleading information in a filing required under the Act,
or has failed to maintain proper books and records, he may order the savings
bank or its holding company to discontinue the violation or practice. Upon
failure of any savings bank, its holding company or any participating person to
comply with his order, the Commissioner may bring an enforcement action which
can include issuing a cease and desist order, the imposition of civil money
penalties, or placing the institution under the control of a


                                       32
<PAGE>



conservator. Furthermore, if it appears doubtful to the Commissioner that a
savings bank subject to such a conservatorship order can be successfully
rehabilitated, the Commissioner may close and liquidate the savings bank.

         The Bank's general permissible lending limit for loans-to-one borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case, this limit is increased to 25% of unimpaired capital and surplus).
At December 31, 1997, the Bank's lending limit under this restriction was $28.2
million. The Bank is in compliance with the loans-to-one borrower limitation.

         A change in control (as defined below) of a savings bank (which
includes the Company for this purpose) requires the prior approval of the
Commissioner. For the purposes of Texas law, control is be deemed to exist if
any person owns or controls 25% or more of the voting securities of a savings
bank. There is a rebuttable presumption of control if any person owns or
controls 10% or more of the voting securities of the savings bank.

         The Commissioner also has the authority to regulate and examine the
holding companies of Texas- chartered savings banks. Each holding company is
required by Texas law to register with the Commissioner within 90 days after
becoming a holding company. Such holding companies, like the Company, must file
periodic reports concerning their operations with the Commissioner. The
Commissioner also has enforcement powers over such holding companies similar to
those applicable to savings banks.

         In addition to the laws of Texas specifically governing savings banks
and their holding companies, the Bank and the Company are also subject to Texas
corporate law, to the extent such law does not conflict with the laws
specifically governing savings banks and their holding companies.

         Federal Regulation of State-Chartered Savings Banks. The Bank's
deposits are insured by the FDIC. As an insurer of deposits, the FDIC has
extensive authority over the Bank. The FDIC issues regulations, conducts
examinations, requires the filing of reports and generally supervises the
operations of institutions for which it provides deposit insurance.

         The Bank is subject to the rules and regulations of the FDIC to the
same extent as all other state banks that are not members of the Federal Reserve
System. The approval of the FDIC is required prior to any merger or
consolidation, certain changes in control and the establishment or relocation of
any branch office of the Bank. This supervision and regulation is intended
primarily for the protection of the deposit insurance fund.

         With respect to a change in control, federal law provides that no
person directly or indirectly or acting in concert with one or more persons, may
acquire "control" of a savings institution, such as the Bank (which includes the
Company for this purpose) at any time without giving 60 days' prior notice to
the FDIC and having received no FDIC objection to such acquisition of control,
unless the transaction involves an acquisition of control by a company or other
entity, in which case, the transaction would be subject to the approval of the
OTS, rather than the FDIC.

         Control, as defined under federal law, means the power, directly or
indirectly, to direct the management or policies of the institution or to vote
25% or more of any class of voting securities of the institution. In general,
acquisition of 10% or more of any class of voting stock, constitutes a
rebuttable determination of control if (i) the institution has any class of
securities registered under the Securities and Exchange Act of 1934 or (ii) the
person is the largest shareholder of such class of securities immediately
following the acquisition. In determining whether to disapprove a notice of
change in control, the FDIC must consider, among other things, the competitive
effect of the transaction, the financial condition of the acquiror and the
competence, integrity and experience of the acquiror and any proposed management
personnel. The determination of control may be rebutted by submission to the
FDIC of a statement setting forth facts and circumstances which would support a
finding that no control relationship will exist and containing certain
undertakings.

         The Bank is also subject to certain capital adequacy guidelines issued
by the FDIC. See "- Regulatory Capital Requirements."


                                       33
<PAGE>



         Federal law also prohibits insured state-chartered banks, including
savings banks such as the Bank, from making equity investments of a type, or in
an amount, that are not permissible for national banks. In general, equity
investments include equity securities, partnership interests and equity
interests in real estate. Under these regulations, non-permissible investments
must have been divested by no later than December 19, 1996. Federal law also
prohibits such banks from engaging as principal in any activity not permissible
for a national bank without FDIC approval. Subsidiaries of such insured banks
may also not engage as principal in any activity that is not permissible for a
subsidiary of a national bank without FDIC approval. Through its service
corporations, BMI, BPI and BHS, the Bank engages in real estate development and
investment activities ("Real Estate Activities"), which activities are not
permissible for a national bank. The FDIC has authorized (the "FDIC Order") the
Bank and its subsidiaries to continue to engage in these Real Estate Activities
provided that they comply with certain requirements. These measures include
requiring that any subsidiary through which the Real Estate Activities are
conducted (each a "Real Estate Subsidiary") is operated to ensure its separate
corporate existence, submission of an annual investment plan to the FDIC,
measures to address concentration of risk, and calculating the Bank's compliance
with regulatory capital standards exclusive of any investment in a Real Estate
Subsidiary. See "- Insurance of Accounts and Regulation by the FDIC and
Regulatory Capital Requirements and Prompt Corrective Action." See "Subsidiaries
of the Bank."

         The FDIC and the other federal banking regulators have issued safety
and soundness guidelines on matters such as loan underwriting and documentation,
internal controls and audit systems, interest rate risk exposure, asset growth,
asset quality, earnings and compensation and other employee benefits. The FDIC
has adopted final regulations providing that any institution it supervises which
fails to comply with these guidelines must submit a compliance plan. A failure
to submit a plan or to comply with an approved plan will subject the institution
to further enforcement action.

         In addition, the OTS also has extensive enforcement authority over 
the Company. This enforcement authority includes, among other things, the 
ability to assess civil money penalties, to issue cease-and- desist or 
removal orders and to initiate injunctive actions. In general, these 
enforcement actions may be initiated for violations of laws and regulations 
and unsafe or unsound practices. Other actions or inactions may provide the 
basis for enforcement action, including misleading or untimely reports filed 
with the OTS. See "- Holding Company Regulation."

         Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. The Bank is subject to the rules
and regulations of the FDIC to the same extent as all other state banks that are
not members of the Federal Reserve System. This supervision and regulation is
intended primarily for the protection of the deposit insurance fund. In
addition, the FDIC may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings banks and may terminate the deposit insurance if it determines
that the institution has violated any law or regulation or has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition. Such enforcement actions may include the assessment of civil money
penalties against the institution and its management, the imposition of a cease
and desist order or supervisory agreement restricting any and all of the
activities of the institution or requiring corrective action to be taken, the
prohibition of dividends or other distributions of capital and the prohibition
of a person from serving the institution in such capacity as a director, officer
or employee. Any such enforcement action could be substantial and adversely
affect the Bank, and thereby adversely affect the Company's ability to meet its
obligations with respect to the Senior Notes. See "-Federal Regulation of
State-Chartered Savings Banks."

         The FDIC's deposit insurance premiums are assessed through a risk-based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a leverage ratio of at least 5%, a ratio of Tier 1 or
leverage capital to risk-weighted assets ("Tier 1 capital") of at least 6% and a
risk-based capital ratio of at least 10%) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (i.e.,
leverage or Tier 1 capital ratios of less than 4% or a risk-based capital ratio
of less than 8%) and considered of substantial supervisory concern pay the
highest premium. The current assessment schedule for both BIF and SAIF insured
institutions ranges from 0 to .27% of deposits. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment period.
Deposit insurance premiums for the fiscal year ended December 31, 1997, totaled
$677,000.



                                       34
<PAGE>

         Under the FDIC Order, the Bank's capital category will be determined
exclusive of its investment in any Real Estate Subsidiary for purposes of
deposit insurance premium assessments except in determining whether the Bank has
become critically undercapitalized.

         The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

         Prior to the enactment of legislation recapitalizing the SAIF in
November 1996, a portion of the SAIF assessment imposed on savings associations
was used to repay obligations issued by a federally chartered corporation to
provide financing ("FICO") for resolving the thrift crisis in the 1980s.
Although SAIF- insured institutions will continue to be subject to a FICO
assessment, the legislation also requires assessments to be made on
BIF-assessable deposits for this purpose. Effective January 1, 1997, that
assessment will be limited to 20% of the rate imposed on SAIF assessable
deposits until the earlier of December 31, 1999 or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions will be made on the same basis as SAIF-member institutions. The
rates established by the FDIC in 1997 to implement this requirement for all
FDIC-insured institutions was 6.48 basis points assessment on SAIF deposits and
1.3 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment. These rates may be revised in the future based upon
changes in the BIF and SAIF assessment base.

         The FDIC has promulgated regulations implementing limitations on
brokered deposits pursuant to the requirements of federal law. Under the
regulations, well capitalized institutions are not subject to any brokered
deposit limitations, while adequately capitalized institutions are able to
accept, renew or roll over brokered deposits only (i) with a waiver from the
FDIC and (ii) subject to the limitation as to all such deposits that they do not
pay an effective yield which exceeds by more than (a) 75 basis points the
effective yield paid on deposits of comparable size and maturity in such
institution's normal market area for deposits accepted in its normal market area
or (b) 120% for retail deposits and 130% for wholesale deposits, respectively,
the current yield on comparable maturity U.S. Treasury obligations for deposits
accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits, and may not solicit
any deposits by offering any effective yield that exceeds by more than 75 basis
points the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited. At December 31, 1997, the Bank qualified as a
well capitalized institution and, as a result, was not subject to restrictions
on brokered deposits. See "- Sources of Funds-Deposits."

         Regulatory Capital Requirements and Prompt Corrective Regulatory
Action. All state-chartered institutions such as the Bank, which report to the
FDIC as their primary federal regulator, must maintain regulatory capital in
accordance with FDIC regulations.

         The FDIC has adopted a minimum leverage ratio of Tier 1 capital to
average total assets of 3% for banks that have a uniform composite ("CAMELS")
supervisory rating of 1. Higher leverage ratios are required to be considered
well capitalized under the prompt corrective action provisions of federal law.
The FDIC is also authorized to impose higher capital requirements on
institutions on a case-by-case basis.

         The FDIC has also issued guidelines to implement the risk-based capital
requirements. The guidelines require a minimum ratio of qualifying total capital
to risk-weighted assets of 8%. The guidelines are intended to establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations, take
off-balance sheet items into account in assessing capital adequacy and minimize
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments, are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and certain
U.S. government securities, to 100% for relatively high-risk assets, such as
loans and investments in fixed assets, premises and other real estate owned. The
aggregate dollar amount of each category is then multiplied by the risk-weight
associated with that 



                                       35
<PAGE>


category. The resulting weighted values from each of the
risk categories are then added together to determine the total risk-weighted
assets. The FDIC may also require an institution to maintain additional capital
to account for the concentration of credit risk, the risk of non-traditional
activities and for interest rate risk.

         Pursuant to the FDIC Order, the Bank must maintain a Tier 1 capital
ratio of 6% after excluding the amount of its investment in BMI or any other
subsidiary (such as BPI and BHS) through which it conducts Real Estate
Activities. In addition, the aggregate investment in any one such subsidiary is
limited to 10% of Tier 1 capital, and with respect to all such subsidiaries is
limited to 20% of Tier 1 capital.

         A banking organization's qualifying total capital consists of two
components: Tier 1 capital (leverage capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchased credit card
relationships may be included, subject to certain limitations. At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.

         Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk-weighted assets and (ii) certain
permanent and non-permanent capital instruments such as cumulative preferred
stock and subordinated debt. The inclusion of the foregoing elements of Tier 2
capital are subject to certain requirements and limitations.

         On October 13, 1997, the Texas Department notified the Bank's Board of
Directors that the Department was rescinding the requirement that the Bank
maintain minimum capital requirements of 9% for leverage capital and 11% for
risk-based capital, based on a business plan submitted to the Texas Department
by the Bank and the Department's evaluation of the Bank's latest examination as
of March 31, 1997. The business plan generally anticipates a significant decline
in total assets, however, the Bank will continue to originate loans that are
within the Bank's loan policy, as approved by the Board, and continue to
purchase loan packages; a continued improvement in the Company's level of
classified assets; the discontinuation of the Company's foreign lending program;
and the Bank maintaining a leverage capital ratio of at least 10%. The Texas
Department must be provided with 30 days prior written notice of any actions
planned or anticipated that might reasonably be expected to result in a material
deviation from the business plan. For purposes of such advance notification,
material deviation would include, but not necessarily be limited to, material
deviations in capital levels, total asset growth or bulk asset purchases in any
quarter, or any resumption of foreign lending. As a result of the recent
decision to focus on loan originations, the Bank is preparing a new business
plan which reflects an anticipated increase in loan originations.

         The following table sets forth the Bank's compliance with its
regulatory capital requirements at December 31, 1997:

<TABLE>
<CAPTION>
                                             At December 31, 1997
                              -----------------------------------------------
                                     Required                  Actual
                              ---------------------     --------------------
                              Amount       Percent      Amount      Percent
                              ------       -------      ------      -------
                                         (Dollars in Thousands)

<S>                          <C>             <C>       <C>            <C>   
Leverage capital ........    $ 67,373        5.00%     $186,116       13.81%
Tier 1 risk-based capital      62,387        6.00       186,116       17.90
Total risk-based capital      103,978       10.00       198,028       19.05
                                                   
</TABLE>




                                       36
<PAGE>



         When assessing the Bank's capital adequacy the federal banking
agencies, including the FDIC with respect to the Bank, must take into
consideration the risk of loss from changes in the value of the institution's
assets and liabilities due to changes in interest rates. The agencies have
adopted a policy statement that provides guidance to institutions on the
management of interest rate risk. Although the FDIC may require the Bank to
maintain additional capital to address such risk, the Bank believes that in
light of its interest rate risk profile it should not be required to maintain
additional capital.

         The FDIC is authorized and, under certain circumstances required, to
take certain actions against any state-chartered bank that fails to meet its
capital requirements. The FDIC is generally required to restrict the activities
of an "undercapitalized institution" (generally defined to be one with less than
either a 4% leverage capital ratio, a 4% Tier 1 capital ratio or an 8%
risk-based capital ratio). Any such institution must submit a capital
restoration plan and until such plan is approved by the FDIC may not increase
its assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The FDIC is
authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized institutions.

         Any institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 or core capital ratios of less
than 3% or a risk-based capital ratio of less than 6%) must be made subject to
one or more of additional specified actions and operating restrictions mandated
by federal law. These actions and restrictions include requiring the issuance of
additional voting securities; limitations on asset growth; mandated asset
reduction; changes in senior management; divestiture, merger or acquisition of
the institution; restrictions on executive compensation; and any other action
the FDIC deems appropriate. An institution that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized associations. In addition, the FDIC must
appoint a receiver or conservator for an institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.

         Under the FDIC Order, the Bank's capital category will be determined
exclusive of its investment in any Real Estate Subsidiary for purposes of these
prompt corrective regulations except in determining whether the Bank has become
critically undercapitalized. In the event that the Bank fails to remain well
capitalized at the and of any quarter as a result of these conditions, it is
required to notify the FDIC within 15 days and to file an acceptable plan for
restoring capital to the well-capitalized level.

         Any undercapitalized institution is also subject to other possible
enforcement actions by the FDIC. Such actions could include a capital directive,
a cease-and-desist order, civil money penalties, the establishment of
restrictions on all aspects of the association's operations or the appointment
of a receiver or conservator or a forced merger into another institution.

         If the FDIC determines that an institution is in an unsafe or 
unsound condition or is engaged in an unsafe or unsound practice it is 
authorized to reclassify a well capitalized institution as an adequately 
capitalized association and if the institution is adequately capitalized, to 
impose the restrictions to an undercapitalized institution. If the 
institution is undercapitalized, the FDIC is authorized to impose the 
restrictions applicable to a significantly undercapitalized institution. The 
purpose of these provisions is to resolve the problems of insured depository 
institutions at the least possible long-term cost to the appropriate deposit 
insurance fund.

         Any undercapitalized depository institution must submit an 
acceptable capital restoration plan to the appropriate federal banking agency 
45 days after becoming undercapitalized. In addition, each company 
controlling an undercapitalized depository institution must provide a 
guarantee that the institution will comply with the capital plan until the 
depository institution has been adequately capitalized on an average basis 
during each of four consecutive calendar quarters and must otherwise provide 
adequate assurances of performance. The aggregate liability of such guarantee 
is limited to the lesser of (a) an amount equal to 5% of the depository 
institution's total assets at the time the institution became 
undercapitalized or (b) the amount which is necessary to bring the 
institution into compliance with all capital standards applicable to such 
institution as of the time the institution fails to comply with its capital 
restoration plan. Finally, the FDIC may impose any of the additional 
restrictions or sanctions that it may impose on significantly 
undercapitalized institutions if it determines that such action will further 
the purpose of the provisions.

                                       37
<PAGE>



         The imposition by the FDIC of any of these measures on the Bank may
have a substantial adverse effect on the Company's operations and profitability.

         Limitations on Dividends and Other Capital Distributions. Under Texas
law, a savings bank may declare and pay dividends out of current and retained
income so long as the savings bank meets its capital requirements. The Bank is
required to provide notice to the OTS at least 30 days' prior to the declaration
of a dividend by the Bank to the Company. In a letter from the OTS dated June
30, 1997, the OTS acknowledged that notice has been given by the Bank to pay
additional dividends, as needed, up to 100% of earnings for the fiscal
year-ended December 31, 1997.

         The FDIC has the authority to prohibit the Bank from engaging in an
unsafe or unsound practice in conducting its business and under such authority
could impose dividend restrictions. Further, the FDIC has established guidelines
with respect to the maintenance of appropriate levels of capital by savings
banks under its jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions described herein could limit the amount of
dividends which the Bank may pay to the Company. In addition, federal law
prohibits an insured depository from paying dividends on its stock or interest
on its debentures (if such interest is required to be paid only out of net
profits) or distribute any of its capital assets while it is in default in the
payment of any assessment due to the FDIC.

         Liquidity. All Texas savings banks, including the Bank, are required to
maintain minimum levels of liquid assets as defined by the Texas Department. A
Texas savings bank is required to maintain liquidity in an amount not less than
10% of an amount equal to its average daily deposits for the most recently
completed calendar quarter in cash or readily marketable securities. At December
31, 1997, the Bank's liquidity ratio was 19.1%.

         Qualified Thrift Lender Test. All state-chartered savings banks with
holding companies governed by the OTS, including the Bank, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. One version of this test requires a savings association to have at
least 65% of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At December 31, 1997, the Bank met the test for the twelve month
period. In the event that the Bank should fail to qualify as a QTL, it would not
be able to requalify for a period of five years. Upon such a failure, the
Company would lose its status as a savings and loan holding company and would be
required to register as a bank holding company and become subject to the
activity restrictions applicable to such companies. See "- Holding Company
Regulation."

         Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), all FDIC insured institutions have a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in
connection with the examination of the Bank, to assess the institution's record
of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by such institution. An unsatisfactory rating may be
used as the basis for the denial of an application by the FDIC. The Bank
received a "satisfactory" rating on its last CRA examination. Subsequent to that
examination, the Bank applied for and received approval from the FDIC, to be
designated as a wholesale institution for purposes of evaluation under the
revised CRA.


         The federal banking agencies, including the FDIC, revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, certain financial institutions have been required to devote additional
funds for investment and lending in its local community. At December 31, 1997,
no additional requirements have been imposed on the Bank. There can be no
assurances that additional requirements will not be imposed on financial
institutions, including the Bank, in the future.

         In addition, the Texas Act and regulations impose a requirement that a
savings bank maintain investments equal to at least fifteen percent of its local
area deposits in first and second lien residential mortgage loans or 


                                       38
<PAGE>


foreclosed residential mortgage loans originated from within the Bank's local
service area; home improvement loans; interim residential construction loans;
mortgage backed securities secured by loans from within the bank's local service
area; and loans for community reinvestment purposes. The Bank's local service
area is currently delineated to include Collin, Dallas, Denton, Ellis, Fort
Bend, Harris, Johnson, Kaufman, Liberty, Montgomery, Parker, Rockwall, Tarrant
and Waller Counties, Texas. At December 31, 1997, the Bank was in compliance
with the requirements of the Texas Act.

         Transactions with Affiliates. The Bank is subject to certain
restrictions imposed by federal and state law on any extensions of credit to, or
the issuance of a guarantee or letter of credit on behalf of, the Company or
other affiliates, the purchase of or investments in stock or other securities
thereof, the taking of such securities as collateral for loans and the purchase
of assets of the Company or other affiliates. Such restrictions prevent the
Company and such other affiliates from borrowing from the Bank unless the loans
are secured in accordance with federal law. Further, such transactions by the
Bank with the Company or with any other affiliate is limited to 10% of the
Bank's capital and surplus (as defined by federal regulations) and such secured
loans and investments are limited, in the aggregate, to 20% of the Bank's
capital and surplus (as defined by federal law). In addition, any transaction
with an affiliate of the Bank must be on terms and under circumstances that are
substantially the same as a comparable transaction with a non-affiliate.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions.

         Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is registered with and files reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings bank subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings bank. The Company is also subject to regulation by the Texas
Department. See "- Texas Law and Supervision by the Texas Department."

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings institution)
would become subject to such restrictions unless such other institutions each
qualify as a QTL and were acquired in a supervisory acquisition.

         If the Bank fails the QTL test, the Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."

         The Company must obtain approval from the OTS before acquiring control
of any other savings association. Such acquisitions are generally prohibited by
federal law if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.

         Federal Securities Law. The Senior Notes are registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result, the Company is subject to certain information, insider trading
restrictions and other requirements of the SEC under the Exchange Act.

         The Senior Notes held by persons who are affiliates (generally
officers, directors and principal shareholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of securities in any three-month
period.

         Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1997, the Bank was in compliance with these
reserve requirements. The 


                                       39
<PAGE>


balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be imposed
by the Texas Department. See "Liquidity."

         Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

         Federal Home Loan Bank System. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas. At December 31, 1997, the Bank had $10.2 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 5.30% and were 5.95% for calendar year 1997.

         Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

Federal and State Taxation

         Federal Taxation. Beal Financial Corporation filed with the Internal
Revenue Service on March 13, 1997, to elect Subchapter S status for federal
income tax purposes effective January 1, 1997. This election covered all
subsidiaries of Beal Financial, including the Bank, except for BAH and BRE-N,
Inc. (an inactive subsidiary), which elected to remain Subchapter C Corporations
for federal tax purposes. Concurrent with the change to Subchapter S status,
Beal Financial and all subsidiaries changed their tax and fiscal year ends to
December 31 from the previous June 30 year ends. Therefore, Beal Financial and
subsidiaries filed a consolidated Subchapter C federal tax return for the six
months ended December 31, 1996 and will file a consolidated Subchapter S federal
tax return for the year ended December 31, 1997.

         In the future, Beal Financial and all subsidiaries electing Subchapter
S status will not pay any federal taxes on net income. The only exception will
involve possible Subchapter C tax liability on net built-in gains as of January
1, 1997, which may potentially be recognized during the 10 year period ending
December 31, 2006. Recognition of built-in gains/losses are subject to certain
limitations. At January 1, 1997, the Company had net unrealized built-in gains
of approximately $80.0 million. For the year ended December 31, 1997, the
Company recorded federal tax expense of $3.2 million related to the recognition
of built-in gains. BAH and BRE-N will continue to pay federal income taxes as
C-Corporations.

         Except as discussed above, the future tax liability for the taxable
earnings of Beal Financial and subsidiaries will be the responsibility of the
shareholders of Beal Financial. It is anticipated that future dividends to
shareholders will be made to meet their tax liability related to the earnings of
Beal Financial.

         The Company and its subsidiaries filed consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable U.S. Department of the Treasury
regulations to reduce their taxable 


                                       40
<PAGE>


income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.

         The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 32.2% assuming the
maximum percentage bad debt deduction).

         In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Bank, to calculate their bad debt reserve for
federal income tax purposes. As a result, large thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the specific charge-off method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. As a Subchapter-S Corporation, recapture will be treated
as a built-in gain in the year recognized. To the extent earnings appropriated
to a savings association's bad debt reserves for "qualifying real property
loans" and deducted for federal income tax purposes exceed the allowable amount
of such reserves computed under the experience method and to the extent of the
association's supplemental reserves for losses on loans ("Excess"), such Excess
may not, without adverse tax consequences, be utilized for the payment of cash
dividends or other distributions to a shareholder (including distributions on
redemption, dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). As of December 31, 1997, the Bank's Excess for tax
purposes totaled approximately $12.0 million. The management of the Company does
not believe that the legislation will have a material impact on the Company or
the Bank.

         The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through June 30, 1995.
With respect to years examined by the IRS, all deficiencies have been satisfied.
In the opinion of management, any examination (including returns of subsidiaries
and predecessors of, or entities merged into, the Company or Bank) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Company, the Bank and their consolidated
subsidiaries.

         Texas State Income Taxation. The Company, the Bank and their
subsidiaries currently file Texas franchise tax returns. Texas imposes a
franchise tax on the taxable income of savings institutions and other
corporations. The Company and the Bank each pay an annual franchise tax equal to
the greater of $2.50 per $1,000 of taxable capital apportioned to Texas, or
$45.00 per $1000 net taxable earned surplus apportioned to Texas. Taxable earned
surplus is the federal corporate taxable income of each company within the
corporate group determined on a separate company basis with certain
modifications.

         Delaware Taxation. As a Delaware holding company, the Beal Banc Holding
Company is exempt from the Delaware corporate income tax but is required to file
an annual report with and pay an annual fee to the State of Delaware. The Beal
Banc Holding Company is also subject to an annual franchise tax imposed by the
State of Delaware.



                                       41

<PAGE>

ITEM 2. PROPERTIES

         The Company conducts its business at its headquarters and branch
offices. The following table sets forth information relating to each of the
Company's properties as of December 31, 1997.

<TABLE>
<CAPTION>

                                                   Owned         Total
          Location                   Year           or        Approximate
                                   Acquired       Leased     Square Footage       Book Value
                                   --------       ------     --------------       ----------
                                                                                 (In Thousands)
<S>                                <C>            <C>        <C>                 <C>   
Corporate Headquarters:
Beal Bank Center I                   1992          Owned        167,138            $4,739
15770 North Dallas
    Parkway
Dallas, Texas

Branch Office:

5100 Westheimer                      1995         Leased          5,064               --
Houston, Texas

Branch Office:

874 Green Bay Road                   1997         Leased          2,500               --
Winnetka, Illinois  60093

</TABLE>


         The Company acquired Beal Bank Center I in 1992 and currently occupies
39,659 square feet in the building. At December 31, 1997, the building was 98.0%
occupied. At December 31, 1997, the Company's total investment in the property
was $6.3 million with a net book value of $4.7 million.

         The total net book value of the Bank's premises and equipment
(including land, building and leasehold improvements and furniture, fixtures and
equipment) at December 31, 1997 was $6.3 million.

                                       42


<PAGE>



ITEM 3. LEGAL PROCEEDINGS

         The Company is involved in various legal proceedings occurring in the
ordinary course of business. Management of the Company, based on discussions
with litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial position or results of operations of the
Company. There can be no assurance that any of the outstanding legal proceedings
to which the Company is a party will not be decided adversely to the Company's
interests and have a material adverse effect on the financial position or
results of operations of the Company.

         Set forth below is a summary description of the only lawsuit involving
the Company claiming damages in excess of $500,000.

         Kenneth L. Musgrave vs. Beal Banc, S.A.; Cause No. 43,536-A in the 42nd
         District Court of Taylor County, Texas. In April 1994, the Bank
         acquired a promissory note with the face amount of $1.5 million (the
         "Note") executed by the plaintiff ("Plaintiff") from the FDIC.
         Thereafter, the Plaintiff negotiated with representatives of the Bank
         to settle the outstanding balance owed on the Note. Those negotiations
         stalled and the Bank foreclosed on the two pieces of property securing
         the Note in September 1994. Plaintiff filed suit against the Bank
         wherein he has asserted claims against the Bank and certain of the
         Bank's officers and directors for (a) intentional infliction of
         emotional distress; (b) breach of "duty to deal honestly and in good
         faith;" (c) wrongful acceleration of the Note and wrongful foreclosure;
         and (d) fraud. All of the Plaintiff's claims arise out of the
         negotiations he conducted with representatives of the Bank to settle
         his debt on the Note. The Plaintiff claims that the Bank deliberately
         made various misrepresentations about its ownership of the Note, its
         willingness to settle his indebtedness on the Note and its conditional
         acceptance of his settlement offers in order to lull the Plaintiff into
         a position where the Bank would be able to foreclose on the properties
         securing repayment of the Note. The Plaintiff seeks $20.0 million in
         actual damages and $40.0 million in punitive damages. His alleged
         actual damages are based upon his contention that the value of the
         foreclosed properties exceeded the amount of his indebtedness to the
         Bank at the time of the foreclosures and the fact that he will lose
         approximately $2.0 million per year for the next ten years because he
         will not be able to bid on note packages offered for sale by the FDIC
         as a result of the Bank's foreclosure on his properties. The trial
         court granted summary judgement in favor of all Defendants on August 4,
         1997. The Plaintiff filed a Notice of Appeal on November 13, 1997.
         However, in January, 1998, the Court of Appeals dismissed Plaintiff's
         appeal because it was untimely filed. Therefore, the case has been
         successfully concluded in favor of the Bank.

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

         No matters were submitted to a vote of security holders of the Company
 during the quarter ended December 31, 1997.

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

         There is no public market in the Company's common stock. The common
stock is held of record by two stockholders. See "Security Ownership of Certain
Beneficial Owners and Management - Common Stock."

                                       43


<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

         The following tables present, for the fiscal years indicated, certain
summary historical data for the Company. In the opinion of management, all
adjustments (which consist of normal recurring accruals) necessary for a fair
presentation of the results of operations for such periods have been included.
This data should be read in conjunction with the separate consolidated financial
statements and related notes included herein.

<TABLE>
<CAPTION>
                                                        At June 30,                           At December 31,
                                     -------------------------------------------------   -----------------------
                                        1993         1994         1995          1996        1996         1997
                                     ----------   ----------   ----------   ----------   ----------   ----------
                                                                  (Dollars In Thousands)
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>       
Selected Financial Condition Data:
Total assets .....................   $  118,849   $  246,308   $  632,866   $1,269,279   $1,394,906   $1,365,754
Loans receivable, net ............      100,810      219,914      493,168      897,414    1,054,204      887,833
Mortgage-backed securities .......         --          1,999       40,714      194,699      123,939      111,376
Deposits .........................       92,826      186,048      458,165      891,304    1,043,433    1,001,476
Total borrowings .................        8,203       27,932      115,898      263,519      217,842      174,787
Stockholders' equity .............       16,211       27,023       52,400       93,172      116,797      160,820
</TABLE>




<TABLE>
<CAPTION>
                                                                                         Twelve
                                                                                        Months Ended   Year Ended
                                                    Year Ended June 30,                 December 31,   December 31,
                                     -------------------------------------------------  ------------   ------------
                                         1993        1994         1995         1996         1996         1997
                                     ----------   ----------   ----------   ----------  ------------   ------------
                                                                  (Dollars In Thousands)
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>       
Selected Operations Data:
Total interest income ............   $   21,706   $   34,580   $   63,795   $  140,948   $  177,339   $  169,181
Total interest expense ...........        3,639        6,559       20,981       56,818       67,708       67,856
                                     ----------   ----------   ----------   ----------   ----------   ----------
Net interest income ..............       18,067       28,021       42,814       84,130      109,631      101,325
Provision for loan losses ........          784        2,888        4,045        9,044        6,423        3,410
                                     ----------   ----------   ----------   ----------   ----------   ----------
Net interest income after provision
 for loan losses .................       17,283       25,133       38,769       75,086      103,208       97,915
Gain on sales of interest-earning
assets ...........................          994          451        9,408        8,413        6,101          550
Gain on sales of real estate .....         --            912        4,412        7,068       10,776       13,708
Other non-interest income ........          406          173          109        1,202        2,615        3,013
                                     ----------   ----------   ----------   ----------   ----------   ----------
Total non-interest income ........        1,400        1,536       13,929       16,683       19,492       17,271
Total non-interest expense .......        5,113        9,085       12,145       22,456       38,588       22,144
                                     ----------   ----------   ----------   ----------   ----------   ----------
Income before income taxes .......       13,570       17,584       40,553       69,313       84,112       93,042
Income taxes .....................        5,115        6,772       15,176       25,153       30,280        6,408
                                     ----------   ----------   ----------   ----------   ----------   ----------
Net income .......................   $    8,455   $   10,812   $   25,377   $   44,160   $   53,832   $   86,634
                                     ----------   ----------   ----------   ----------   ----------   ----------
                                     ----------   ----------   ----------   ----------   ----------   ----------
</TABLE>



                                       44
<PAGE>




<TABLE>
<CAPTION>
                                                                                          Twelve
                                                                                           Months
                                                                                           Ended    
                                                             Year Ended June 30,        December 31,    Year Ended
                                                    ----------------------------------- -----------    December 31,
                                                     1993      1994      1995     1996      1996          1997
                                                    ------    ------    ------    -----    ------      ------------
<S>                                                 <C>       <C>       <C>       <C>   <C>            <C>   
Selected Financial Ratios and Other Data:                                                              
Performance Ratios:                                                                                    
   Return on assets (ratio of net income to                                                            
    average total assets) ....................        9.15%     6.06%     5.76%    4.46%     4.36%         6.66%
   Return on equity (ratio of net income to                                                            
    average equity) ..........................       71.77     51.23     64.76    64.51     57.10         59.77
   Interest rate spread information, average                                                           
    during period ............................       20.61     16.92     10.50     9.43      9.64          8.72
   Net interest margin(1) ....................       21.03     17.15     10.65     9.32      9.68          8.86
   Ratio of operating expense to average total                                                         
    assets ...................................        5.53      5.09      2.74     2.27      3.13          1.71
   Ratio of average interest-earning assets to                                                         
    average interest-bearing liabilities .....      109.90    105.62    102.89    98.30    102.29        102.60
                                                                                                       
Quality Ratios:                                                                                        
   Net non-performing assets to total assets,                                                          
    at end of period .........................        6.36      7.95      7.07    11.84     17.77         17.88
   Allowance for loan losses to net non-                                                               
    performing loans .........................       27.80     21.14     17.06     9.65      6.49          9.17
   Allowance for loan losses to loans                                                                  
    receivable, net ..........................        1.24      1.62      1.24     1.32      1.25          1.34
   Net charge-offs to average loans, net .....         .11       .40       .41      .39       .38           .49
                                                                                                       
Equity Ratios:                                                                                         
   Equity to total assets, at end of period ..       13.64     10.97      8.28     7.34      8.37         11.78
   Average equity to average assets ..........       12.74     11.83      8.84     6.91      7.64         11.19
                                                                                                       
Ratio of Earnings to Fixed Charges:                                                                    
   Excluding interest on deposits ............      64.1:1    23.9:1     6.6:1     7.4:1    8.1:1         10.4:1
   Including interest on deposits ............       4.5:1     3.5:1     2.3:1     1.4:1    1.4:1          1.5:1
                                                                                                       
Other Data:                                                                                            
   Number of full-service offices ............           1         1         2         3        3           3
</TABLE>

-----------------
(1) Net interest income divided by average interest-earning assets.


                                       45
<PAGE>


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

General

         The Company's results of operations are dependent primarily on net
interest income, which is determined by the difference between the yield earned
on interest-earning assets and rates paid on interest-costing liabilities
("interest rate spread"). The yield on interest-earning assets is enhanced by
the accretion of unearned discounts, which are recognized on the level yield
method as dictated by generally accepted accounting principles. Results of
operations are also affected by the Company's provision for loan losses, the
level of operating expenses, and the net gain (loss) from loans or other assets
which have been sold. Due to the substantial discounts generally associated with
the majority of the Company's purchased loans, the gains recognized upon the
sales of such loans or the underlying collateral have been significant in prior
years.

         The Company's results of operations are also significantly affected by
prevailing economic conditions, competition, regulatory factors, and the
monetary and fiscal policies of governmental agencies. The Company's primary
business of purchasing discounted loans and assets is influenced by the general
level of product available from U.S. government agencies and private sellers and
the competition for such loans from other purchasers. Deposit flows and cost of
funds are influenced by prevailing market rates of interest primarily on
competing investments, account maturities, and the levels of personal income and
savings in the Company's market areas. Future changes in applicable law,
regulations or government policies may also have a material impact on the
Company.

Financial Condition

         The Company's total assets remained unchanged at $1.4 billion at
December 31, 1997 and December 31, 1996, respectively. The asset composition
changed, however, with net loans decreasing approximately $167.6 million, due to
loan payoffs and foreclosure of non-performing loans, exceeding loan
originations and discounted loan purchases. In addition, cash balances increased
$84.5 million and real estate held for investment or sale increased $74.0
million. The increase in cash and cash equivalents was the result of normal
operations. The increase in real estate held for investment or sale was
primarily the result of additional foreclosures occurring as part of the normal
resolution process for non-performing assets.

         The Company had total assets of $1.4 billion at December 31, 1996
representing an increase of $125.6 million or 9.9%, from $1.3 billion at June
30, 1996. The increase resulted primarily from an increase in net loans
receivable of $156.8 million, an increase in cash and cash equivalents of $10.6
million and an increase in real estate held for investment or sale of $18.4
million; partially offset by a decrease in securities available for sale of
$70.8 million. The increase in net loans receivable was due primarily to the
Company being the successful bidder on loan pools sold by various U.S.
governmental agencies and to a lesser extent, to loan origination activity. The
increase in cash and cash equivalents was the result of normal operations,
including proceeds received from the sale of certain mortgage-backed securities
from the securities available for sale portfolio. The increase in real estate
held for investment or sale was primarily the result of additional real estate
direct investments by the Bank's subsidiaries.

         Total assets increased $636.4 million or 100.6%, from $632.9 million at
June 30, 1995 to $1.3 billion at June 30, 1996. The increase resulted primarily
from an increase in net loans receivable of $405.1 million and an increase in
securities available for sale of $154.0 million. The increase in net loans
receivable was due primarily to the Company being the successful bidder on loan
pools sold by various U.S. governmental agencies. The increase in securities
available for sale resulted from the purchase of mortgage backed securities,
purchased primarily for liquidity and to maintain regulatory compliance with the
QTL requirements. In addition, real estate held for investment or sale increased
$36.4 million or 88.4%, from $41.2 million at June 30, 1995 to $77.6 million at
June 30, 1996. The increase was primarily due to the increased investment in
residential developments.


                                       46
<PAGE>

         Total liabilities decreased $73.2 million from December 31, 1996 to
December 31, 1997, primarily due to a decrease of $42.0 million in deposits and
a decrease in Federal Home Loan Bank advances of $36.0 million. The decrease in
deposits and advances from the FHLB reflect the decrease in net loan
receivables.

         Total liabilities increased $102.0 million, or 8.7% from $1.2 billion
at June 30, 1996 to $1.3 billion at December 31, 1996, primarily due to an
increase in deposits of $152.1 million, or 17.1%, partially offset by a decline
in FHLB advances of $39.0 million, a decline in other borrowings of $6.7 million
and a decline of $4.5 million in other liabilities. The $152.1 million increase
in deposits was made up of a $194.6 million increase in retail deposits from the
Bank's three branches, offset by a $42.5 million decrease in brokered deposits.
Advances from the FHLB of Dallas were repaid with the increased deposits and
proceeds from the sale of mortgage backed securities.

         Total liabilities increased $595.6 million, or 102.6% from $580.5
million at June 30, 1995 to $1.2 billion at June 30, 1996, primarily due to FHLB
advances and the issuance of $57.5 million of Senior Notes and increases in
deposits. Savings deposits increased $433.1 million, or 94.5%, from $458.2
million at June 30, 1995 to $891.3 million at June 30, 1996. Of the $433.1
million net increase in savings deposits, $141.3 million were generated by the
sale of certificates of deposits through various brokers, $179.7 million was due
to deposits generated at the Company's branch located in Houston, Texas, which
opened in April 1995 and $9.5 million was due to deposits generated at the
Company's branch located in Winnetka, Illinois, which opened in March, 1996.
Advances from the FHLB increased by $74.0 million to fund loan purchases.

         Stockholders' equity increased $44.0 million or 41.0% from $116.8
million at December 31, 1996 to $160.8 million at December 31, 1997.
Stockholders' equity increased $23.6 million, or 25.4%, from $93.2 million at
June 30, 1996 to $116.8 million at December 31, 1996. Stockholders' equity
increased $40.8 million, or 77.8%, from $52.4 million at June 30, 1995 to $93.2
million at June 30, 1996. These increases were due to earnings, net of dividends
paid to stockholders of $45.6 million. The Company anticipates future dividends
to be significant, subject to limitations imposed upon the Company by the Trust
Indenture (the "Indenture") governing the Senior Notes. The Indenture limits
dividends to 50% of consolidated net income since August 1, 1995. At December
31, 1997, under the terms of the Indenture, the Company would have been
permitted to dividend an additional $30.8 million.

Results of Operations

         General. The level of net income experienced by the Company in the
years ended June 30, 1996, 1995, and the year ended December 31, 1997 resulted
primarily from (i) the significant increase in the average balance of
interest-earning assets as a result of the Company's efforts to return
non-performing loans to performing status and (ii) gains on the sales of loans
and gains on sale of real estate. Gains on the sales of loans and real estate
generally are dependent on various factors which are not necessarily within the
control of the Company, including market and economic conditions. As a result,
there can be no assurance that the gains on sales of loans and real estate
reported by the Company in prior periods will be reported in future periods or
that there will not be substantial periodic variation in the results from such
activities.


                                       47
<PAGE>

         Average Balance, Interest and Average Yields and Rates. The following
tables present for the periods indicated the total dollar amount of interest
income from average interest-earning assets and the resultant yields, as well as
the interest expense on average interest-bearing liabilities, expressed both in
dollars and rates. No tax equivalent adjustments were made. All average balances
are monthly average balances. Non-accruing loans have been included in the table
as loans carrying a zero yield.

<TABLE>
<CAPTION>
                                                          Year Ended June 30,                       Twelve Months Ended December 31,
                                  --------------------------------------------------------------- ----------------------------------
                                                1995                             1996                              1996
                                  ------------------------------  -------------------------------  ---------------------------------
                                   Average     Interest             Average    Interest              Average     Interest
                                  Outstanding   Earned/   Yield/  Outstanding   Earned/    Yield/  Outstanding    Earned/     Yield/
                                    Balance     Paid       Rate     Balance      Paid       Rate    Balance       Paid         Rate
                                  ----------- ----------  ------  ----------- ----------   ------  -----------  ----------   -------
                                                                     (Dollars in Thousands)
<S>                               <C>         <C>         <C>    <C>         <C>           <C>     <C>          <C>           <C>
Interest-Earning Assets:
 Loans receivable(1) ..........   $  359,317  $   61,185   17.03% $  760,906  $  131,544    17.29% $  947,653   $  164,675    17.38
 Mortgage-backed securities ...       18,694       1,328    7.10      99,495       6,916     6.95     145,995       10,434     7.15
 Interest-earning deposits ....       15,993         896    5.60      36,890       2,183     5.92      31,463        1,781     5.66
 FHLB stock ...................        6,381         386    6.05       4,984         305     6.12       7,649          449     5.87
                                  ----------  ----------          ----------  ----------           ----------   ----------
  Total interest-earning
    assets(1) .................   $  400,385      63,795   15.93  $  902,275     140,948    15.62  $1,132,760      177,339    15.66
                                  ----------  ----------          ----------  ----------           ----------   ----------
                                  ----------                      ----------                       ---------- 

Interest-Bearing Liabilities:
 Savings deposits .............       29,276       1,435    4.90     127,126       6,099     4.80     158,392        8,111     5.12
 Certificate accounts .........      233,875      12,282    5.25     669,269      39,816     5.95     821,848       47,781     5.81
 Senior notes, net ............         --          --      --        50,093       6,904    13.78      57,042        7,918    13.88
 Borrowings ...................      125,987       7,264    5.77      71,360       3,999     5.60      70,077        3,898     5.56
                                  ----------  ----------          ----------  ----------           ----------   ----------
  Total interest-bearing
    liabilities ...............   $  389,138      20,981    5.39  $  917,848      56,818     6.19  $1,107,359       67,708     6.11
                                  ----------  ----------          ----------  ----------           ----------   ----------
                                  ----------                      ----------                       ---------- 

Net interest income ...........               $   42,814                      $   84,130                        $  109,631 
                                              ----------                      ----------                        ----------
                                              ----------                      ----------                        ----------
Net interest rate spread ......                            10.54%                            9.43%                             9.54%
Net earning assets ............   $   11,247                      $  (15,573)                      $   25,401
                                  ----------                      ----------                       ----------  
                                  ----------                      ----------                       ----------  
Net yield on average interest-
  earning assets ..............                            10.69%                            9.32%                             9.68%
Average interest-earning assets
  to average interest-bearing
  liabilities .................                   102.89%                           98.30%                         102.29%
</TABLE>


<TABLE>
<CAPTION>
                                       Year Ended December 31,
                                  -------------------------------------
                                                 1997
                                  -------------------------------------
                                   Average      Interest              
                                  Outstanding    Earned/        Yield/    
                                    Balance       Paid           Rate     
                                  -----------   ---------      ----------
<S>                               <C>          <C>             <C>   
 Interest-Earning Assets:
 Loans receivable(1) ..........   $  967,265    $ 157,458       16.28%
 Mortgage-backed securities ...      117,141        8,407        7.18
 Interest-earning deposits ....       49,653        2,730        5.50
 FHLB stock ...................        9,835          586        5.96
                                  ----------    ---------
  Total interest-earning
    assets(1) .................   $1,143,894      169,181       14.79
                                  ----------    ---------
                                  ---------- 

Interest-Bearing Liabilities:
 Savings deposits .............      185,233        9,025        4.87
 Certificate accounts .........      847,937       48,955        5.77
 Senior notes, net ............       57,131        7,986       13.98
 Borrowings ...................       28,286        1,890        6.68
                                  ----------    ---------
  Total interest-bearing
    liabilities ...............   $1,118,587       67,856        6.07
                                  ----------   ---------
                                  ----------  


Net interest income ...........                $ 101,325
                                               ---------
                                               ---------
Net interest rate spread ......                                  8.72%
Net earning assets ............  $    25,307
                                 -----------
                                 -----------
Net yield on average interest-
  earning assets ..............                                  8.86%
Average interest-earning assets
  to average interest-bearing
  liabilities .................                   102.26%
</TABLE>


------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.


                                       48
<PAGE>

         Rate/Volume Analysis. The following schedule presents the dollar amount
of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and that due to the changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.

<TABLE>
<CAPTION>
                                                                                    Twelve Months Ended 
                                                                                    December 31, 1996 vs
                                                   Year Ended June 30,                   Year Ended     
                                                     1995 vs. 1996                    December 31, 1997 
                                        ---------------------------------  ---------------------------------
                                               Increase                          Increase
                                              (Decrease)                         (Decrease)              
                                                Due to           Total             Due to            Total
                                        --------------------   Increase     -------------------     Increase
                                         Volume       Rate     (Decrease)    Volume       Rate     (Decrease)
                                        --------    --------    --------    --------    --------    --------
                                                                         (Dollars in Thousands)
<S>                                     <C>         <C>        <C>         <C>         <C>         <C>     
Interest-Earning Assets:
 Loans receivable ...................   $ 50,403    $    357    $ 50,760    $     34    $  1,021    $  1,055
 Loans receivable - discount ........     19,009         590      19,599       3,479     (11,751)     (8,272)
                                        --------    --------    --------    --------    --------    --------
 Loans receivable - total ...........     69,412         947      70,359       3,513     (10,730)     (7,217)
 Mortgage-backed securities .........      5,616         (28)      5,588      (2,071)         44      (2,027)
 Interest-earning deposits ..........      1,234          53       1,287         999         (50)        949
 Other ..............................        (86)          5         (81)        130           7         137
                                        --------    --------    --------    --------    --------    --------
   Total interest-earning assets ....   $ 76,176    $    977      77,153    $  2,571    $(10,729)     (8,158)
                                        --------    --------    --------    --------    --------    --------
                                        --------    --------    --------    --------    --------    --------
Interest-Bearing Liabilities:
 Savings deposits ...................   $  4,694    $    (30)   $  4,664    $  1,281    $   (367)   $    914
 Certificate accounts ...............     25,700       1,834      27,534       1,503        (329)      1,174
 Senior notes, net ..................      6,904        --         6,904          12          56          68
 Borrowings .........................     (3,067)       (198)     (3,265)     (3,031)      1,023      (2,008)
                                        --------    --------    --------    --------    --------    --------
   Total interest-bearing liabilities   $ 34,231    $  1,606      35,837    $   (235)   $    383         148
                                        --------    --------    --------    --------    --------    --------
                                        --------    --------    --------    --------    --------    --------
Change in net interest income .......                           $ 41,316                            $ (8,306)
                                                                --------                            --------
                                                                --------                            --------
</TABLE>



                                       49
<PAGE>


Comparison of Operating Results for the Fiscal Year Ended December 31, 1997 and
Twelve Months Ended December 31, 1996

         Net Income. For the fiscal year ended December 31, 1997, net income of
$86.6 million represented an increase of $32.8 million, or 60.9% from $53.8
million for the twelve months ended December 31, 1996. As discussed in more
detail below, the increase in net income was primarily due to a decrease of
$23.9 million in income tax expense as a result of the Company's election of
Subchapter S tax status, a decrease of $3.0 million in the provision for loan
losses and a decline of $16.4 million in non-interest expense, partially offset
by a $8.3 million decline in net interest income.

         Net Interest Income. Net interest income decreased $8.3 million, or
7.6%, from $109.6 million for the twelve months ended December 31, 1996 to
$101.3 million for the year ended December 31, 1997. Although the average
balance of interest-earning assets remained virtually unchanged, the net
interest spread, however, decreased from 9.5% for the twelve months ended
December 31, 1996 to 8.7% for the year ended December 31, 1997.

         Interest Income. Interest income decreased $8.2 million, or 4.6%, from
$177.4 million for the twelve months ended December 31, 1996 to $169.2 for the
year ended December 31, 1997. The increase of $1.1 million in interest income on
loans including fees was offset by a decrease of $8.3 million in purchased
discount accretion and $941,000 in interest income on investment securities. The
average balance of interest earning assets increased slightly, however, this
increase was offset by a decrease in the yield on interest earning assets by
 .82% for the year ending December 31, 1997, as compared to the twelve months
ended December 31, 1996. This decrease in yield was primarily due to a decrease
in yield on loans, net, from 17.38% for the twelve months ended December 31,
1996 to 16.28% for the year ended December 31, 1997.

         Interest Expense. Interest expense increased $148,000, or 0.22%, from
$67.7 million for the twelve months ended December 31, 1996 to $67.9 million for
the year ended December 31, 1997. The average balance of interest-bearing
liabilities remained virtually the same, increasing only $11.2 million during
the year ended December 31, 1997 reflecting the increase in deposit accounts and
comparable decline in other borrowings during the year. The four basis point
decrease in the average cost of interest-bearing liability from 6.11% for the
twelve month period ended December 31, 1996 to 6.07% for the year ended December
31, 1997 was primarily due to the shift from higher cost FHLB advances to
deposit accounts.

         Provision for Loan Losses. The provision for loan losses is determined
by management as an amount sufficient to maintain the allowance for loan losses
at a level considered adequate to absorb future losses inherent in the loan
portfolio in accordance with generally accepted accounting principles. The
provision for loan losses decreased $3.0 million, or 46.9% for the twelve months
ended December 31, 1997 primarily as a result of a decline in net loans
receivable and non-performing loans.

         The Company establishes an allowance for loan losses based upon a
systematic analysis of risk factors in the loan portfolio. This analysis
includes an evaluation of the Company's loan portfolio, past loan loss
experience, current economic conditions, loan volume and growth, composition of
the loan portfolio and other relevant factors. Management's analysis results in
the establishment of allowance amounts by loan type based on allocations by
asset classification and specific allocations based on asset reviews. The
allowance for loan losses as a percentage of net non-performing loans was 9.2%
at December 31, 1997 as compared to 6.5% at December 31, 1996. The primary
reason for the increase in this ratio was due to a decrease in net
non-performing loans of $73.4 million from $203.3 million at December 31, 1996
to $129.9 million at December 31, 1997.

         Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustment and net income could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted with
absolute certainty in advance. In addition, regulatory agencies, as an
integral part of the examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize


                                       50
<PAGE>

additions to the allowance level based upon their judgment of the information
available to them at the time of their examination.

         Non-Interest Income. Total non-interest income decreased $2.2 million,
or 11.4% to $19.5 million for the twelve months ended December 31, 1996 to $17.3
million for the year ended December 31, 1997. This decrease was primarily due to
a decrease of $5.5 million in the income attributable to gain on sale of loans
and a $6.4 million decrease in gain of sales of securities available for sale,
partially offset by an increase of $8.2 million on the gain on sale of real
estate transactions and a $1.1 million increase in other real estate operations.

         Non-Interest Expense. Non-interest expense decreased $16.4 million, or
42.6%, from $38.6 million at December 31, 1996 to $22.1 million at December 31,
1997, primarily due to a decrease in salaries and employee benefits of $11.2
million, $10.5 million of which related to a bonus paid to the Bank's Chairman,
Andrew Beal in December 1996. The SAIF deposit insurance premium decreased $2.8
million, of which $2.2 million related to the one time assessment to
recapitalize the SAIF which was paid in 1996. In addition, other operating
expenses decreased by $1.5 million during the year ended December 31, 1997.

         Income Taxes. Income taxes decreased $23.9 million, or 78.8%, from
$30.3 million for the twelve months ended December 31, 1996 to $6.4 million for
the twelve months period ended December 31, 1997. This decrease was due to the
Company's election of Subchapter S tax status at December 31, 1996.

Comparison of Operating Results for the Fiscal Years Ended June 30, 1996 and 
1995

         Net Income. The Company had net income of $44.2 million for the fiscal
year ended June 30, 1996, as compared to $25.4 million for the fiscal year ended
June 30, 1995. As discussed in more detail below, the increase in net income of
$18.8 million, or 74.0%, was due primarily to an increase in net interest income
of $41.3 million and an increase in non-interest income of $2.8 million, which
more than offset the increases in the provision for loan losses of $5.0 million,
non-interest expense of $10.3 million and income taxes of $10.0 million.

         Net Interest Income. Net interest income increased $41.3 million, or
96.5%, from $42.8 million in fiscal 1995 to $84.1 million in fiscal 1996, due to
an increase in average interest-earning assets during fiscal 1996. The average
balance of interest-earning assets increased $501.9 million during this period
primarily due to an increase in discounted loans purchased from the HUD and FDIC
and, to a lesser extent, increased loan originations and purchases of
mortgage-backed securities. In addition, net interest rate spread decreased from
10.54% for fiscal 1995 to 9.43% for fiscal 1996 primarily due to the purchase of
lower yielding mortgage-backed securities and interest expense on the Senior
Notes.

         Interest Income. Interest income increased by $77.1 million, or 120.9%,
from $63.8 million at June 30, 1995 to $140.9 million at June 30, 1996. Of the
total increase in interest income, $50.4 million was due to the increase in
average interest-earning assets and $19.6 million was due to the increase in the
purchase discount accretion. The increase in average interest- earning assets
was primarily due to the increase in discounted loans purchased from the HUD and
the FDIC and, to a lesser extent, increased mortgage-backed securities. The
increase in the average balance of interest-earning assets more than offset the
31 basis point decrease in the average yield on interest-earning assets from
15.93% during fiscal 1995 to 15.62% during fiscal 1996. This decrease in yield
was due in part to increases in lower yielding mortgage-backed securities and in
interest-earning deposits.

         Interest Expense. Interest expense increased by $35.8 million, or
170.8%, from $21.0 million for fiscal 1995 to $56.8 million for fiscal 1996 due
primarily to an increase in the average balance of interest-bearing liabilities
and, to a lesser extent, the issuance of the Senior Notes. An increase in
certificate accounts accounted for $25.7 million of the increase and the
issuance of the Senior Notes accounted for $6.9 million of the increase. The
average balance of savings deposits and certificate accounts increased $97.9
million and $435.4 million, respectively, between the two periods due to the
opening of two new branch offices, increased rates paid on savings and
certificate accounts and increased deposit solicitation efforts as a result of
management's decision to utilize such deposits to fund the purchase of
discounted loans. The average rate paid on certificate accounts increased from
5.25% during fiscal 1995 to 5.95%



                                       51
<PAGE>

for fiscal 1996. The increase in rates paid on deposits was due to increases in
market rates of interest and management's decision to pay higher rates to obtain
deposits.

         Provision for Loan Losses. The provision for loan losses is determined
by management as an amount sufficient to maintain the allowance for loan losses
after net charge-offs at a level considered adequate to absorb future losses
inherent in the loan portfolio in accordance with generally accepted accounting
principles. The increase of $5.0 million, or 123.6%, in the provision for loan
losses from June 30, 1995 to June 30, 1996 was the result of an increase in the
average outstanding balance of net loans receivable of $401.6 million, or
111.8%. In addition, at June 30, 1996, net non-accruing loans totaled $55.3
million, as compared to $36.0 million at June 30, 1995.

         The allowance for loan losses as a percentage of net non-performing
loans was 17.1% at June 30, 1995 as compared to 9.7% at June 30, 1996. The
primary reason for the decline in this ratio was due to the purchase of
multi-family non-performing loans for $132.6 million. Management believes that
the underlying collateral value is sufficient to cover the Company's basis in
these loans.

         Non-Interest Income. Total non-interest income increased $2.8 million,
or 19.8% to $16.7 million for fiscal 1996 from $13.9 million for fiscal 1995.
This increase was primarily due to an increase in gain on real estate
transactions of $3.6 million and an increase of $1.1 million in other real
estate operations, net, partially offset by a $1.0 million decrease in gains on
certain assets. Other real estate operations income, net, increased primarily
due to an increase of $822,000 in real estate investment income. During fiscal
1996, the Company increased its earnings on real estate investments primarily
due to the operations of two office buildings and three low income multi-family
housing developments. The increase of $3.6 million in gains on real estate
transactions was primarily due to an increase in foreclosures.

         During fiscal 1996, the Company discontinued the home improvement
operations of Beal Acceptance Corporation, a wholly owned subsidiary of the
Bank. The Company does not anticipate a material effect on operations as a
result of this action.

         Non-Interest Expense. Non-interest expense increased $10.3 million, or
84.9%, from $12.2 million for fiscal 1995 to $22.5 million for fiscal 1996
primarily due to an increase in salaries and employee benefits of $3.3 million
and an increase in other operating expenses of $4.4 million. The increases in
operating expenses, primarily due to the Company's purchasing activities and
resultant increase in asset size were principally legal expenses, loan
acquisition and origination expenses, loan servicing expenses, audit expenses
and marketing expenses. The increase of $3.3 million in salaries and employee
benefits was due to the addition of an average of 48 full-time equivalent
employees as a result of the Company's increased asset size and an increase in
annual bonuses of $614,000. Total full-time equivalent employees at June 30,
1996 were 113 compared to 93 at June 30, 1995. In addition, occupancy expense
increased $1.1 million. Lastly, deposit insurance premiums increased $861,000
due the Company's deposit growth.

         Year 2000. The Company is currently in the process of conducting a 
comprehensive review of its computer systems to identify the systems that 
could be affected by the "Year 2000" problem. The Year 2000 problem is the 
result of computer programs being written using two digits rather than four 
to define the applicable year. Any of the Company's programs that have time 
sensitive software may recognize a date using "00" as the year 1900 rather 
than the year 2000. This could result in a major system failure or 
miscalculations. Management anticipates that the enhancements necessary to 
prepare its systems for the year 2000 will be completed in a timely manner.

         The majority of the Company's information processing capabilities are
currently provided by third party vendors. The Company is aware of the risks to
third parties, including vendors (and to the extent appropriate, depositors and
borrowers) and the potential adverse impact on the Company resulting from
failures by these parties to adequately address the Year 2000 problem. The
Company has been communicating with its outside data processing service bureau,
as well as other third party service providers (and to the extent appropriate,
depositors and borrowers) to assess their progress in evaluating their systems
and implementing any corrective measures required by them to be prepared for the
year 2000. To date, the Company has not been advised by any of its primary
vendors that they do



                                       52
<PAGE>

not have plans in place to address and correct the issues associated with the
Year 2000 problem; however, no assurance can be given as to the adequacy of such
plans or to the timeliness of their implementation.

         The Company anticipates that it will incur internal staff costs as well
as consulting and other expenses related to the enhancements necessary to
prepare the systems for the year 2000. Based on the Company's current knowledge
and investigations, the expense of the year 2000 project as well as the related
potential effect on the Company's earnings is not expected to have a material
effect on the Company's financial position or results of operations.

         Income Taxes. Income taxes increased $10.0 million from $15.2 million
for fiscal 1995 to $25.2 million for fiscal 1996 due to an increase in taxable
income for the 1996 period. The effective tax rate for federal income taxes was
34.8% for the 1995 period as compared to 33.1% for the 1996 period. The rate
decrease was due primarily to the utilization of tax credits generated by BAH.
As a result of the increase in the Company's taxable income, the Company is
currently subject to the highest federal corporate tax rate of 35%.

Liquidity and Capital Resources

         Beal Financial's primary sources of funds are dividends from the Bank
and interest earned on its investments. The Bank's primary sources of funds for
operations are deposits obtained from its market area, principal and interest
payments on loans, and advances from the FHLB of Dallas and to a lesser extent,
from the sale of assets. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, and
competition.

         The primary investing activity of the Company is the purchase of
discounted loans from the HUD and FDIC through the sealed bid process or
auctions and other private sector sellers. During the year ended December 31,
1997 and the twelve months ended December 31, 1996, the Company purchased $130.4
million and $308.0 million of net loans, respectively. During the years ended
June 30, 1996 and, 1995, the Company purchased $524.7 million and $346.2 million
of net loans, respectively. Loan originations for the year ended December 31,
1997 and the twelve months ended December 31, 1996 were $76.6 million and $132.5
million, respectively. Loan originations for the years ended June 30, 1996 and
1995 were $138.4 million and $76.4 million, respectively.

         The Company's primary financing activity is the attraction of deposits.
During the fiscal years ended June 30, 1996 and 1995, the Company experienced a
net increase in deposits of $433.2 million and $272.1 million, respectively.
During the year ended December 31, 1997 and the twelve months ended December 31,
1996, the Company experienced a net increase (decrease) in deposits of $(42.0)
million and $57.5 million, respectively. The Company also utilizes FHLB advances
to fund the Bank's discounted loan purchases. During the year ended December 31,
1997, the twelve months ended December 31, 1996 and the years ended June 30,
1996 and 1995, the Company's net financing activity (proceeds less repayments)
with the FHLB totaled $(36.0) million $(39.0) million, $74.0 million and $86.0
million, respectively. The Company had other borrowings of $64.7 million at
December 31, 1997, including $57.1 million of Senior Notes.

         The Company has the ability to borrow additional funds from the FHLB of
Dallas by pledging additional assets as collateral, subject to certain
restrictions. At December 31, 1997, the Company had an undrawn advance
arrangement with the FHLB for $26.0 million.

         The Bank is required to maintain minimum levels of liquid assets as
defined by the Texas Department. A Texas savings bank is required to maintain
liquidity in an amount not less than 10% of an amount equal to its average daily
deposits for the most recently completed calendar quarter in cash or readily
marketable securities. At December 31, 1997, the Bank's liquidity ratio was
19.1%.

         The Company's most liquid asset is cash and cash equivalents. The level
of cash and cash equivalents is dependent on the Company's operating, financing,
and investing activities during any given period. At June 30, 1996 and 1995,
cash and cash equivalents totaled $55.4 million and $31.5 million, respectively.
At December 31, 1997 and 1996 cash and cash equivalents totaled $150.8 million
and $65.9 million, respectively.



                                       53
<PAGE>

         The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1997, the Company had commitments
to originate one loan of $7.0 million. Certificates of deposits which are
scheduled to mature in one year or less at December 31, 1997 totaled $778.4
million reflecting consumer preference for short-term investments in the current
interest rate environment. Due to the Company's high interest rate spread,
management has typically relied upon interest rate sensitive short-term deposits
to fund its loan purchases. The Company believes the potential interest rate
risk is acceptable in view of the Company's belief that it can maintain an
acceptable net interest spread. The Company further believes that based on the
levels of retention of such deposits in the recent past, that a significant
portion of such deposits will remain with the Company.

         At December 31, 1997, the Bank exceeded each of its three capital
requirements. The following is a summary of the Bank's regulatory capital
position at December 31, 1997.

<TABLE>
<CAPTION>
                                       At December 31, 1997
                            ------------------------------------------
                                   Required              Actual
                            --------------------   -------------------
                              Amount     Percent    Amount     Percent
                            ---------  ---------   ---------  --------
                                      (Dollars in Thousands)
<S>                         <C>        <C>         <C>        <C>   
Leverage capital ........   $ 67,373       5.00%  $186,116      13.81%
Tier 1 risk-based capital     62,387       6.00    186,116      17.90
Total risk-based capital     103,978      10.00    198,028      19.05
</TABLE>


         The Company anticipates based on the amount of dividends to
stockholders expected to be declared by the Board of Director's in 1998, that
the Bank's regulatory capital ratios will be reduced. It is the Company's
intention that any such dividends would be limited to ensure that the Bank
maintains its capital ratios in excess of the ratios necessary to be classified
as a "well capitalized institution" as defined in FDIC regulations. See Item 1.
Business - Regulation - Insurance of Accounts and Regulation by the FDIC."

Impact of Inflation and Changing Prices

         The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Nearly
all the assets and liabilities of the Company are financial, unlike most
industrial companies. As a result, the Company's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. Since the Company has historically placed more
emphasis on increasing net interest margin rather than on matching the
maturities of interest rate sensitive assets and liabilities, changes in
interest rates may have a greater impact on the Company's financial condition
and results of operations. Changes in investment rates do not necessarily move
to the same extent as changes in the price of goods and services.

Ratios of Earnings to Fixed Charges

         The Company's consolidated ratios of earnings to fixed charges for the
year ended December 31, 1997 are set forth below. Earnings used in computing the
ratios shown consist of earnings from continuing operations before taxes and
interest expenses. Fixed charges, excluding interest of deposits, represent
interest expense on borrowings. Fixed charges, including interest on deposits,
represent all of the foregoing items plus interest on deposits. Interest expense
(other than on deposits) includes interest on FHLB of Dallas borrowings, the
Senior Notes and other borrowed funds.



                                       54
<PAGE>

<TABLE>
<CAPTION>
                                                           For the Year
                                                              Ended
                                                         December 31, 1997
                                                         -----------------
<S>                                                      <C>
Excluding interest on deposits...............                  10.4:1
Including interest on deposits...............                   1.5:1
</TABLE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/liability Management

         The interest rate sensitivity of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities will mature or
reprice within the same period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities repricing within that same period. A gap is considered positive when
the amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities, and is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income while a positive gap could result in an
increase in net interest income. Conversely during a period of falling interest
rates, a negative gap would result in an increase in net interest income and a
positive gap would adversely affect net interest income.

         Management monitors the Bank's interest rate risk as one component of
its business risk. The Bank has an Investment Committee consisting of the
Chairman of the Board, the President, the Executive Vice President and two
outside Directors. The Bank's Senior Vice President/Controller and Senior Vice
President/Compliance also attend all Investment Committee meetings. This
committee meets at least quarterly to review the Bank's interest rate risk
position and profitability and to make recommendations for adjustments to the
Bank's Board of Directors. This committee also reviews the Bank's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. In addition, the Committee reviews on a quarterly basis the
Bank's asset/liability position, including the sensitivity of the market value
of portfolio equity based on various interest rate scenarios.

         In managing its asset/liability mix, the Bank has, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, placed more emphasis on increasing net interest margin than
on better matching the interest rate sensitivity of its assets and liabilities
in an effort to enhance net interest income. Management believes that due to the
high yield the Bank earns on its assets resulting from accretion of purchased
discount, the increased net interest income resulting from a mismatch in the
maturity of its asset and liability portfolios can, during periods of declining
or stable interest rates, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates. In addition, the
majority of the Bank's loan originations, renewals, or modifications are made at
adjustable interest rates to improve the interest rate sensitivity of the Bank's
loan portfolio. The Bank believes that it has the ability to restructure its
liabilities very quickly by extending the maturities of FHLB advances and
pricing deposits to attract funds with longer terms to maturity. It should be
noted that an extension of maturities may result in a higher cost of funds.

         As indicated in the table below, at December 31, 1997, the Bank's
interest-bearing liabilities repricing in one year or less exceeded
interest-earning assets maturing during the same period by $529.1 million,
resulting in a one-year negative gap equal to 50.0% of its interest-earning
assets at that date. Despite the Bank's negative gap position, management
believes that the Bank's interest rate risk is acceptable given its high yield
on earning assets. This high yield is a direct result of (i) purchasing
performing loans at a discount, (ii) prepayments of loans in full that have been
purchased at a discount and (iii) successfully resolving non-performing loans so
that they are performing and thus begin to amortize the discount as the loans
are paid down.



                                       55
<PAGE>

         The following table sets forth the interest rate sensitivity of the
Bank's net assets and liabilities at December 31, 1997 on the basis of the
following assumptions. It is assumed that adjustable-rate assets and liabilities
would reprice at their earliest repricing date and fixed-rate assets and
liabilities would reprice on their contractual maturity date. Money market
deposit accounts ("MMDA's") and savings deposits are assumed to reprice in
accordance with FIDICIA Section 305 guidelines, as follows: Fifteen percent of
MMDA's are assumed to reprice in 0-3 months, 45% in 3-12 months and 40% in 1-3
years; savings deposits are assumed to reprice at 5% in 0-3 months, 15% in 3-12
months, 40% in 1-3 years and 40% in 3-5 years. All prepayment assumptions are
based on the Bank's historical experience while liability repricing assumptions
are based on industry averages used for the purpose of assessing interest rate
sensitivity, which the Company believes does not differ materially from its
historical experience. Balances in all instruments are kept stable with the
assumption that runoff is reinvested in the same instrument. Nonaccrual loans
are not reflected below.

<TABLE>
<CAPTION>
                                                                Maturing or Repricing
                                     --------------------------------------------------------------------------------
                                                     Over 1        Over 2       Over 3        Over 5
                                       1 Year       Year to       Years to      Years to      Years to      Over 10
                                       or Less     Two Years     Three Years     5 Year       10 Years       Years        Total
                                     -----------   -----------   -----------   -----------   -----------  -----------  -----------
                                                                      (Dollars in Thousands)
<S>                                  <C>           <C>           <C>           <C>           <C>          <C>          <C>        
Fixed rate one- to four-family,
 commercial real estate and
 construction loans ..............   $    27,831   $    48,180   $    50,257   $    95,508   $    65,373  $   129,177  $   416,326
Adjustable rate one- to four-
 family, commercial real estate
 and construction loans ..........       142,067         4,029        11,080       139,136           506          451      297,269
Commercial business loans ........         1,324         2,437            27         6,806         1,682          823       13,099
Consumer loans ...................        32,836           881         2,191         3,676         7,127       13,346       60,057
Interest-earning deposits ........       150,039          --            --            --            --           --        150,039
FHLB Stock .......................        10,203          --            --            --            --           --         10,203
Securities available for sale and
  other investments ..............       111,376                                                                           111,376
                                     -----------   -----------   -----------   -----------   -----------  -----------  -----------
     Total interest-earning assets       475,676        55,527        63,555       245,126        74,688      143,797    1,058,369

Money market accounts ............       101,593        33,864        33,864          --            --           --        169,321
Commercial demand ................        14,272          --            --            --            --           --         14,272
Savings deposits .................           239           239           239           476          --           --          1,193
Certificate accounts .............       778,354        19,606        17,582         1,148          --           --        816,690
Subordinated debt, net ...........          --            --          57,188          --            --           --         57,188
FHLB advances ....................       110,000          --            --            --            --           --        110,000
Other borrowings .................           304          --             923         6,015          --            357        7,599
                                     -----------   -----------   -----------   -----------   -----------  -----------  -----------
     Total interest-bearing
liabilities ......................     1,004,762        53,709       109,796         7,639          --            357    1,176,263

Interest-earning assets less
 interest-bearing liabilities ....      (529,086)        1,818       (46,241)      237,487        74,688      143,440     (117,894)

Cumulative interest-rate
 sensitivity gap .................      (529,086)     (527,268)     (573,509)     (336,022)     (261,334)    (117,894)    (117,894)

Cumulative interest-rate gap
 as a percentage of total assets
 at December 31, 1997 ............        (38.74%)      (38.61%)      (41.99%)      (24.60%)      (19.13%)      (8.63%)      (8.63%)

Cumulative interest-rate gap as
 a percentage of interest-earning
 assets at December 31, 1997 .....        (49.99%)      (49.82%)      (54.19%)      (31.75%)      (24.69%)     (11.14%)     (11.14%)


Cumulative interest-rate gap as a
 percentage of interest-bearing
 liabilities at December 31, 1997         (44.99%)      (44.83%)      (48.76%)      (28.57%)      (22.22%)     (10.02%)     (10.02%)
</TABLE>





                                       56

<PAGE>

         Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rate. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would significantly
change the results set forth in the foregoing table. The ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.

         The table below sets forth, as of December 31, 1997, the estimated
changes in (i) the Bank's market value of portfolio equity ("MVPE") (i.e., the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts) and (ii) the Bank's net interest income on December 31, 1997,
presented on an annualized basis which would result from the designated
instantaneous changes in the U.S. Treasury yield curve. Yields used in the table
to compute Net Interest Income and MVPE reflect actual effective yields for the
quarter ended December 31, 1997, annualized.

<TABLE>
<CAPTION>
                              Percentage Change in:
                ---------------------------------------------
                  Net Interest Income               MVPE                  Change      Change               Dollar       Percent
  Change in     -----------------------   -------------------     Net     in Net      in Net               Change       Change
Interest Rates    Board      Projected    Board     Projected  Interest  Interest    Interest                in           in
(Basis Points)  Limit %(1)    Change %  Limit %(1)   Change %   Income    Income      Income %   MVPE       MVPE         MVPE
--------------  ----------   ---------  ----------  ---------  --------  --------    --------- --------   --------      ----------
                                                                  (Dollars in Thousands)
<S>             <C>          <C>        <C>         <C>        <C>       <C>         <C>       <C>        <C>           <C>
     +400         (75)%       (8.8)%      (75)%      (25.8)%   $92,508   $(8,927)      (8.8)%  $143,597   $(49,917)      (25.8)%
     +300         (50)        (6.6)       (50)       (20.1)     94,749    (6,686)      (6.6)    154,636    (38,878)      (20.1)
     +200         (35)        (4.4)       (35)       (13.9)     96,985    (4,450)      (4.4)    166,575    (26,939)      (13.9)
     +100         (25)        (2.2)       (25)        (7.2)     99,213    (2,222)      (2.2)    179,502    (14,012)       (7.2)
        0                                                      101,435                          193,514
     -100         (25)         2.2        (25)         7.9     103,651     2,216        2.2     208,722     15,208         7.9
     -200         (35)         4.6        (35)        20.7     106,128     4,693        4.6     233,633     40,119        20.7
     -300         (55)         7.0        (55)        32.7     108,525     7,090        7.0     256,709     63,195        32.7
     -400         (75)         9.3        (75)        45.8     110,915     9,480        9.3     282,114     88,600        45.8
</TABLE>

-------------------
(1) Reflects the limits established by the Board of Directors.

         As indicated in the table above, management has structured its assets
and liabilities to increase net interest margin rather than minimize its
exposure to interest rate risk. As a result, the changes in the
Bank's MVPE reflected above exceed industry averages. In the event of a 400
basis point change in interest rates, the Bank would experience a 45.8% increase
in MVPE and a $9.5 million increase in net interest income in a declining rate
environment and a 25.8% decrease in MVPE and a $8.9 million decrease in net
interest income in a rising rate environment. The Bank's asset and liability
structure results in a decrease in MVPE in a rising interest rate environment
and an increase in MVPE in a declining interest rate scenario. During periods of
rising rates, the value of monetary assets and monetary liabilities decline.
Conversely, during periods of falling rates, the value of monetary assets and
liabilities increase. However, the amount of change in value of specific assets
and liabilities due to changes in rates is not the same in a rising rate
environment as in a falling rate environment (i.e., the amount of value increase
under a specific rate decline may not equal the amount of value decrease under
an identical upward rate movement). The decrease in MVPE in a rising interest
rate environment is the result of management's use of relatively short-term
liabilities to fund its purchases of loans with substantially longer terms to
maturities. While this results in a decrease in MVPE during a rising rate
environment and an increase in MVPE in a falling rate environment, management
believes that the level of the Bank's net interest spread enables the Bank to
incur this additional interest rate risk.

         Management of the Bank believes that the assumptions used by it to
evaluate the vulnerability of the Bank's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effect of changes in interest rates on the Bank's net interest income and MVPE
could vary substantially if different assumptions were used or actual experience



                                       57
<PAGE>

differs from the historical experience on which they are based. In addition, in
evaluating the Bank's exposure to interest rate risk, certain other shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ substantially from that
presented in the foregoing table.


                                       58
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                              <C>
Report of Independent Certified Public Accountants ............................   60

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1997 and 1996 ..................   61

Consolidated Statements of Income for the year ended December 31, 1997, the six
months ended December 31, 1996 and the years ended June 30, 1996
and 1995 ......................................................................   62

Consolidated Statements of Stockholders' Equity for the year ended December 31,
1997, the six months ended December 31, 1996
and the years ended June 30, 1996 and 1995 ....................................   63

Consolidated Statements of Cash Flows for the year ended December 31, 1997, the
six months ended December 31, 1996 and the years ended June 30, 1996
and 1995.......................................................................   64

Notes to Consolidated Financial Statements ....................................   67

</TABLE>


                                       59


<PAGE>



               Report of Independent Certified Public Accountants

Board of Directors
Beal Financial Corporation

We have audited the accompanying consolidated balance sheets of Beal 
Financial Corporation and Subsidiaries as of December 31, 1997 and 1996, and 
the related consolidated statements of income, stockholders' equity and cash 
flows for the year ended December 31, 1997, the six months ended December 31, 
1996, and for each of the two years in the period ended June 30, 1996. These 
financial statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe our audits provide a reasonable 
basis for our opinion.

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of Beal Financial Corporation and Subsidiaries as of December 31, 1997 and 
1996, and the consolidated results of their operations and their consolidated 
cash flows for the year ended December 31, 1997, the six months ended 
December 31, 1996, and each of the two years in the period ended June 30, 
1996, in conformity with generally accepted accounting principles.

Dallas, Texas
March 16, 1998



                                       60
<PAGE>





                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>


                                                                                                 December 31,
                                                                                       ----------------------------
                                                                                          1997              1996
                                                                                       ----------        ----------
<S>                                                                                    <C>               <C>       
ASSETS
    Cash                                                                                    $ 630             $ 449
    Interest-bearing deposits with Federal Home Loan Bank                                 150,219            65,491
                                                                                       ----------        ----------

                  Cash and cash equivalents                                               150,849            65,940

    Accrued interest receivable                                                            13,071            16,361
    Securities - available for sale                                                       111,376           123,939
    Loans receivable, net                                                                 887,833         1,054,204
    Federal Home Loan Bank stock                                                           10,203             9,618
    Real estate held for investment or sale                                               176,682           102,680
    Premises and equipment, net                                                             6,351             6,802
    Other assets                                                                            9,389            15,362
                                                                                       ----------        ----------

                                                                                       $1,365,754        $1,394,906
                                                                                       ----------        ----------
                                                                                       ----------        ----------

LIABILITIES

    Deposit accounts                                                                   $1,001,476        $1,043,433
    Federal Home Loan Bank advances                                                       110,000           146,000
    Senior notes, net                                                                      57,188            57,094
    Other borrowings                                                                        7,599            14,748
    Other liabilities                                                                      28,673            16,834
                                                                                       ----------        ----------

                  Total liabilities                                                     1,204,936         1,278,109

COMMITMENTS AND CONTINGENCIES                                                                  --                --

STOCKHOLDERS' EQUITY
    Common stock, $1 par value per share; authorized 375
       shares; issued and outstanding 300 shares                                              300               300

    Additional paid-in capital                                                              2,740             2,740

    Unrealized gain on available for sale securities, net
       of taxes of  $381 at December 31, 1996                                               3,722               709
    Retained earnings                                                                     154,056           113,048
                                                                                       ----------        ----------

                  Total stockholders' equity                                              160,818           116,797
                                                                                       ----------        ----------

                                                                                       $1,365,754        $1,394,906
                                                                                       ----------        ----------
                                                                                       ----------        ----------

</TABLE>


          The accompanying notes are an integral part of these statements.



                                       61
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except per share data)

<TABLE>
<CAPTION>


                                                                            Six months
                                                            Year Ended        ended           Year ended June 30,
                                                           December 31,     December 31,     ----------------------
                                                               1997             1996           1996           1995
                                                           ------------     ------------     --------       -------

<S>                                                           <C>             <C>            <C>           <C>     
Interest income:
    Loans, including fees                                     $112,785        $ 51,726       $ 92,618      $ 41,858
    Purchase discount accretion                                 44,673          30,451         38,926        19,327
    Investment securities                                       11,723           5,875          9,404         2,610
                                                              --------        --------        -------       -------
                  Total interest income                        169,181          88,052        140,948        63,795

Interest expense:
    Deposits                                                    57,980          28,221         45,915        13,717
    Federal Home Loan Bank advances
       and other borrowings                                      1,890           1,758          3,999         7,264
    Senior notes                                                 7,986           3,962          6,904            --
                                                              --------        --------        -------       -------
                  Total interest expense                        67,856          33,941         56,818        20,981
                                                              --------        --------        -------       -------

                  Net interest income                          101,325          54,111         84,130        42,814

Provision for loan losses                                        3,410           3,314          9,044         4,045
                                                              --------        --------        -------       -------
                  Net interest income after provision
                      for loan losses                           97,915          50,797         75,086        38,769

Noninterest income:
    Gains on real estate transactions                           13,708           6,434          7,068         4,412
    Other real estate operations, net                            2,486           1,202          1,108            --
    Gain on sales of loans                                         550           1,701          8,413         8,620
    Gain on sales of securities available for sale                  --              --             --           788
    Other operating income                                         527             723             94           109
                                                              --------        --------        -------       -------
                  Total noninterest income                      17,271          10,060         16,683        13,929

Noninterest expense:

    Salaries and employee benefits                               8,318          15,615          8,232         4,944
    Occupancy and equipment                                      2,392           1,143          2,049           922
    SAIF deposit insurance premium                                 676           2,605          1,332           471
    Loss on sales of securities available for sale                  --             437            587            --
    Other operating expense                                     10,758           6,851         10,256         5,808
                                                              --------        --------        -------       -------
                  Total non-interest expenses                   22,144          26,651         22,456        12,145
                                                              --------        --------        -------       -------

                  Income before income taxes                    93,042          34,206         69,313        40,553

Income taxes                                                     6,408          12,152         25,153        15,176
                                                              --------        --------        -------       -------

                  NET INCOME                                  $ 86,634        $ 22,054       $ 44,160      $ 25,377
                                                              --------        --------        -------       -------
                                                              --------        --------        -------       -------

Income per common share                                        $288.78          $73.51        $147.20        $84.59
                                                              --------        --------        -------       -------
                                                              --------        --------        -------       -------

Weighted average number of common

    shares outstanding                                             300             300            300           300
                                                              --------        --------        -------       -------
                                                              --------        --------        -------       -------

</TABLE>


         The accompanying notes are an integral part of this statement.


                                       62
<PAGE>


                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                           Unrealized gain
                                                                              (loss) on
                                             Common stock    Additional      securities
                                         -----------------     paid-in        available     Retained
                                         Shares     Amount     capital         for sale     earnings         Total
                                         ------     ------   ----------    ---------------  --------        -------

<S>                                       <C>       <C>         <C>           <C>            <C>           <C>     
Balance at June 30, 1994                  300       $300        $2,740          $ --         $ 23,983      $ 27,023

   Net income                              --         --            --            --           25,377        25,377
                                        -----      -----        ------         -----         --------      --------

Balance at June 30, 1995                  300        300         2,740            --           49,360        52,400

   Net income                              --         --            --            --           44,160        44,160

   Net unrealized loss on securities
       available for sale, net of tax
       benefit of $466                     --         --            --          (862)              --          (862)

   Dividends paid                          --         --            --            --           (2,526)       (2,526)
                                        -----      -----        ------         -----         --------      --------

Balance at June 30, 1996                  300        300         2,740          (862)          90,994        93,172

   Net income                              --        --             --            --           22,054        22,054

   Net unrealized gain on securities
       available for sale, net of tax
       expense of $847                     --         --            --         1,571               --         1,571
                                        -----      -----        ------         -----         --------      --------

Balance at December 31, 1996              300        300         2,740           709          113,048       116,797

   Net income                              --         --            --            --           86,634        86,634

   Net unrealized gain on securities
       available for sale                  --         --            --         3,013               --         3,013

   Dividends declared                      --         --            --            --          (45,626)      (45,626)
                                        -----      -----        ------         -----         --------      --------

Balance at December 31, 1997              300       $300        $2,740        $3,722         $154,056      $160,818
                                        -----      -----        ------         -----         --------      --------
                                        -----      -----        ------         -----         --------      --------

</TABLE>

            The accompanying notes are an integral part of this statement.

                                       63
<PAGE>


                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                            Six months
                                                            Year ended         ended         Year ended June 30,
                                                           December 31,     December 31,    ----------------------
                                                               1997             1996           1996          1995
                                                           ------------     ------------     --------      --------
<S>                                                          <C>              <C>            <C>           <C>     
Operating activities
    Net income                                               $ 86,634         $ 22,054       $ 44,160      $ 25,377
    Adjustments to reconcile net income
       to net cash provided by (used in)
       operating activities

          Depreciation and amortization                         2,468            1,071          1,791           585
          Accretion of purchase discount                      (44,673)         (30,451)       (38,926)      (19,327)
          Provision for loan losses                             3,410            3,314          9,044         4,045
          Amortization of bond premium
              and underwriting costs                              654              297            477            --
          Gains on real estate transactions                   (13,708)          (6,434)        (7,068)       (4,412)
          Gain on sales of loans                                 (550)          (1,701)        (8,413)       (8,620)
          (Gain) loss on sales of securities
              available for sale                                   --              437            587          (788)
          Loss on sale of premises and
              equipment                                             7               71             --            --
    Changes in operating assets and liabilities
       Accrued interest receivable                             (1,361)          (1,249)       (11,102)       (3,822)
       Prepaid expenses and other assets                         (334)            (191)        (4,515)       (3,300)
       Other liabilities and accrued expenses                   2,225           (7,573)        14,842         1,098
                                                            ---------         --------       --------      --------

                  Net cash provided by (used in)
                     operating activities                      34,772          (20,355)           877        (9,164)

</TABLE>



                                       64
<PAGE>


                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                 (In thousands)
<TABLE>
<CAPTION>


                                                                            Six months
                                                            Year ended        ended           Year ended June 30,
                                                           December 31,     December 31,    ------------------------
                                                               1997             1996           1996          1995
                                                           ------------     ------------    ----------    ----------
<S>                                                          <C>              <C>            <C>           <C>      
Investing activities
    Proceeds from sales of loans                                 $ 26          $ 8,477       $ 19,045      $ 64,469
    Proceeds from sales of securities available
       for sale                                                    --           68,134        151,744        43,372
    Proceeds from paydowns of securities
       available for sale                                      15,306            4,674         10,954           116
    Proceeds from sales of real estate                         34,929           16,446         11,067        11,087
    Purchase of loans and bid deposits on loan
       purchases                                             (130,418)        (273,885)      (541,173)     (374,403)
    Purchases of securities available for sale                                      --       (318,769)      (81,426)
    (Purchase) sales of Federal Home Loan
       Bank stock                                                (585)            (278)        (1,865)       (5,902)
    Purchase of real estate held for investment
       or sale                                                (17,395)         (10,525)       (18,519)      (28,776)
    Loan originations and advances, less loan
       collections                                            266,850          111,791        136,265         49,499
    Purchases of premises and equipment, net                     (443)            (412)        (1,406)       (2,488)
                                                             --------         --------       --------      --------

                  Net cash provided by (used in)
                      investing activities                    168,270          (75,578)      (552,657)     (324,452)


</TABLE>



                                       65
<PAGE>


                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                 (In thousands)

<TABLE>
<CAPTION>


                                                                            Six months
                                                            Year ended         ended          Year ended June 30,
                                                           December 31,     December 31,      --------------------
                                                               1997             1996            1996          1995
                                                           ------------     ------------       ------        ------
<S>                                                         <C>              <C>            <C>           <C>      
Financing activities
    Net increase (decrease) in deposit accounts             $ (41,958)       $ 152,130      $ 433,168     $ 272,117
    Proceeds from long-term debt                                  162            1,158         17,776         2,501
    Repayments of long-term debt                               (7,311)          (7,785)        (3,767)         (535)
    (Repayments) advances from the Federal
       Home Loan Bank                                         (36,000)         (39,000)        74,000        86,000
    Proceeds from issuance of senior notes                         --               --         54,492            --
    Cash dividend paid                                        (33,026)              --            (26)           --
                                                            ---------        ---------      ---------     ---------

                  Net cash provided (used in) by
                      financing activities                   (118,133)         106,503        575,643       360,083
                                                            ---------        ---------      ---------     ---------

                  Increase in cash and cash equivalents        84,909           10,570         23,863        26,467

Cash and cash equivalents at beginning of period               65,940           55,370         31,507         5,040
                                                            ---------        ---------      ---------     ---------

Cash and cash equivalents at end of period                  $ 150,849         $ 65,940       $ 55,370      $ 31,507
                                                            ---------        ---------      ---------     ---------
                                                            ---------        ---------      ---------     ---------

Supplemental disclosure of cash flow information
    Cash paid during the period for
       Interest                                              $ 66,661         $ 36,319       $ 19,049      $ 50,707
       Income taxes                                             2,215           18,780          5,550        19,668

Supplemental disclosures of noncash investing
    and financing activities
       Real estate acquired in foreclosure
          or in settlement of loans                          $ 89,850         $ 27,615        $ 6,752      $ 22,520
       Assumption of majority stockholders'
          indebtedness in lieu of cash dividend                  $ --             $ --        $ 2,500       $ 2,500

</TABLE>



          The accompanying notes are an integral part of these statements.




                                       66
<PAGE>




                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (In thousands)

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

    Nature of Operations: Beal Financial Corporation (the Company), through its
    subsidiary, Beal Bank ssb (the Bank), collectively, (the Corporation)
    operates three branches in Dallas and Houston, Texas and Winnetka, Illinois.
    The Bank's primary business consists of purchasing pools of loans generally
    at a discount from the principal balances of the loans. These loans are
    generally purchased from the Resolution Trust Corporation ("RTC"), the
    Federal Deposit Insurance Corporation ("FDIC"), and the U.S. Department of
    Housing and Urban Development ("HUD"). The Bank also provides loans and
    banking services to consumer and commercial customers in the market areas in
    which its branches are located.

    A summary of the significant accounting policies of the Corporation applied
    in the preparation of the accompanying consolidated financial statements
    follows. The accounting principles followed by the Corporation and the
    methods of applying them are in conformity with both generally accepted
    accounting principles and prevailing practices of the banking industry.

    Basis of Presentation: The accompanying consolidated financial statements
    include the accounts of the Corporation, its subsidiaries including the Bank
    and subsidiaries of the Bank, and partnerships in which subsidiaries are the
    1% general and 98% limited partner. All significant intercompany
    transactions and balances are eliminated.

    Use of Estimates in the Preparation of Financial Statements: In preparing
    financial statements in conformity with generally accepted accounting
    principles, management is required to make estimates and assumptions that
    affect the reported amounts of assets and liabilities and the disclosure of
    contingent assets and liabilities at the date of the financial statements
    and revenues and expenses during the reporting period. Actual results could
    differ from those estimates.

    Loans: Loans that management has the intent and ability to hold for the
    foreseeable future or until maturity or pay-off are stated at unpaid
    principal balances less the allowance for loan losses, loans in process and
    net deferred loan origination fees and discounts.

    A loan is identified as impaired when it is probable that interest and
    principal will not be collected according to the contractual terms of the
    loan agreement. For impaired loans the accrual of interest is discontinued 
    when the net carrying value of the loan equals the net realizable value of 
    the underlying collateral. Impairments of loans are measured based on the 
    present value of expected future cash flows discounted at the loan's 
    effective interest rate, its observable market price, or fair value of 
    collateral if the loan is collateral dependent.

    Discounts on mortgage loans purchased by the Corporation are amortized to
    income using the interest method over a remaining period which is the longer
    of the contractual maturity or the remaining amortization term of the note.
    Upon early payoff, any remaining discount collected is taken into income and
    reflected in the financial statements as interest income. Discounts on loans
    originated are recognized over the lives of the loans using methods that
    approximate the interest method.

    Loans held for sale are carried at the lower of cost or estimated fair
    value.



                                       67
<PAGE>


                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued

    Loans in process of foreclosure are classified as loans until legal
    title is transferred.

    Investment Securities: The Corporation classifies investments as available
    for sale and records them at fair value, with unrealized gains and losses,
    net of income taxes, excluded from earnings and reported as a separate
    component of stockholders' equity.

    Realized gains and losses on securities are reported in income in the year
    of sale.

    Loan-Origination Fees, Commitment Fees, and Related Costs: Loan fees and
    certain direct loan origination costs are deferred, and the net fee or cost
    is recognized as an adjustment to interest income using the interest method
    over the estimated life of the loans based on the Corporation's historical
    prepayment experience. Commitment fees and costs relating to commitments,
    for which the likelihood of exercise is remote, are recognized over the
    commitment period on a straight-line basis. If the commitment is exercised
    during the commitment period, the remaining unamortized commitment fee at
    the time of exercise is recognized over the life of the loan as an
    adjustment of yield.

    Allowance for Loan Losses: The allowance for loan losses is maintained at a
    level believed adequate by management to absorb potential losses in the loan
    portfolio. Management's determination of the adequacy of the allowance is
    based on an evaluation of the portfolio, past loan loss experience, current
    economic conditions, volume, growth, composition of the loan portfolio, and
    other relevant factors. The allowance is increased by provisions for loan
    losses charged to operations.

    Management believes the allowance for loan losses is adequate. While
    management uses available information to recognize losses on loans, future
    additions to the allowance may be necessary based on changes in economic
    conditions. In addition, various regulatory agencies, as an integral part of
    their examination process, periodically review the Corporation's allowance
    for loan losses.

    Real Estate Held for Investment and Sale: Real estate properties held for
    investment are carried at the lower of cost, including cost of improvements
    and amenities incurred subsequent to acquisition, or net realizable value
    (fair value). Costs relating to development and improvement of the real
    estate are capitalized, whereas costs relating to the holding of property
    are expensed. Real estate properties acquired through or in lieu of loan
    foreclosure are initially recorded at fair value less cost to sell at the
    date of foreclosure.

    Valuations are periodically performed by management, and an allowance for
    losses is established by a charge to operations if the carrying value of a
    property exceeds its fair value.

    Income Per Common  Share:  Income per common  share is based on the  
    weighted  average  number of common  shares outstanding during each year.
    There are no common stock equivalents.

    Statements of Cash Flows: For purposes of reporting cash flow, cash and cash
    equivalents include cash on hand, amounts due from banks and
    interest-bearing deposits in other banks.



                                       68
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued

    Premises and Equipment: Premises and equipment are stated at cost, less
    accumulated depreciation based on the estimated useful lives of the assets,
    as follows:

<TABLE>

<S>                                                                  <C>        
       Buildings and improvements                                    10-45 years
       Furniture and equipment                                        3-10 years

</TABLE>

    Depreciation is computed using the straight-line method.

    Income Taxes: Prior to January, 1997, the Corporation and its subsidiaries
    filed a Federal income tax return on a consolidated basis. Deferred tax
    assets and liabilities were recognized for the future tax consequences
    attributable to differences between the financial statement carrying amounts
    of existing assets and liabilities and their respective tax bases.

    Effective January 1, 1997, the Corporation and all of its subsidiaries,
    except for Beal Affordable Housing, Inc. and BRE-N, Inc., elected to be
    taxed as S Corporations, and their federal income taxes will be the
    responsibility of the Corporation's stockholders.

    Off-Balance Sheet Financial Instruments: In the ordinary course of business,
    the Corporation has entered into off-balance sheet financial instruments
    consisting of commitments to extend credit and letters of credit. Such
    financial instruments are recorded in the financial statements when they are
    funded or related fees are incurred or received.

    Fair Values of Financial Instruments: The Corporation provides disclosures
    regarding financial instruments as prescribed by generally accepted
    accounting principles. These disclosures do not purport to represent the
    aggregate net fair value of the Corporation. Further, the fair value
    estimates are based on various assumptions, methodologies and subjective
    considerations which vary widely among different financial institutions and
    which are subject to change. The following methods and assumptions were used
    by the Corporation in estimating financial instruments' fair values:

       Cash and cash equivalents: The balance sheet carrying amounts approximate
       the estimated fair values of such assets.

       Investment securities: Fair values for investment securities are based on
       quoted market prices, if available. If quoted market prices are not
       available, fair values are based on quoted market prices of comparable
       instruments.

       Loans: For variable rate loans that reprice frequently and entail no
       significant change in credit risk, fair values are based on the carrying
       values. The fair values of other loans are estimated based on discounted
       cash flow analysis using interest rates currently offered for loans with
       similar terms to borrowers of similar credit quality.



                                       69
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued

       Deposit Liabilities: The fair values estimated for demand deposits
       (interest and non-interest bearing accounts) are, by definition, equal to
       the amount payable on demand at the reporting date (i.e., their carrying
       amounts). The carrying amounts of variable rate, fixed-term money market
       accounts and certificates of deposit approximate their fair values. Fair
       values of fixed rate certificates of deposit are estimated using a
       discounted cash flow calculation that applies interest rates currently
       being offered to a schedule of aggregated expected maturities.

       Federal Home Loan Bank Advances and Other Borrowings: Fair values for
       Federal Home Loan Bank advances and other borrowings are based upon
       current market rates for instruments with similar maturities.

       Senior Notes: Fair value for senior notes is based upon the closing
       market price at December 31, 1997.

NOTE B - FORMATION OF HOLDING COMPANY

    On April 5, 1995, the Company filed an application with the Office of Thrift
    Supervision for approval to acquire, indirectly, 100% of the outstanding
    common stock of the Bank in exchange for 100% of the Company's common stock.
    The application was approved on June 29, 1995 and the acquisition was
    effective on July 1, 1995. The accompanying financial statements for the
    year ended June 30, 1995 reflect the results of operations of the Bank and
    its subsidiaries. In connection with the acquisition of the Bank's common
    stock, the Company assumed certain related indebtedness of $2,500 from the
    majority shareholder. This amount has been reflected in stockholders' equity
    as a dividend.



                                       70
<PAGE>


                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE C - LOANS RECEIVABLE

    A substantial portion of the Corporation's loan portfolio consists of first
    mortgage loans in Texas, California, Florida and Illinois. A borrower's
    ability to pay in full is dependent, in some respects, upon the general
    economic condition of the geographic location of the underlying collateral.
    Loans receivable consisted of the following:

<TABLE>
<CAPTION>


                                                                                                  December 31,
                                                                                          ------------------------
                                                                                             1997          1996
                                                                                          ---------      ---------
<S>                                                                                       <C>            <C>       
       Real estate loans
          One-to-four family first liens                                                  $ 213,584       $ 276,591
          Multifamily                                                                       321,423         466,697
          Commercial                                                                        337,825         388,460
          Construction and development                                                       98,503          74,437
          Land                                                                               71,379          95,684
                                                                                            -------         -------

               Total real estate loans                                                    1,042,714       1,301,869

       Other loans
          Consumer loans
             One-to-four family junior lien                                                  71,465          77,528
             Timeshares                                                                       3,615           6,446
             Other                                                                            5,003           7,095
                                                                                             ------          ------

                Total consumer loans                                                         80,083          91,069

          Commercial business loans                                                          25,554          35,131
                                                                                            -------         -------

                 Total other loans                                                          105,637         126,200
                                                                                           --------        --------

                  Total loans                                                             1,148,351       1,428,069

       Less:
          Loans in process                                                                  (16,806)        (16,364)
          Deferred fees and discounts                                                      (231,800)       (344,312)
          Allowance for loan losses                                                         (11,912)        (13,189)
                                                                                           --------        --------

                  Total loans receivable, net                                             $ 887,833      $1,054,204
                                                                                           --------        --------
                                                                                           --------        --------
</TABLE>


    The amount of loans  being  serviced  by the  Corporation  for others was 
    approximately  $36,484 and $46,402 at December 31, 1997 and 1996, 
    respectively.



                                       71
<PAGE>





                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE C - LOANS RECEIVABLE - Continued

    Transactions in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>


                                                                             Six months
                                                            Year ended            ended        Year ended June 30,
                                                           December 31,     December 31,       --------------------
                                                                  1997             1996         1996          1995
                                                           ------------     ------------       --------------------
<S>                                                        <C>                <C>             <C>           <C>    
       Balance at beginning of year                        $13,189            $11,832         $ 6,137       $ 3,547
          Provision for loan losses                          3,410              3,314           9,044         4,045
          Charge-offs                                       (4,956)            (1,978)         (3,385)       (1,462)
          Recoveries                                           269                 21              36             7
                                                           -------            -------         -------       -------

       Balance at end of year                              $11,912            $13,189         $11,832       $ 6,137
                                                           -------            -------         -------       -------
                                                           -------            -------         -------       -------

</TABLE>


    In the normal course of business, the Corporation acquires pools of loans at
    a discount from their unpaid contractual principal balance. The unearned
    discount is then accreted over the life of the loans using the interest
    method. In the Corporation's due diligence procedures and bidding, it takes
    into consideration potential loans to be modified in determining the price
    it is willing to pay for a particular pool. In connection with these loan
    purchases, the Corporation subsequently may modify the terms of certain
    loans included in the pools. The Corporation does not consider these to be
    troubled debt restructurings. The effective interest rate on the
    Corporation's modified loans is equal to or greater than the rate the
    Corporation would be willing to accept for a new loan with comparable risk.

    At December 31, 1997 and 1996, all significant impaired loans have been
    determined to be collateral dependent and have been measured utilizing the
    fair value of the collateral.

    The Corporation's recorded investment in impaired loans and the related
valuation allowance are as follows:

<TABLE>
<CAPTION>


                                                                  December 31, 1997           December 31, 1996
                                                               -----------------------    -------------------------
                                                                Recorded     Valuation     Recorded       Valuation
                                                               investment    allowance    investment      allowance
                                                               ----------    ---------    ----------      ---------
<S>                                                              <C>          <C>          <C>            <C>   
       Impaired loans - valuation allowance required             $ 9,412      $2,186       $ 12,755       $3,454
       Impaired loans - no valuation allowance                    79,914          --        153,677           --
                                                                 -------      ------       --------       ------

       Total impaired loans                                      $89,326      $2,186       $166,432       $3,454
                                                                 -------      ------       --------       ------
                                                                 -------      ------       --------       ------

</TABLE>



                                       72
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE C - LOANS RECEIVABLE - Continued

    The valuation allowance for impaired loans is included in the allowance for
    loan losses.

    The average recorded investment in impaired loans for the year ended
    December 31, 1997, the six months ended December 31, 1996, and the year
    ended June 30, 1996 was $132,277, $136,000 and $94,007, respectively.
    Interest income on impaired loans for the year ended December 31, 1997, the
    six months ended December 31, 1996 and the year ended June 30, 1996 was
    $8,576, $3,830 and $8,206, respectively. Interest income foregone under the
    original terms of impaired loans for the year ended December 31, 1997, the
    six months ended December 31, 1996 and the year ended June 30, 1996 was
    approximately $4,189, $4,341 and $5,400, respectively.

    Nonaccrual and renegotiated loans for which interest has been reduced
    totaled approximately $57,990 at June 30, 1995. Interest income foregone
    under the original terms of such loans was approximately $3,578 for the year
    ended June 30, 1995.

NOTE D - REAL ESTATE HELD FOR INVESTMENT OR SALE

    Real estate held for investment or sale is comprised of the following:

<TABLE>
<CAPTION>


                                                                                December 31,
                                                                         ------------------------
                                                                           1997            1996
                                                                         --------        --------
<S>                                                                      <C>             <C>     
       Real estate held for development and rental                       $ 64,390        $ 59,773
       Real estate held for sale                                          113,852          44,630
                                                                         --------        --------
                                                                          178,242         104,403

            Less accumulated depreciation                                  (1,560)         (1,723)
                                                                         --------        --------

                  Total real estate held for investment or sale          $176,682        $102,680
                                                                         --------        --------
                                                                         --------        --------

</TABLE>

    Income from real estate development and rental activities which has not been
    significant is included in other income in the statements of income. Real
    estate held for sale was acquired by foreclosure or by deed in lieu of
    foreclosure.



                                       73
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE E - SECURITIES AVAILABLE FOR SALE

    Securities available for sale consist of the following:

<TABLE>
<CAPTION>


                                                                                  Gross          Gross
                                                                 Amortized    unrealized     unrealized       Fair
                                                                     cost         gains         losses       value
                                                                 ---------    ----------     ----------    --------
<S>                                                              <C>          <C>            <C>       <C>     
       Mortgage-backed securities:

          December 31, 1997                                      $107,655       $3,721           $ --      $111,376
          December 31, 1996                                       122,849        1,090             --       123,939

</TABLE>


    At December 31, 1997, mortgage-backed securities valued at approximately
    $11,570 were pledged to another institution for the benefit of a customer of
    the Bank.

    The mortgage-backed securities at December 31, 1997 are scheduled to mature
    in 2025 and 2026.

NOTE F - DEPOSITS

<TABLE>
<CAPTION>


                                                                                    December 31,
                                                                ---------------------------------------------------
                                                                          1997                          1996
                                                                ---------------------         ---------------------
                                                                   Amount     Percent            Amount     Percent
                                                                ----------    -------         ---------     -------
<S>                                                             <C>           <C>             <C>           <C>   
    Noninterest-bearing demand deposits                           $ 14,272        1.4%           $ 2,870       .2%
    Statement savings deposits (4.7% at
       December 31, 1997)                                            1,193        .1                 653       .1
    Money market demand deposit accounts
       (4.9% at December 31, 1997)                                 169,321      17.0             188,466     18.1
                                                                  --------      -----           --------     -----
                                                                   184,786      18.5             191,989     18.4

    Certificates of deposit

       3.51% to 4.00%                                                    2        --                  --      --
       4.01% to 4.50%                                                    1        --                 138      --
       4.51% to 5.00%                                                1,524        .2              25,039     2.4
       5.01% to 5.50%                                              198,607      19.8             220,903     21.2
       5.51% to 6.00%                                              585,733      58.4             441,676     42.3
       6.01% to 6.50%                                               13,329       1.3             133,013     12.7
       6.51% to 7.00%                                                2,960        .3              16,522     1.6
       7.01% to 7.50%                                               14,522       1.5              14,153     1.4
       7.51% to 8.00%                                                   12        --                  --      --
                                                                ----------     -----          ----------    -----

       Total certificates of deposit                               816,690      81.5             851,444     81.6
                                                                ----------     -----          ----------    -----

       Total deposits                                           $1,001,476     100.0%         $1,043,433    100.0%
                                                                ----------     -----          ----------    -----
                                                                ----------     -----          ----------    -----

</TABLE>



                                       74
<PAGE>





                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)



NOTE F - DEPOSITS - Continued

    The aggregate  amount of deposits with a minimum  denomination  of $100 or 
    more was  approximately  $377,183 at December 31, 1997 and $228,690 at 
    December 31, 1996.

    At December 31, 1996, the scheduled maturities of certificates of deposit
    were as follows:

<TABLE>
<CAPTION>

                         December 31,
                         ------------
<S>                         <C>                                                 <C>     
                            1998                                                $778,354
                            1999                                                  19,606
                            2000                                                  17,582
                            2001                                                     576
                            2002                                                     572
                                                                                --------

                                                                                $816,690
                                                                                --------
                                                                                --------
</TABLE>

    Interest expense on deposits consists of the following:

<TABLE>
<CAPTION>

                                                                              Six months
                                                              Year ended        ended          Year ended June 30,
                                                              December 31,    December 31,     --------------------
                                                                  1997           1996            1996        1995
                                                              ------------    -----------      --------    --------
<S>                                                              <C>             <C>            <C>         <C>    
       Savings deposits                                          $ 9,025         $ 4,683        $ 6,675     $ 1,435
       Certificates of deposit                                    48,955          23,538         39,240      12,282
                                                                 -------         -------        -------     -------

                                                                 $57,980         $28,221        $45,915     $13,717
                                                                 -------         -------        -------     -------
                                                                 -------         -------        -------     -------
</TABLE>


NOTE G - FEDERAL HOME LOAN BANK ADVANCES

    Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
    advances are collateralized by all stock in the FHLB, certain premises and
    equipment and certain qualifying first mortgage loans, with a total
    collateral value of approximately $119,029 at December 31, 1997. The FHLB
    advances of $110,000 at December 31, 1997 bear interest of rates ranging
    from 6.3% to 7.1% and mature in January 1998.

NOTE H - SENIOR NOTES

    On August 9, 1995, the Company issued $57,500 of 12.75% Senior Notes due on
    August 15, 2000 at a discount of $500 which is being accreted over the life
    of the notes. Interest is payable semi-annually on February 15 and August 15
    of each year. The Senior Notes are redeemable, in whole or in part, at the
    option of the Company.



                                       75
<PAGE>






                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE I - REGULATORY MATTERS

    The Company is not subject to capital adequacy requirements by its primary
    regulator, the Office of Thrift Supervision.

    The Bank is subject to various regulatory capital requirements administered
    by the Texas Savings and Loan Department (the Department) and the Federal
    Deposit Insurance Corporation (FDIC), collectively, (regulators). Failure to
    meet minimum capital requirements can initiate certain mandatory and
    possibly additional discretionary actions by regulators that, if undertaken,
    could have a direct material effect on the Bank's financial statements.
    Under capital adequacy guidelines and the regulatory framework for prompt
    corrective action, the Bank must meet specific capital guidelines that
    involve quantitative measures of the Bank's assets, liabilities, and certain
    off-balance-sheet items as calculated under regulatory accounting practices.
    The Bank's capital amounts and classification are also subject to
    qualitative judgments by the regulators about components, risk weightings,
    and other factors.

    Quantitative measures established by regulation to ensure capital adequacy
    require the Bank to maintain minimum amounts and ratios (set forth in the
    table below) of total risk based and tier I capital to risk-weighted assets,
    and of leverage capital to total assets. Management believes, as of December
    31, 1997, that the Bank meets all capital adequacy requirements to which it
    is subject.

    Texas savings banks, including the Bank, are required to maintain a daily
    balance of liquid assets at least equal to 10% of the average daily balance
    of deposits for the preceding quarter. At December 31, 1997 and 1996, the
    Bank's liquidity ratio was 19.11% and 16.53%, respectively.

    The most recent notification from the regulators categorized the Bank as
    well capitalized under the regulatory framework for prompt corrective
    action. There are no conditions or events since that notification that
    management believes have changed the Bank's category.

    To be categorized as well capitalized by the federal banking agencies, the
    Bank must maintain minimum total risk-based, tier I risk-based, and leverage
    ratios as set forth in the table below.

<TABLE>
<CAPTION>


                                                                                                             To be well
                                                                                                          capitalized under
                                                                             For capital                  prompt corrective
                                                 Actual                   adequacy purposes               action provisions
                                            ----------------          ---------------------------     ----------------------------
                                            Amount     Ratio          Amount          Ratio           Amount          Ratio
                                            ------     -----          ------      ---------------     ------      ----------------

<S>                                         <C>                        <C>        <C>                 <C>         <C>
       December 31, 1997
          Total risk based capital          198,028    19.05%          83,182     greater than 8%     103,978     greater than 10%
          Tier I risk based capital         186,116    17.90%          41,591     greater than 4%      62,387     greater than 6%
          Leverage capital                  186,116    13.81%          53,898     greater than 4%      67,373     greater than 5%

       December 31, 1996
          Total risk based capital          150,703    14.03%          85,903     greater than 8%     107,379     greater than 10%
                                                                                  or equal to                     or equal to
          Tier I risk based capital         137,514    12.81%          42,951     greater than 4%      64,427     greater than 6%
                                                                                  or equal to                     or equal to
          Leverage capital                  137,514    10.05%          54,722     greater than 4%      68,403     greater than 5%
                                                                                  or equal to                     or equal to

</TABLE>


                                       76
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE J - INCOME TAXES

    The following items give rise to deferred tax assets and liabilities in the
consolidated balance sheet:

<TABLE>
<CAPTION>

                                                                                                       December 31,
                                                                                                           1996
                                                                                                       ------------
<S>                                                                                                     <C>   
       Deferred tax assets
          Accrued interest receivable                                                                   $2,870
          Loan acquisition cost                                                                            352
          Deferred loan fees                                                                                80
          Accrued expenses                                                                                 109
          Allowance for loan loss                                                                          486
          Real estate held for investment or sale                                                          177
          Premises and equipment                                                                           139
          Unrealized loss on investment securities                                                          --
          Other                                                                                            777
                                                                                                        ------

                 Gross deferred tax asset                                                                4,990

       Deferred tax liabilities
          Loan discounts                                                                                   176
          Allowance for loan losses                                                                         --
          FHLB stock dividends                                                                             281
          Gains on real estate transactions                                                              1,785
          Accrued interest                                                                               2,442
          Unrealized gains on investment securities                                                        382
          Other                                                                                             --
                                                                                                        ------

                  Gross deferred tax liability                                                           5,066

                  Net deferred tax liability                                                             $ (76)
                                                                                                        ------
                                                                                                        ------

</TABLE>


    Taxes on income consisted of the following:

<TABLE>
<CAPTION>


                                                                              Six months
                                                             Year ended          ended          Year ended June 30,
                                                            December 31,      December 31,      -------------------
                                                                1997              1996          1996        1995
                                                            ------------      ------------      ----        ----
<S>                                                            <C>               <C>            <C>         <C>    
       Federal
          Current                                              $3,249            $11,214        $21,095     $13,646
          Deferred                                                 --             (1,251)         1,249         (57)
                                                               ------            -------        -------     -------
                                                                3,920              9,963         22,344      13,589
       State - current and deferred                             3,159              2,189          2,809       1,587
                                                               ------            -------        -------     -------

                                                               $6,408            $12,152        $25,153     $15,176
                                                               ------            -------        -------     -------
                                                               ------            -------        -------     -------

</TABLE>



                                       77
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE J - INCOME TAXES - Continued

    On March 13, 1997, the Corporation filed an application with the Internal
    Revenue Service to elect S Corporation status for federal income tax
    purposes effective January 1, 1997. This election covered all subsidiaries
    of the Corporation except Beal Affordable Housing, Inc., and BRE-N, Inc.

    As a result of the aforementioned application, beginning January 1, 1997,
    the Corporation and all of its subsidiaries electing S Corporations status
    will no longer pay federal income taxes, except for the federal taxes
    related to the recognition of built-in gains which existed at January 1,
    1997. At January 1, 1997, the Corporation had net unrealized built-in gains
    of approximately $80,000 which may potentially be recognized during the
    ten-year recognition period beginning on January 1, 1997. For the year ended
    December 31, 1997 the Corporation recorded federal tax expense of $3,249
    related to the recognition of built-in gains. Except as discussed above,
    beginning January 1, 1997, the liability for federal income taxes of the
    Corporation will be the responsibility of its stockholders.

    Income taxes for financial reporting purposes differed from the amount
    computed by applying the statutory federal income tax rate to the income
    before income taxes for the years ended below as follows:

<TABLE>
<CAPTION>


                                                                              Six months
                                                                                 ended          Year ended June 30,
                                                                              December 31,      -------------------
                                                                                   1996           1996        1995
                                                                              ------------        ----        ----
<S>                                                                             <C>             <C>         <C>    
       Computed tax at statutory Federal income tax rate                        $11,972         $24,260     $14,193
       Increase (decrease) in taxes resulting from
          State tax, net of federal tax benefit                                   1,246           2,195       1,047
          Tax credits                                                            (1,182)         (1,469)         --
          Other                                                                     116             167         (64)
                                                                                -------         -------     -------

                 Total                                                          $12,152         $25,153     $15,176
                                                                                -------         -------     -------
                                                                                -------         -------     -------

</TABLE>


NOTE K - OTHER OPERATING EXPENSE

    Other operating expense consists of the following:

<TABLE>
<CAPTION>


                                                                            Six months
                                                            Year ended         ended            Year ended June 30,
                                                           December 31,     December 31,        -------------------
                                                               1997             1996            1996          1995
                                                           ------------     ------------        ----          ----
<S>                                                         <C>               <C>             <C>            <C>   
       Advertising and promotion                              $ 248            $ 448            $ 714         $ 584
       Office supplies and expense                              250              127              394           267
       Legal and professional                                 6,448            3,327            3,599         1,351
       Expenses related to loan purchases                       630            1,108            2,409         1,375
       Loan servicing fees                                    2,376            1,332            2,278         1,611
       Other                                                    806              509              862           620
                                                            -------           ------          -------        ------

                                                            $10,758           $6,851          $10,256        $5,808
                                                            -------           ------          -------        ------
                                                            -------           ------          -------        ------

</TABLE>




                                       78
<PAGE>




                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE L - COMMITMENTS AND CONTINGENCIES

    The Corporation's financial statements do not reflect various commitments 
    to extend credit or commitments to purchase loans which arise in the 
    normal course of business and which involve elements of credit risk, 
    interest rate risk or liquidity risk. At December 31, 1997, there were 
    commitments to purchase loans of $44,078. Unfunded commitments to extend 
    credit were $20,806.

    Commitments to purchase loans are agreements to purchase certain loans at 
    a specified percentage of the outstanding principal balance as long as 
    all conditions established in the contract are met. Commitments do not 
    have a fixed expiration date. Since the conditions in the contract may 
    not be met for all loans covered by the commitments, the total 
    commitments do not necessarily represent future cash requirements. 
    Collateral on the loans consists primarily of single family residences. 

    Commitments to extend credit are agreements to lend to a customer as long 
    as there is no violation of any condition established in the contract. 
    Commitments generally have fixed expiration dates or other termination 
    clauses and may require payment of a fee by the customer. Since many of 
    the commitments are expected to expire without being funded, the total 
    commitment amounts do not necessarily represent future cash requirements. 
    The Corporation evaluates each customer's creditworthiness on a 
    case-by-case basis. The amount of collateral obtained, if deemed 
    necessary by the Corporation upon extension of credit is based on 
    management's credit evaluation. Collateral held varies but may include 
    accounts receivable, inventory, property, plant and equipment and liens 
    on real estate. 

    The Corporation is a defendant in various matters in litigation which 
    have arisen in the normal course of business. In the opinion of 
    management, such litigation will not have a material effect on the 
    Corporation's consolidated financial position or results of operations. 

NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS

    The estimated fair values of the Corporation's financial instruments were 
    as follows:

<TABLE>
<CAPTION>


                                                           December 31, 1997                  December 31, 1996
                                                          -------------------                ------------------
                                                    Carrying            Fair           Carrying            Fair
                                                     amount             value           amount             value
                                                   -----------       -----------      -----------       ------------
<S>                                                <C>               <C>              <C>               <C>        
       Financial assets:
          Cash and cash equivalents                $   150,849       $   150,849      $    65,940       $    65,940
          Securities available for sale                111,376           111,376          123,939           123,939
          Loans receivable                             887,833           897,201        1,054,204         1,055,653

       Financial liabilities:
          Deposit liabilities                       (1,001,476)       (1,002,057)      (1,043,433)       (1,043,981)
          Federal Home Loan Bank advances             (110,000)         (110,000)        (146,000)         (146,000)
          Other borrowings                              (7,599)           (7,599)         (14,748)          (14,748)
          Senior notes                                 (57,188)          (59,404)         (57,094)          (60,950)

</TABLE>

                                       79
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

                           Beal Financial Corporation

                                  Balance Sheet

<TABLE>
<CAPTION>


                                                                                                  December 31,
                                                                                           -------------------------
                                                                                              1997            1996
                                                                                           ---------       ---------
<S>                                                                                        <C>             <C>     
       Assets
          Cash                                                                             $ 17,906         $ 9,624
          Investment in subsidiary                                                          189,846         145,062
          Loans receivable, net                                                                  --          18,500
          Real estate held for investment                                                    14,190           3,162
          Other assets                                                                       14,694           2,655
                                                                                           ---------       ---------

                                                                                           $236,636        $179,003
                                                                                           ---------       ---------
                                                                                           ---------       ---------

       Liabilities and stockholders' equity
          Senior notes                                                                     $ 57,188        $ 57,094
          Other borrowings                                                                       --           1,775
          Other liabilities                                                                  18,630           3,337
          Stockholder's equity:
              Common stock                                                                      300             300
              Additional paid-in capital                                                      2,740           2,740
              Retained earnings                                                             154,056         113,048
              Unrealized gain on available for sale securities                                3,722             709
                                                                                           ---------       ---------

                 Total stockholders' equity                                                 160,818         116,797
                                                                                           ---------       ---------

                                                                                           $236,636        $179,003
                                                                                           ---------       ---------
                                                                                           ---------       ---------

</TABLE>

                                       80
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - CONTINUED

                               Statement of Income

<TABLE>
<CAPTION>


                                                                                        Six months
                                                                        Year ended         ended        Year ended
                                                                       December 31,     December 31,      June 30,
                                                                           1997             1996            1996
                                                                       ------------     ------------    ----------

<S>                                                                    <C>              <C>             <C>
    Income
       Equity in undistributed earnings of subsidiary                    $41,771           $    53         $45,648
       Dividends from subsidiary                                          47,369            25,000           3,181
       Interest income                                                     5,817                --              --
                                                                       ---------        ----------      ----------

                  Total income                                            94,957            25,053          48,829

    Interest expense
       Federal Home Loan Bank advances and other
          borrowings                                                          36                66             162
       Senior notes                                                        7,986             3,962           6,903
                                                                       ---------        ----------      ----------

                  Total interest expense                                   8,022             4,028           7,065

    Noninterest expense
       Salary and employee benefits                                           --                15               2
       Other operating expenses                                              285               436             116
                                                                       ---------        ----------      ----------

                  Total noninterest expense                                  285               451             118
                                                                       ---------        ----------      ----------

                  Income before taxes                                     86,650            20,574          41,646

    Income tax expense (benefit)                                              16            (1,480)         (2,514)
                                                                       ---------        ----------      ----------

                  Net income                                             $86,634           $22,054         $44,160
                                                                       ---------        ----------      ----------
                                                                       ---------        ----------      ----------

</TABLE>

                                       81
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                 (In thousands)


NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - CONTINUED

                             Statement of Cash Flows

<TABLE>
<CAPTION>


                                                                                        Six months
                                                                        Year ended         ended        Year ended
                                                                       December 31,     December 31,      June 30,
                                                                           1997             1996            1996
                                                                       ------------     ------------    ----------
<S>                                                                    <C>              <C>             <C>
    Operating activities
       Net income                                                       $ 86,634          $22,054         $ 44,160
       Adjustments to reconcile net income to net cash used
          in operating activities
          Equity in undistributed earnings of subsidiary                 (54,362)             (53)         (45,648)
          Accretion of purchase discount                                  (4,820)              --               --
          Changes in operating assets and liabilities
             Increase in other assets                                    (12,418)          (2,916)          (2,900)
             Increase in other liabilities                                15,388              744            2,635
                                                                       ---------        ---------         --------

                 Net cash provided by (used in) operating activities      30,422           19,829           (1,753)

    Investing activities
       Capital contributed to subsidiary                                     (10)              --          (46,252)
       Purchase of loans                                                      --          (18,500)              --
       Cash repayment of loans                                            12,670               --               --
                                                                       ---------        ---------         --------

                 Net cash provided by (used in) investing activities      12,660          (18,500)         (46,252)

    Financing activities
       Repayments of other borrowings                                     (1,774)            (125)            (600)
       Proceeds from issuance of senior notes                                 --               --           57,051
       Dividends paid                                                    (33,026)              --              (26)
                                                                       ---------        ---------         --------

                 Net cash provided by (used in) financing activities     (34,800)            (125)          56,425
                                                                       ---------        ---------         --------

                 Net increase in cash and cash equivalents                 8,282            1,204            8,420

    Cash and cash equivalents, beginning of year                           9,624            8,420               --
                                                                       ---------        ---------         --------

    Cash and cash equivalents, end of year                              $ 17,906          $ 9,624          $ 8,420
                                                                       ---------        ---------         --------
                                                                       ---------        ---------         --------

</TABLE>

                                       82
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                      (In thousands, except per share data)

NOTE O - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

<TABLE>
<CAPTION>


                                                                         For the year ended December 31, 1997
                                                                    ----------------------------------------------
                                                                       1st         2nd          3rd         4th
                                                                    --------     -------      -------      -------

<S>                                                                 <C>          <C>          <C>          <C>
    Interest income                                                 $ 54,945     $37,531      $34,261      $42,444
    Interest expense                                                  17,555      16,929       16,327       17,045
                                                                    --------     -------      -------      -------

          Net interest income                                         37,390      20,602       17,934       25,399

    (Provision) credit for losses                                       (933)        261       (1,764)        (974)
    Other income                                                       2,651       3,397        6,430        4,793
    Other expenses                                                    (4,602)     (5,625)      (6,490)      (5,427)
                                                                    --------     -------      -------      -------

          Income before income tax                                    34,506      18,635       16,110       23,791

    Income tax expense                                                 1,203         961          999        3,245
                                                                    --------     -------      -------      -------

          Net income                                                $ 33,303     $17,674      $15,111      $20,546
                                                                    --------     -------      -------      -------
                                                                    --------     -------      -------      -------

    Income per common share                                         $ 111.01     $ 58.91      $ 50.37      $ 68.49
                                                                    --------     -------      -------      -------
                                                                    --------     -------      -------      -------

</TABLE>

                                       83
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                      (In thousands, except per share data)

NOTE O - SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

<TABLE>
<CAPTION>


                                                                                                     For the six
                                                                                                     months ended
                                                                                                  December 31, 1996
                                                                                                --------------------
                                                                                                   1st         2nd
                                                                                                --------    --------
<S>                                                                                             <C>        <C>     
       Interest income                                                                          $46,743    $ 41,309
       Interest expense                                                                          16,718      17,223
                                                                                                --------    --------

                Net interest income                                                              30,025      24,086

       Provision for losses                                                                        (334)     (2,980)
       Other income                                                                               4,022       6,038
       Other expenses                                                                            (9,288)    (17,363)
                                                                                                --------    --------

                Income before income tax                                                         24,425       9,781

       Income tax expense                                                                         8,749       3,403
                                                                                                --------    --------

                Net income                                                                      $15,676     $ 6,378
                                                                                                --------    --------
                                                                                                --------    --------

       Income per common share                                                                   $52.25      $21.26
                                                                                                --------    --------
                                                                                                --------    --------

</TABLE>

                                       84
<PAGE>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                      (In thousands, except per share data)

NOTE O - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - CONTINUED

<TABLE>
<CAPTION>


                                                                            For the year ended June 30, 1996
                                                                    -----------------------------------------------
                                                                       1st          2nd          3rd           4th
                                                                    -------      -------      -------       --------
<S>                                                                 <C>          <C>          <C>           <C>
       Interest income                                              $21,807      $29,854      $45,448       $43,839
       Interest expense                                               9,629       13,422       17,014        16,753
                                                                    -------      -------      -------       --------

                Net interest income                                  12,178       16,432       28,434        27,086

       Provision for losses                                          (1,366)      (4,569)        (927)       (2,182)
       Other income                                                   3,018        4,233        2,819         6,613
       Other expenses                                                (5,089)      (5,430)      (4,632)       (7,305)
                                                                    -------      -------      -------       --------

                Income before income tax                              8,741       10,666       25,694        24,212

       Income tax expense                                             3,100        3,925        9,205         8,923
                                                                    -------      -------      -------       --------

                Net income                                          $ 5,641      $ 6,741      $16,489       $15,289
                                                                    -------      -------      -------       --------
                                                                    -------      -------      -------       --------

       Income per common share                                      $ 18.80      $ 22.47      $ 54.96       $ 50.97
                                                                    -------      -------      -------       --------
                                                                    -------      -------      -------       --------

</TABLE>

NOTE P - 401 (K) PLAN

    The Corporation offers a 401(k) plan to all full time employees who have 
    reached the age of 21 and completed three months of service. The Company 
    matches 50% of the employees' contribution up to 6% of base salary. For 
    the year ended December 31, 1997, the Corporation made matching 
    contributions of $107.

                                       85
<PAGE>

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

        None.

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS

Directors of Beal Financial

        The Board of Directors of Beal Financial currently consists of four 
members including D. Andrew Beal, Timothy M. Fults, Bernard L. Weinstein and 
David C. Meek. Each member of Beal Financial's Board of Directors is also a 
director of the Bank. See "Board of Directors of the Bank." Directors Beal 
and Fults have served as such since Beal Financial's incorporation in 
September 1993, Director Weinstein has served since June 1995, and Director 
Meek was appointed in February 1996. The directors of Beal Financial are 
elected at each annual meeting of stockholders for terms of one year.

Executive Officers of the Company

        The executive officers of Beal Financial, who are currently directors 
or executive officers of Beal Bank, are identified below. The executive 
officers of Beal Financial are elected annually by Beal Financial's Board of 
Directors. The executive officers of Beal Financial do not receive any 
remuneration in their capacity as Beal Financial executive officers. 

<TABLE>
<CAPTION>

        Name                                     Position with Company
----------------------                       ----------------------------
<S>                                          <C>

D. Andrew Beal                               Chairman of the Board

David C. Meek                                President

David R. Farmer                              Senior Vice President and Treasurer

Timothy M. Fults                             Secretary

Margaret M. Curl                             Vice President/Assistant Secretary

James W. Lewis, Jr.                          Vice President/Assistant Treasurer

</TABLE>

                                       86
<PAGE>

Board of Directors of the Bank

        The Board of Directors of Beal Bank is presently composed of nine 
members. The following table sets forth certain information with respect to 
the current directors of the Bank. Under the Bank's Bylaws, directors are 
elected annually by stockholders for terms of one year. Except as described 
herein, there are no arrangements or understandings between the persons named 
and any other person pursuant to which such director was selected.

<TABLE>
<CAPTION>

                                                                                                          Term of
                                                                                              Director     Office
     Name                     Age(1)                         Position(s) Held                  Since      Expires
--------------               -------    -------------------------------------------------     ------      --------
<S>                          <C>        <C>                                                   <C>         <C> 

D. Andrew Beal                 45       Chairman of the Board                                   1985        1998
David C. Meek                  53       President, Chief Executive Officer and Director         1996        1998
David R. Farmer                49       Executive Vice President, Chief Operating Officer       1993        1998
                                          and Director
Timothy M. Fults               44       Director and Secretary                                  1985        1998
Bernard L. Weinstein           55       Director                                                1991        1998
Susan D. Arnold                55       Director                                                1992        1998
Lawrence C. Blanton            61       Director                                                1992        1998
R. Michael Eastland            52       Director                                                1992        1998
David L. Goldstein, CPA        39       Director                                                1993        1998

</TABLE>

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

(1)  At December 31, 1997.

        The business experience of each director is set forth below. All 
directors have held their present positions for at least the past five years, 
except as otherwise indicated.

        D. Andrew Beal. Mr. Beal is Chairman of the Board of the Company, a 
position he has held since June 1995. Mr. Beal has been Chairman of the Board 
of the Bank since its formation in 1985. He is the owner of approximately 99% 
of the Company's outstanding common stock. Mr. Beal has been involved in 
buying and operating apartment complexes since the mid 1970s. Mr. Beal is a 
member of various real estate groups located in the Dallas area and a member 
and supporter of various civic organizations.

         David C. Meek. Mr. Meek is President and Chief Executive Officer of 
the Company and the Bank. Mr. Meek joined the Bank as President in January 
1996. Immediately prior to joining the Bank, Mr. Meek was a self-employed 
investor and consultant. From February 1991 until January 1995, Mr. Meek was 
President/Chief Executive Officer/Chief Operating Officer of Coventry 
Properties, Inc., and Partnership Services, Inc., real estate management 
corporations located in Dallas, Texas.

        David R. Farmer. Mr. Farmer is a Senior Vice President and Treasurer 
of the Company and Executive Vice President- Chief Operating Officer of the 
Bank. Mr. Farmer joined the Bank as Chief Financial Officer and was elected 
as a Director of the Bank in February 1993. Mr. Farmer also currently holds 
various other management positions with the Bank's subsidiaries. Prior to 
joining the Bank in February 1993, Mr. Farmer was a self-employed consultant 
from June 1990 to February 1993 and Senior Vice President and Chief Operating 
Officer of Murray Federal Savings and Loan Association in Dallas, Texas from 
June 1987 until June 1990.

         Timothy M. Fults. Mr. Fults is the Secretary of the Company and the 
Bank, positions he has held since September 1993 and June 1995, respectively. 
Mr. Fults is a self-employed trial attorney engaged in the practice of law in 
the Dallas, Texas area.

         Bernard L. Weinstein. Dr. Weinstein has been a Professor of Applied 
Economics at the University of North Texas in Denton, Texas since June 1989. 
Dr. Weinstein has also taught at Rensselaer Polytechnic Institute, the State 
University of New York, the University of Texas at Dallas and Southern 
Methodist University. Dr. Weinstein has authored or co-authored numerous 
books and articles on the subject of economic development, public policy and 

                                       87

<PAGE>

taxation. Dr. Weinstein currently serves as a director and consultant to 
various non-public companies, non-profit organizations and government 
agencies.

         Susan D. Arnold. Mrs. Arnold is the President of Coldwell 
Bankers/Paula Stringer Realtors located in Dallas, Texas, a position she has 
held since 1996. Mrs. Arnold was previously the President of Murray Realtors 
from 1980 to 1996, which was acquired by Coldwell Bankers/Paula Stringer 
Realtors in 1996. Mrs. Arnold is a former director of both the Greater Dallas 
Board of Realtors and the Texas Association of Realtors and the former 
President of the Greater Dallas Association of Realtors. Mrs. Arnold 
currently holds various positions with numerous community service 
organizations.

        Lawrence C. Blanton. Mr. Blanton is President of Crest Mortgage 
Corporation of Dallas, Texas since April, 1997. He previously was the 
Chairman and Chief Executive Officer of Providers Funding Corporation of 
Dallas, Texas from 1989 to 1996, a medical receivables financing company. Mr. 
Blanton has over 25 years of commercial lending experience.

        R. Michael Eastland. Mr. Eastland has been the Executive Director and 
Chief Executive Officer of the North Central Texas Council of Governments 
located in Arlington, Texas since December 1992. Prior thereto, Mr. Eastland 
was the City Manager for the City of Carrollton, Texas from June 1984 to 
December 1992. Mr. Eastland has over 25 years of service in municipal 
positions in various Texas localities. He has also served as President and a 
member of the board of the Texas City Management Association Board. Mr. 
Eastland is also a former President of the North Texas City Management 
Association.

        David L. Goldstein, CPA. Mr. Goldstein is a self employed information 
systems consultant. In addition, he served as an information systems 
consultant with Work Flow Design, Inc., an information systems consulting 
firm located in Dallas, Texas from April 1996 through July 1997. From 
November 1993 to August 1994, he was Vice President of Advanced Thought 
Systems, an information systems consulting firm located in Dallas, Texas, and 
a consultant with Compucom, a systems integration company located in Dallas, 
Texas, from March 1993 to November 1993. He was a consultant with Coopers & 
Lybrand, a national accounting and consulting firm, from July 1990 to March 
1993 and Corporate Controller of Singer Management Company, a family 
amusement company located in Carrollton, Texas, from February 1983 to July 
1990.

Executive Officers of the Bank

        The executive officers of the Bank are elected annually by the Board 
of Directors of the Bank. Except as described herein, there are no 
arrangements or understandings between the person named and any other person 
pursuant to which such officer was selected.

        The following information as to business experience during the past 
five years is supplied with respect to each executive officer of the Bank who 
does not serve on the Bank's Board of Directors.

        Margaret M. (Molly) Curl. Ms. Curl, age 43 has been the Senior Vice 
President of the Bank since February 1994. She is also the Bank's compliance 
and CRA officer, positions she has held since March 1994. Ms. Curl also holds 
various positions with the Bank's subsidiaries. Prior to joining the Bank in 
1994, Ms. Curl was employed by Grant Thornton LLP, a national accounting firm 
located in Dallas, Texas, as a Senior Associate from August 1993 to February 
1994 and a Senior Consulting Manager from October 1986 to August 1993. Ms. 
Curl was employed by the Office of the Comptroller of the Currency, the 
primary regulator of national banks, as Manager of the Licensing Division 
from 1983 to 1984, as a National Bank Examiner from 1980 to 1984 and as an 
Assistant National Bank Examiner from 1975 to 1980. Ms. Curl is also a 
certified public accountant.

        William T. Saurenmann. Mr. Saurenmann, age 49 is the Senior Vice 
President-Lending of the Bank. Prior to such time, he was a Vice President of 
the Bank from August 1991 to November 1994 and an independent consultant to 
the Bank from May 1991 through August 1991. Mr. Saurenmann is also a Vice 
President in virtually all of the Bank's subsidiaries. Prior to joining the 
Bank in 1991, he was Senior Vice President - Lending of San Jacinto Savings 

                                       88

<PAGE>

and Loan Association, Houston, Texas, from October 1990 to May 1991 and Vice 
President of Murray Federal Savings and Loan Association, Dallas, Texas, from 
April 1982 to October 1990.

        Stephen K. O'Neal. Mr. O'Neal, age 42, has been a Vice President of 
Loan Administration since joining the Bank in July 1996. From 1987 to 1995, 
Mr. O'Neal was employed in various positions with Metropolitan Federal Bank, 
f.s.b., an $8 billion financial institution headquartered in Minneapolis, 
Minnesota, including Vice President and Manager of Commercial Loan Servicing 
and Asset Management. Prior to that Mr. O'Neal was employed with Grant 
Thornton LLP, a national public accounting firm located in Dallas, Texas from 
1986 to 1987 as a Manager in the consulting department. Mr. O'Neal is also a 
certified public accountant.

         Clark E. Enright. Mr. Enright, age 45, joined the Bank in February 
1996 as the Vice President - Special Assets Department and was appointed 
Senior Vice President-Commercial Loans in October 1996. Prior to such time, 
Mr. Enright served as President and Chief Executive Officer of Kelly, Enright 
and Associates, Inc., a corporation involved in all levels of property 
administration as well as receivable management, investment and mortgage 
banking, venture capital and litigation support. He was Senior Vice 
President/Manager - Special Assets Division of San Jacinto Savings 
Association in Houston, Texas from 1988 to 1991.

         James W. Lewis, Jr. Mr. Lewis, age 54, has been a Vice President of 
Accounting/Operations and Treasurer of the Bank since February 1993. Mr. 
Lewis was appointed Senior Vice President-Controller in October 1996. He is 
also the Assistant Secretary and Treasurer of BMI, BPI and Assistant 
Secretary and Treasurer of various Bank subsidiaries. Prior to being 
appointed to his current positions, Mr. Lewis was an Executive Vice President 
of the Bank from December 1988 until February 1993. Mr. Lewis is also a 
certified public accountant.

        Richard L. Killmon. Mr. Killmon, age 62, joined the Bank as Vice 
President-Retail Operations in April 1995. Prior to such time, Mr. Killmon 
served as a self-employed management consultant with Richard L. Killmon & 
Associates located in Tyler, Texas since 1991. He was Vice President of First 
Pinnacle, Inc., a financial institution holding company located in Dallas, 
Texas, from 1989 to 1991. Mr. Killmon has had extensive operational 
experience with various consulting firms and several large commercial banks 
located primarily in Texas.

Meetings and Committees of the Board of Directors of the Company and the Bank

        Meetings and Committees of the Company. Meetings of the Company's 
Board of Directors are generally held on an as needed basis. For the year 
ended December 31, 1997, the Board of Directors met twelve times. During the 
year ended December 31, 1997, no incumbent director of the Company attended 
fewer than 90% of the aggregate of the total number of Board meetings and the 
total number of meetings held by the committees of the Board of Directors on 
which they served.

        The Board of Directors of the Company has a standing Audit Committee.

        The Company's Audit Committee recommends independent auditors to the 
full Board, reviews the results of the auditors' services, reviews with 
management and the internal auditor the systems of internal control and 
internal audit reports and assures that the books and records of the Company 
and the Bank are kept in accordance with applicable accounting principles and 
standards. The members of the Audit Committee are Directors Fults and 
Weinstein. During the year ended December 31, 1997, this committee met three 
times.

        The Bank has standing Executive, Executive Loan, Audit, Investment 
and Compensation Committees. Set forth below is a description of the Bank's 
primary committees.

        The Executive Committee is comprised of Directors Beal, Meek, Farmer 
and Weinstein. The Committee meets when necessary in lieu of the full board 
of directors. Certain matters that would come under the purview of the full 
board are addressed by the Executive Committee in lieu of a full board 
meeting. This committee did not meet during the year ended December 31, 1997.

                                       89

<PAGE>


        The Executive Loan Committee was formed in December 1994 and is
comprised of Directors Beal, Meek, Fults, Blanton, Weinstein and Goldstein with
directors Arnold, Farmer and Eastland as alternates. The Committee meets when
necessary and approves all loans or purchases in excess of $1.0 million. This
Committee met 33 times during the year ended December 31, 1997.

        The Audit Committee maintains a liaison with the Bank's independent
auditors and the Bank's internal auditor throughout the year and reviews the
adequacy of the Bank's internal controls. The Committee is composed of Directors
Eastland, Fults and Goldstein. This Committee met three times during the year
ended December 31, 1997.

        The Investment Committee meets monthly to review the Bank's current or
planned activities to ensure adequate liquidity, to maintain a high quality of
diversified investments, and to provide collateral for pledging requirements.
The Committee also acts as the Bank's asset/liability management committee and
reviews the Bank's interest rate risk position and profitability on a quarterly
basis and makes recommendations for adjustments in the Bank's asset liability
management strategy to the full board. The Committee is comprised of Directors
Beal, Meek, Farmer, Weinstein and Goldstein. This Committee met eight times
during the year ended December 31, 1997.

        The Compensation Committee is comprised of Directors Eastland, Arnold
and Weinstein. The Committee meets on an as needed basis to establish the
compensation of the Chief Executive Officer, approve the compensation of senior
officers and the compensation and benefits paid to employees of the Bank. This
Committee did not meet during the year ended December 31, 1997.

Compensation Committee Interlocks and Insider Participation

        During the year ended December 31, 1997, the Compensation Committee was
comprised of non-employee Directors Eastland, Arnold and Weinstein.

Compensation of Directors

        Cash Compensation. Mr. Beal receives a salary of $120,000 in his
capacity as Chairman of the Board of the Company and the Bank and does not
receive compensation as an officer in various Bank subsidiaries. Non-employee
directors of the Company were paid fees of $500 per meeting for attendance at
regular meetings of the Company's Board of Directors and $200 per committee
meeting attended. Non-employee directors of the Bank were paid fees of $1,500
per meeting for attendance at regular meetings of the Bank's Board of Directors.
Directors are also paid $200 for each committee meeting attended. In addition,
all non-employee directors of the Bank were paid a $10,000 bonus during the year
ended December 31, 1997.

                                       90

<PAGE>



ITEM 11.        EXECUTIVE COMPENSATION

Compensation of Executive Officers

        The following table sets forth the compensation paid or accrued by the
Company for services rendered by the Company's Chairman of the Board, Chief
Executive Officer and the other four most highly compensated executive officers
of the Company in 1997 (the "Named Officers").

                                       SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>


                                                                   Annual Compensation          
                                                                   -------------------         All Other
                                                                    Salary       Bonus        Compensation
        Name and Principal Position               Year               ($)          ($)            ($)(1)
        ---------------------------               ----              ------      ------       --------------
<S>                                               <C>              <C>          <C>              <C>  
D. Andrew Beal, Chairman of the                   1997             $120,000    $   ---          $ N/A
Board(2)                                          1996              120,000     10,500,000        N/A
                                                  1995              120,000        ---            N/A


David C. Meek, President and                      1997              200,000     150,000          6,000
  Chief Executive Officer(2)                      1996              200,000     638,390          4,894
                                                  1995               N/A         N/A              N/A


David R. Farmer, Executive Vice                   1997              135,000      125,000         3,881
  President and Chief                             1996              147,980      125,000         3,747
  Operating Officer                               1995              149,555      102,500         3,615


William T. Saurenmann, Senior Vice                1997              100,000       90,000         3,000
  President-Lending                               1996              103,845      105,000         2,622
                                                  1995               91,666      102,500         2,724


Clark Enright, Senior Vice President/             1997               98,623      185,000         1,538
 Commercial Loans(3)                              1996               77,916       82,500         1,250
                                                  1995                 N/A          N/A           N/A

</TABLE>

(1)      Includes the Company's contribution to the 401(k) Plan and life
         insurance premiums paid.

(2)      Mr. Meek served as a Bank consultant starting in September 1995 until
         his appointment as President and Chief Executive Officer in January
         1996.

(3)      Mr. Enright joined the Bank in February 1996.

Executive Bonus Plan

        In February, 1998, Mr. Meek and the Company entered into an executive
bonus plan (the "Plan"). The Plan provides that Mr. Meek shall be entitled to
bonus compensation equal to ten percent of the earnings (as described below) in
excess of prime plus 150 basis points attributable to a designated pool of
loans. The earnings, losses and related expenses from each loan (including
profit, losses and expenses resulting from the sale of the underlying collateral
if foreclosed upon) shall be aggregated in determining the amount of the bonus.
Bonus calculations shall be determined in the sole discretion and judgment of
the board of directors. Mr. Meek shall be entitled to bonus compensation for the
life of the loan pool regardless of whether or not he remains employed by the
Company or its subsidiaries.

        The initial loan pool is comprised of certain loans originated by the
Company and its subsidiaries after January 1, 1997, aggregating approximately
$62.2 million. New loan originations shall become a part of the loan pool when
specifically identified in writing by both Mr. Meek and Mr. Beal and ratified by
the board of directors. Loans shall be removed from the loan pool once a loan is
paid in full (including any profit participation interest), an amount less than
full payment is accepted as payment in full, or the underlying collateral
obtained through the foreclosure or deed in lieu of foreclosure is sold.

                                       91

<PAGE>



        Earnings subject to the bonus calculation are intended to include all
income and expenses attributable to the loan pool assets including interest
income, profit participation payments, release fees, loan origination or renewal
fees and income or losses created from former loans or assets in the loan pool,
all charge-offs, write downs and specific loan loss provisions, expenses of
collection, attorneys fees, as well as any other income or expenses attributable
to the loan pool as determined by the board of directors (except that cost of
funds (i.e., interest paid to depositors) and normal non-default servicing costs
shall not be included as expenses). Expenses incurred during Mr. Meek's
employment which are directly attributable to loans held in the pool shall be
deducted from earnings.

        Bonuses shall be calculated as of October 1 of each year and paid on
December 1 of each year. Twenty-five percent of the bonus amount shall be
retained as a reserve and seventy-five percent shall be paid to Mr. Meek. All
remaining reserves shall be paid to Mr. Meek when no assets remain in the loan
pool. No bonus shall be paid that would result in a failure to maintain the 25%
reserve amount, and prior bonus payments shall be refunded by Mr. Meek to the
extent the reserve is below 25% as calculated at the time of any bonus
calculation.

        Upon final resolution of all assets in the pool, in the event that Mr.
Meek has been overpaid in total bonus payments, Mr. Meek has agreed to
immediately repay any overpayments to the Company.

        Under certain circumstances, including the failure by the Company to
make timely payments to holders of the Senior Notes, payment of any bonus due
shall be deferred. In this event, the Company shall owe Mr. Meek interest on the
delinquent payment(s) at a rate of prime plus 150 basis points, compounded
monthly, until such payments and applicable interest is paid in full.

        The maximum bonus amount to be paid pursuant to the Plan shall not
exceed $3.0 million.

Benefits

        General. The Bank currently maintains an employee benefit program
providing, among other benefits, major medical insurance, dental benefits,
disability insurance and life insurance. The Bank also maintains a 401(k) plan
for the benefit of its employees.

        401(k) Plan. The Bank maintains the Beal Bank 401(k) Plan, designed to
be qualified under Section 401(k) of the Code (the "401(k) Plan"). The 401(k)
Plan covers all full-time salaried employees of the Bank. Any employee of the
Bank or its subsidiaries over the age of 21 is eligible to participate in the
401(k) Plan following the completion of three months of service to the Bank or
any of its subsidiaries. Under the 401(k) Plan, a participant may elect to defer
up to a maximum of $9,500 of his salary for calendar 1997 to the 401(k) Plan.
The Bank makes discretionary matching and profit-sharing contributions to the
401(k) Plan, up to a maximum of 25% of the participant's compensation for the
plan year. "Compensation" for purposes of the 401(k) Plan generally includes a
participant's base compensation, including amounts contributed to the 401(k)
Plan by the employer. A Participant is always 100% vested in his or her salary
deferral contributions and the earnings thereon. A Participant becomes vested in
Bank contributions to the 401(k) Plan at the rate of 25% per year commencing
with the completion of two years of service.

        Participants can allocate their salary deferral contributions and the
Bank's contributions to the 401(k) Plan, if any, among one or more of the six
investment options available under the 401(k) Plan. These investment options
include two fixed interest funds, a bond fund, a bond and stock fund and two
growth stock funds.

        The 401(k) Plan provides for in-service hardship distributions of a
participant's salary deferral contributions. Distributions from the 401(k) Plan
are made upon termination of service in the form of a lump sum. The Bank's
contributions to the 401(k) Plan on behalf of the Named Officers are included in
the Summary Compensation Table.

                                       92

<PAGE>



ITEM 12.        STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

        The following table sets forth information as of December 31, 1997
regarding the share ownership of those persons or entities known by management
to beneficially own the Company's Common Stock. Except as set forth below, no
other director or executive officer owns any shares of the Company's Common
Stock.

<TABLE>
<CAPTION>

                                                                      Shares
                                                                   Beneficially      Percent
         Name and Address of Beneficial Owner                         Owned          of Class
----------------------------------------------------               ------------      --------
<S>                                                                 <C>              <C>  
D. Andrew Beal, Chairman of the Board of the Company                  297,000          99.0%
 and the Bank
Suite 902, 15770 N. Dallas Parkway
Dallas, TX  75248

Timothy M. Fults, Director and Secretary of the Company
 and Director and Secretary of the Bank                                 3,000           1.0%
5956 Sherry Lane #800
Dallas, TX  75225

</TABLE>

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain Transactions

        The Bank has a policy of granting loans to eligible directors, officers,
employees and members of their immediate families for the financing of their
personal residence and for consumer purposes. Loans to such individuals for
commercial purposes are limited to the lesser of $100,000, or 15% of the Bank's
net worth. All such loans to directors, officers, employees and their immediate
families are made in the ordinary course of business and on the same terms,
including collateral and interest rates, as those prevailing at the time for
comparable transactions with unaffiliated parties and do not involve more than
normal risk of collectibility. All transactions with related parties are also
approved by at least a majority of the disinterested members of the Board of
Directors.

        All loans by the Bank to its directors and executive officers are
subject to federal regulations restricting loan and other transactions with
affiliated persons of the Bank. Federal regulations currently require that all
loans to directors and executive officers be made on terms and conditions
comparable to those for similar transactions with non-affiliates. At December
31, 1997, there were no loans outstanding to any director, executive officer,
member of their immediate families or business interest of such individuals,
except for one loan to a member of Mr. Beal's family. This loan was made on
terms and conditions comparable to those for similar transactions with
non-affiliates.

        From time to time Mr. Beal has made loans to the Bank and its
subsidiaries. He has also provided his personal guarantee on loans made to the
Bank or its subsidiaries by unaffiliated lenders. All of these transactions were
on the same terms as those prevailing at the time for comparable transactions
with unaffiliated parties except that the loans made by Mr. Beal to the Bank's
subsidiaries were interest-free. The amount of interest if a market rate were to
have been used, would not be material to the financial condition or results of
operations of the Bank.

        Mr. Beal currently rents office space from the Bank, for which he pays
$500 per month. In addition, a company affiliated with Mr. Beal currently rents
space from the Company at the rate of $7,458 per month. The Board of Directors
believes that the rental rate charged is equivalent to the rental rate which
would be charged to an unaffiliated party for each leased space.

        In connection with the Company's indirect acquisition of the Bank's
outstanding capital stock, the Company assumed the obligation to repay a $2.5
million debt obligation of D. Andrew Beal. The proceeds from this borrowing were
used for the initial capitalization of the Bank. This obligation is secured in
full by a certificate of deposit owned by D. Andrew Beal. The debt had a balance
of $1.8 million at January 1, 1997 and was repaid in full in April, 1997.

                                       93

<PAGE>



ITEM 14.        EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
                FORM 8-K

        (a)(1)  Financial Statements:

        The following information appearing in Part I, Item 8 of this Form 10-K
           is incorporated herein by reference.

        Independent Auditor's Report

        Consolidated Statements of Financial Condition at December 31, 1997 and 
           1996 and at June 30, 1996 and 1995

        Consolidated Statements of Income for the Year Ended December 31, 1997,
           the Six Months Ended December 31, 1996 and the Years Ended June 30,
           1996 and 1995

        Consolidated Statements of Changes in Stockholders' Equity for the Year
           Ended December 31, 1997, the Six Months Ended December 31, 1996 and
           the Years Ended June 30, 1996 and 1995

        Consolidated Statements of Cash Flows for the Year Ended December 31,
           1997, the Six Months Ended December 31, 1996 and the Years Ended June
           30, 1996 and 1995

        Notes to Consolidated Financial Statements


        (a)(2)   Financial Statement Schedules:

        All financial statement schedules have been omitted as the information
is not required.

                                       94

<PAGE>



        (a)(3)  Exhibits:

<TABLE>
<CAPTION>


                                                                                       Reference
                                                                                           to
                                                                                          Prior
                                                                                         Filing
Regulation                                                                             or Exhibit
   S-K                                                                                   Number
 Exhibit                                                                                Attached
 Number                                     Document                                     Hereto
-----------       --------------------------------------------------------------       ------------

<S>                  <C>                                                                  <C>
      2              Plan of Acquisition, Reorganization, Arrangement,                    None
                       Liquidation or Succession
      3.1            Certificate of Incorporation                                             *
      3.2            Bylaws                                                                   *
      4.1            Form of Indenture dated as of August 11, 1995, with                      *
                       respect to the Registrant's 12-3/4% Senior Notes, due
                       August 15, 2000.

      4.2            Specimen Senior Note (found at Sections 2.02 and 2.03 of                 *
                       the Form of Indenture filed as Exhibit 4.1)
      9              Voting Trust Agreement                                               None
     10              Material contracts:
                     (a)  Employment Agreement with Margaret Curl                             *
                     (b)  Executive Bonus Plan with David C. Meek                             **
     11              Statement re:  computation of per share earnings                     Not required
     12              Statement re:  computation of ratios                                 Not required
     13              Annual Report to Security Holders                                    Not required
     16              Letter re:  change in certifying accountants                         Not required
     18              Letter re:  change in accounting principles                          None
     21              Subsidiaries of Registrant                                               **
     22              Published report regarding matters submitted to vote of              None
                       security holders
     23              Consents of Experts and Counsel                                      None
     24              Power of Attorney                                                    Not required
     27              Financial Data Schedule                                                  **
     99              Additional Exhibits                                                  Not applicable

</TABLE>

*               Filed as exhibits to the Company's Registration Statement on
                Form S-1 under the Securities Act of 1993, filed with the
                Securities and Exchange Commission on June 7, 1995 (Registration
                No. 33-93212). All of such previously filed documents are hereby
                incorporated herein by reference in accordance with Item 601 of
                Regulation S-K.

**              Exhibit filed herewith.

                (b)  Reports on Form 8-K

                No reports on Form 8-K were filed during the quarter ended 
                December 31, 1997.

                                       95

<PAGE>


                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>

 Exhibit
 Number                                                             Document
---------           ---------------------------------------------------------------------------------------

<S>                 <C>
      3.1           Certificate of Incorporation*

      3.2           Bylaws*

      4.1           Form of Indenture dated as of August 11, 1995, with respect to the Registrant's 12-3/4%
                      Senior Notes, due August 15, 2000*

      4.2           Specimen Senior Note (found at Sections 2.02 and 2.03 of the Form of Indenture filed as
                      Exhibit 4.1)*

     10             Material contracts:
                    (a)  Employment Agreement with Margaret Curl*
                    (b)  Executive Bonus Plan with David C. Meek**

     21             Subsidiaries of Registrant**

     27             Financial Data Schedule**

</TABLE>

*               Filed as exhibits to the Company's Registration Statement on
                Form S-1 under the Securities Act of 1993, filed with the
                Securities and Exchange Commission on June 7, 1995 (Registration
                No. 33-93212). All of such previously filed documents are hereby
                incorporated herein by reference in accordance with Item 601 of
                Regulation S-K.

**              Exhibit filed herewith.

                                       96