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, 1998

                                          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                (IRS Employer Identification No.)
incorporation or organization)


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, 1998.

      As of December 31, 1998, there were issued and outstanding  300,000 shares
of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

      None.




<PAGE>



                               TABLE OF CONTENTS


ITEM 1.     BUSINESS.........................................................1
      General................................................................1
      Forward-Looking Statements.............................................2
      Lending Activities.....................................................2
            GENERAL..........................................................2
            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 LOANS............................................13
            ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING................14
            MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING.................14
            CONSTRUCTION, DEVELOPMENT AND LAND LENDING......................15
            CONSUMER LENDING................................................16
            COMMERCIAL BUSINESS LENDING.....................................17
            FOREIGN LENDING ACTIVITIES......................................17
      Loan Delinquencies and Non-Performing Assets..........................17
            OTHER LOANS OF CONCERN..........................................20
            CLASSIFIED ASSETS...............................................20
            ALLOWANCE FOR LOAN LOSSES.......................................20
      Investment Activities.................................................23
            GENERAL.........................................................23
      Sources of Funds......................................................24
            GENERAL.........................................................24
            DEPOSITS........................................................24
            BORROWINGS......................................................26
      Subsidiaries of the Company...........................................27
      Subsidiaries of the Bank..............................................28
            BEAL MORTGAGE, INC. ("BMI"), BEAL PROPERTIES, INC. ("BPI")
               AND BEAL/H.S., INC ("BHS")...................................28
            LOAN ACCEPTANCE CORP. ("LAC")...................................29
            BRE, INC. ("BRE")...............................................29
            BEAL AFFORDABLE HOUSING, INC. ("BAH")...........................29
            FOREIGN LENDING CORPORATION ("FLC").............................30
      Competition...........................................................30
      Employees.............................................................30
      Regulation............................................................31
            GENERAL.........................................................31
            TEXAS LAW AND SUPERVISION BY THE TEXAS DEPARTMENT...............31
            FEDERAL REGULATION OF STATE-CHARTERED SAVINGS BANKS.............32
            INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC................33
            REGULATORY CAPITAL REQUIREMENTS AND PROMPT CORRECTIVE
               REGULATORY ACTION............................................34
            LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS........36
            LIQUIDITY.......................................................36
            QUALIFIED THRIFT LENDER TEST....................................36
            COMMUNITY REINVESTMENT ACT......................................36
            TRANSACTIONS WITH AFFILIATES....................................37
            HOLDING COMPANY REGULATION......................................37
            FEDERAL SECURITIES LAW..........................................37
            FEDERAL RESERVE SYSTEM..........................................37
            FEDERAL HOME LOAN BANK SYSTEM...................................37
      Federal and State Taxation............................................38
            FEDERAL TAXATION................................................38
            TEXAS STATE INCOME TAXATION.....................................39
            DELAWARE TAXATION...............................................39

ITEM 2.     PROPERTIES......................................................39

ITEM 3.     LEGAL PROCEEDINGS...............................................39

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............40

                                      i

<PAGE>




ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS.............................................40

ITEM 6.     SELECTED FINANCIAL DATA.........................................41

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS.......................................43
      General...............................................................43
      Financial Condition...................................................43
      Results of Operations.................................................44
            GENERAL.........................................................44
      Comparison of Operating Results for the Fiscal Years Ended
            December 31, 1998 and December 31, 1997.........................47
            NET INCOME......................................................47
            NET INTEREST INCOME.............................................47
            INTEREST INCOME.................................................47
            INTEREST EXPENSE................................................47
            PROVISION FOR LOAN LOSSES.......................................47
            NON-INTEREST INCOME.............................................47
            NON-INTEREST EXPENSE............................................47
            INCOME TAXES....................................................47
      Comparison of Operating Results for the Fiscal Year Ended
            December 31, 1997 and Twelve Months Ended December 31, 1996.....48
            NET INCOME......................................................48
            NET INTEREST INCOME.............................................48
            INTEREST INCOME.................................................48
            INTEREST EXPENSE................................................48
            PROVISION FOR LOAN LOSSES.......................................48
            NON-INTEREST INCOME.............................................48
            NON-INTEREST EXPENSE............................................49
            INCOME TAXES....................................................49
      Liquidity and Capital Resources.......................................49
      Impact of Inflation and Changing Prices...............................50
      Ratios of Earnings to Fixed Charges...................................50

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......51

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION..............54

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
      Compensation of Directors.............................................90

ITEM 11.    EXECUTIVE COMPENSATION..........................................90
      Compensation of Executive Officers....................................90
      Executive Bonus Plan..................................................91
      Benefits..............................................................91

ITEM 12.    STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................92

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................92
      Certain Transactions..................................................92

ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
            FORM 8-K........................................................93

                                      ii

<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 Beal  Financial.  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,  1998,  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 1985 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.  As a result there has been a steady decline in
discounted loan purchases and recent  purchases,  particularly  loans secured by
single-family  residences,  have been at approximately their aggregate principal
balance  at  the  time  of  purchase.  See  "-  Loan  Acquisition,   Resolution,
Origination and Sale Activities."

      The Company originates 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,  Harris,  Liberty,  Montgomery  and  Waller  counties,  Texas.  These
counties consist of communities  comprising the Dallas and Houston  metropolitan
statistical areas, respectively.


                                      1

<PAGE>



      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, 1998, the Company's
real estate held for development totaled $53.8 million. BMI and BPI also held in
the aggregate $10.1 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,  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 $24.9
million in three affordable  housing  apartment  buildings at December 31, 1998.
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. See "Sources of Funds - Deposits."

      At December 31, 1998,  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
12.8%, 17.3% and 18.6%, 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.

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.  Beginning in 1998, as a result of
the Company being unable to identify and purchase  discounted  loans meeting the
Company's  investment  objectives,  the Company  began  purchasing a significant

                                      2

<PAGE>



amount of predominately performing  single-family  residential mortgage loans at
approximately their aggregate principal balance at the time of purchase.

      At December  31, 1998 the  Company's  gross loan  portfolio  totaled  $1.3
billion.  The Company's  unaccreted  purchase discounts and fees at December 31,
1998 totaled $193.5 million.  The Company's gross loan portfolio at December 31,
1998 was comprised primarily of one- to four-family  residential  mortgage loans
(38.9%),  commercial real estate loans (18.7%) and multi-family residential real
estate loans  (21.5%).  The balance of the gross loan  portfolio  included  land
loans (6.9%),  construction and development loans (4.4%),  consumer loans (6.8%)
and  commercial  business  loans (2.8%).  At December 31, 1998 the Company's net
loan  portfolio  totaled  $1.0  billion.  The  Company's  net loan  portfolio at
December 31, 1998 was  comprised  primarily of one- to  four-family  residential
mortgage loans (43.7%),  commercial  real estate loans (18.1%) and  multi-family
residential  real estate loans  (17.6%).  The balance of the net loan  portfolio
included land loans (6.7%),  construction and development loans (4.4%), consumer
loans (6.8%) and commercial business loans (2.7%).

      At December  31, 1998,  approximately  16.7% 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,  Florida and
Massachusetts,  representing  19.1%,  12.6% and 5.3% of the Company's gross loan
portfolio,  respectively. At December 31, 1998, 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,  1998,  the Bank's loans to-one  borrower
limit was $24.8 million. At that date, the largest amount outstanding to any one
borrower or group of affiliated  borrowers  consisted of six loans,  aggregating
$25.6  million,  net,  secured  by a first  lien on 727 acres  located in Denton
County,  Texas, a pledge of a 49%  partnership  interest in a partnership  which
owns  an  additional  1,490  acres  in  Collin  County,  Texas  and  a  $750,000
certificate of deposit.  These loans were in compliance  with the Bank's loan to
one borrower limitation at the time of origination.  See "Loan Delinquencies and
Non-Performing  Assets -- Other  Loans of  Concern."  The  Bank's  next  largest
relationship totaled $19.7 million, net and consisted of seven letters of credit
aggregating  $17.6  million,  net,  which,  if drawn against shall be secured by
first liens on nine office buildings  located in Houston,  Texas and the balance
of $2.1 million, secured by first liens on two small office buildings located in
Houston,  Texas.  See  "Multi-family  and  Commercial  Real Estate  Lending" and
"Regulation - Texas Law and Supervision by the Texas Department".

      The  Company  has three  other  loans to any  borrower or group of related
borrowers in excess of $15.0 million,  net  (aggregating  $47.5  million,  net),
three other lending  relationships in excess of $10.0 million,  net (aggregating
$33.5 million),  an additional two such lending  relationships in excess of $7.5
million, net (aggregating $16.0 million),  five additional lending relationships
in excess of $5.0 million,  net (aggregating $33.7 million) and an additional 43
such lending  relationships in excess of $2.0 million,  net (aggregating  $130.0
million).  At December 31, 1998, 14 of these lending  relationships in excess of
$2.0 million,  net, aggregating $68.6 million were  non-performing.  See "- Loan
Delinquencies and Non-Performing Assets."


                                      3

<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,                                   December 31,
                                     ------------------------------------   -----------------------------------------------------
                                            1995               1996               1996              1997              1998
                                     -----------------   ----------------   ---------------- ----------------- ------------------
                                      Amount   Percent    Amount  Percent    Amount  Percent   Amount  Percent   Amount   Percent
                                     --------  -------   -------  -------   -------  ------- --------- ------- ---------  -------
<S>                                  <C>       <C>    <C>         <C>    <C>         <C>    <C>         <C>    <C>         <C>
                                                                        (Dollars in Thousands)
REAL ESTATE LOANS:
 One- to four-family ............... $237,585  35.70% $  273,780  22.47% $  276,591  19.37% $  213,584  18.60% $  490,717  38.93%
 Commercial ........................  109,080  16.39     321,385  26.38     388,460  27.20     337,825  29.42     236,252  18.74
 Multi-family ......................  124,985  18.78     341,696  28.05     466,697  32.68     321,423  27.99     270,337  21.45
 Construction or development .......   51,284   7.71      85,133   6.99      74,437   5.21      98,503   8.58      55,040   4.37
 Land ..............................   35,997   5.41     100,047   8.21      95,684   6.70      71,379   6.21      87,068   6.91
                                     -------- ------  ---------- ------  ---------- ------  ---------- ------  ---------- ------
     Total real estate loans .......  558,931  83.99   1,122,041  92.10   1,301,869  91.16   1,042,714  90.80%  1,139,414  90.40

OTHER LOANS:
 Consumer Loans:
  One- to four-family - junior liens   44,999   6.77      50,146   4.12      77,528   5.43      71,465   6.22      47,992   3.81
  Timeshares .......................   11,668   1.75       7,809    .64       6,446    .45       3,615    .31       2,432    .19
  Automobile........................       95    .01          59     --          19     --           1     --      31,878   2.53
  Other ............................    4,696    .71       8,314    .69       7,076    .50       5,002    .44       3,121    .25
                                     -------- ------  ---------- ------  ---------- ------  ---------- ------  ---------- ------
     Total consumer loans ..........   61,458   9.24      66,328   5.45      91,069   6.38      80,083   6.97      85,423   6.78
 Commercial business loans .........   45,060   6.77      29,886   2.45      35,131   2.46      25,554   2.23      35,537   2.82
                                     -------- ------  ---------- ------  ---------- ------  ---------- ------  ---------- ------
     Total loans ...................  665,449 100.00%  1,218,255 100.00%  1,428,069 100.00%  1,148,351 100.00%  1,260,374 100.00%
                                              ======             ======             ======             ======             ======
LESS:
 Loans in process .................    21,217            27,172              16,364            16,806               7,493
 Deferred fees and discounts ......   144,927           281,837             344,312           231,800             193,468
 Allowance for loan losses ........     6,137            11,832              13,189            11,912              13,867
 Loans held for sale ..............       866                --                  --                --                  --
                                     --------        ----------          ----------        ----------          ----------
      Total loans receivable, net..  $492,302        $  897,414          $1,054,204        $  887,833          $1,045,546
                                     ========        ==========          ==========        ==========          ==========
</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,
1998.

<TABLE>
<CAPTION>

                                                                      AT DECEMBER 31, 1998
                                        ----------------------------------------------------------------------
                                                                                                    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
                                         ---------- ---------  ----------- ---------- -----------  ----------
<S>                                      <C>         <C>        <C>         <C>        <C>            <C>
                                                                (Dollars In Thousands)
REAL ESTATE LOANS:
  One- to four-family - first liens...   $ 490,717   $    --    $  28,373   $  5,136   $  457,208     5.78%
  Commercial .........................     236,252        --       45,846      1,481      188,925    19.41
  Multi-family .......................     270,337        --       84,679      1,055      184,603    31.32
  Construction or development ........      55,040     7,493        1,086          9       46,452     1.97
  Land ...............................      87,068        --       16,430        820       69,818    18.87
                                        ----------   -------    ---------    -------    ---------
       Total real estate loans .......   1,139,414     7,493      176,414      8,501      947,006    15.48

OTHER LOANS:
Consumer Loans:
  One- to four-family - junior liens..      47,992       --        3,989       2,312       41,691     8.31
  Timeshares .........................       2,432       --          350         839        1,243    14.39
  Automobile..........................      31,878       --        5,188         773       25,917    16.27
  Other ..............................       3,121       --          584         720        1,817    18.71
                                        ----------   ------    ---------    --------    ---------
  Total consumer loans ...............      85,423       --       10,111       4,644       70,668    11.84
Commercial business loans ............      35,537       --        6,943         722       27,872    19.54
                                        ----------   ------    ---------    --------    ---------
      Total other loans ..............     120,960       --       17,054       5,366       98,540    14.10
                                        ----------   ------    ---------    --------   ----------
 Total loans .........................   1,260,374    7,493      193,468      13,867    1,045,546    15.35

Less:
   Loans in process ..................       7,493    7,493           --          --           --
   Deferred fees and discounts .......     193,468       --      193,468          --           --
   Allowance for losses ..............      13,867       --           --      13,867           --
                                        ----------   ------    ---------    --------   ----------
      Total loans receivable, net ....  $1,045,546   $   --    $      --    $     --   $1,045,546
                                        ==========   ======    =========    ========   ==========

</TABLE>



                                         5

<PAGE>



      Contractual Principal  Repayments.  The following schedule illustrates the
contractual maturity of the Company's loan portfolio at December 31, 1998. 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-                              or                        Commercial
                                     Family    Multi-family  Commercial Development  Land    Consumer   Business     Total
                                  -----------  ------------  ---------- ----------- -------  --------  ---------  ----------
<S>                                <C>         <C>         <C>          <C>        <C>       <C>       <C>        <C>
                                                                     (Dollars in Thousands)
        Due During
      Periods Ending
       December 31,
-------------------------------
1999 ..........................    $  6,592    $ 25,860    $ 38,923     $25,673    $ 9,832   $ 7,961   $19,472    $  134,313
2000 to 2003 ..................      24,395      53,367      82,027      20,788     56,174    35,881     5,687       278,319
2004 and following ............     431,357     106,431      69,456          --      4,632    31,470     3,435       646,781
                                   --------    --------    --------     -------    -------   -------   -------    ----------
    Total .....................    $462,344    $185,658    $190,406     $46,461    $70,639   $75,311   $28,594    $1,059,413

Less:
  Allowance for loan losses ...       5,136       1,055       1,481           9        820     4,644       722        13,867
                                   --------    --------    --------     -------    -------   -------   -------    ----------
  Total loans receivable, net..    $457,208    $184,603    $188,925     $46,452    $69,818   $70,668   $27,872    $1,045,546
                                   ========    ========    ========     =======    =======   =======   =======    ==========

</TABLE>







                                        6

<PAGE>



      The total  amount of gross  loans due after  December  31, 1999 which have
predetermined  interest rates is $376.7 million, while the total amount of gross
loans due after such date which have  floating or adjustable  interest  rates is
$548.4 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, 1998 the Company's gross real estate  collateralized loans (excluding junior
liens secured by one- to  four-family  real estate  totaling $48.0 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                 1998     Outstanding      1998       Non-performing
-------------------------  -----------  ----------- -------------- --------------
<S>                      <C>              <C>         <C>              <C>
                                  (Dollars in Thousands)

California ............  $  217,198       19.06%      $ 28,995         16.27%
Texas .................     188,585       16.55          9,803          5.50
Florida ...............     146,829       12.89         42,097         23.62
Massachusetts .........      62,797        5.51         26,364         14.80
Virginia ..............      39,500        3.47            644           .36
Maryland ..............      35,048        3.08          5,388          3.02
New York ..............      34,508        3.03          3,682          2.07
All others ............     414,949       36.41         61,217         34.36
                         ----------      ------       --------        ------
  Total real estate
     loan portfolio....  $1,139,414      100.00%      $178,190        100.00%
                         ==========      ======       ========        ======

</TABLE>

      At December 31, 1998, 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, 1998.


<TABLE>
<CAPTION>

                                    Outstanding               Non-performing
                                    Balance At    Percent       Balance At
One- to Four-family First Lien     December 31,   of Total     December 31,     Percent of
Loans by Geographic Location          1998       Outstanding      1998         Non-performing
------------------------------    -----------    -----------  --------------   --------------
<S>                               <C>              <C>           <C>              <C>
                                                (Dollars in Thousands)

California ....................   $ 82,630         16.84%        $ 4,168          19.49%
Texas .........................     73,101         14.90           4,983          23.29
Florida .......................     68,309         13.92           2,031           9.49
Virginia ......................     33,208          6.77             504           2.35
Maryland ......................     24,205          4.93             971           4.54
Arizona .......................     17,219          3.51             432           2.02
New York ......................     16,539          3.37             755           3.53
Ohio ..........................     15,610          3.18             615           2.88
Oklahoma ......................     15,069          3.07             250           1.17
Massachusetts .................     14,927          3.04             655           3.06
All others ....................    129,900         26.47           6,027          28.18
                                  --------        ------         -------         ------
  Total One- to Four- Family
     Loans ....................   $490,717        100.00%        $21,391         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         1998      Outstanding      1998      Non-performing
-------------------------------  -----------   -----------  ------------  --------------
<S>                                <C>           <C>        <C>               <C>
                                                (Dollars in Thousands)

California ...................     $ 53,841      27.79%     $  8,051          30.32%
Texas ........................       40,036      16.95           993           3.74
Florida ......................       20,229       8.56         2,759          10.39
Illinois .....................       18,400       7.79            --             --
Massachusetts ................       16,829       7.12         3,400          12.81
Connecticut ..................        9,130       3.86         1,987           7.48
Oklahoma .....................        8,405       3.56             8            .03
All others ...................       69,382      29.37         9,354          35.23
                                   --------     ------      --------         ------
  Total Commercial Real
     Estate Loans ............     $236,252     100.00%     $ 26,552         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         1998       Outstanding       1998       Non-performing
----------------------------      ------------  -----------  --------------  --------------
<S>                                <C>             <C>          <C>              <C>
                                                  (Dollars in Thousands)

Florida ......................     $ 48,922        18.10%       $ 37,275         30.54%
California ...................       39,266        14.52          15,397         12.61
Massachusetts ................       29,013        10.73          23,199         19.01
Texas ........................       18,647         6.90           1,724          1.41
Colorado .....................       16,490         6.10           5,948          4.87
Missouri .....................       14,146         5.23           6,068          4.97
South Carolina ...............       13,290         4.92           9,602          7.87
Arkansas .....................       11,836         4.38           2,976          2.44
New York .....................       10,684         3.95           2,361          1.93
Georgia ......................       10,222         3.78           2,605          2.13
Connecticut ..................        9,717         3.59             316           .26
All others ...................       48,104        17.80          14,589         11.96
                                   --------       ------        --------        ------
  Total Multi-Family .........     $270,337       100.00%       $122,060        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        1998        Outstanding       1998       Non-performing
------------------------------    ------------   -----------   ------------   --------------
<S>                                <C>              <C>            <C>              <C>
                                                    (Dollars in Thousands)

Texas ........................     $40,781          74.09%         $   280          86.19%
California....................      10,976          19.94               --             --
Louisiana ....................       2,926           5.32               --             --
All others ...................         357            .65               45          13.81
                                   -------         ------          -------         ------
  Total Construction and
     Development Loans .......     $55,040         100.00%         $   325         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             1998        Outstanding       1998       Non-performing 
------------------------------     ------------   -----------   ------------   --------------
<S>                                 <C>               <C>         <C>               <C>
                                                   (Dollars in Thousands)

California ...................      $38,242           43.92%      $   684           8.69%
Texas ........................       20,746           23.83           418           5.32
Florida ......................        6,756            7.76         1,696          21.57
Maryland .....................        5,919            6.80         1,760          22.38
New Mexico ...................        4,265            4.90         1,882          23.93
All others ...................       11,140           12.79         1,422          18.11
                                    -------          ------       -------         ------
  Total Land Loans ...........      $87,068          100.00%      $ 7,862         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,
1998.

<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      1998        Outstanding       1998         Non-performing
-------------------------------  ------------   -----------   ------------     --------------
<S>                              <C>              <C>            <C>               <C>
                                                 (Dollars in Thousands)


California ...................   $10,112          21.07%         $   931           14.92%
Texas ........................     9,134          19.03              976           15.64
Louisiana ....................     5,244          10.93               82            1.31
New York .....................     4,215           8.78            1,144           18.33
New Jersey ...................     3,466           7.22            1,341           21.48
Connecticut ..................     3,305           6.89              246            3.93
Florida ......................     2,531           5.27              317            5.07
Arizona ......................     1,460           3.04               --              --
All others ...................     8,525          17.77            1,206           19.32
                                 -------         ------          -------          ------
  Total One- to Four- Family
     Junior Lien Loans .......   $47,992         100.00%         $ 6,243          100.00%
                                 =======         ======          =======          ======
</TABLE>


LOAN ACQUISITION, RESOLUTION, ORIGINATION AND SALE ACTIVITIES

     GENERAL.  The Company  historically has invested and intends to continue to
invest,  subject to market  conditions,  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

                                      9

<PAGE>



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.

      Recently,  however,  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.  As a result,  the Company has  recently
purchased a significant  amount of predominately  performing  one-to four family
residential mortgage loans at approximately their aggregate principal balance at
the time of  purchase.  Although  the  Company  continues  to review  and bid to
acquire a substantial  amount of discounted  loans, the Company does not believe
it 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.

      All  reviews of 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  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 construction  and/or  development,  land and commercial  business
loans. This effort is being managed by Chief Executive Officer Meek.  Consistent
with the intent of an executive bonus plan entered into between Mr. Meek and the
Company in February, 1998, Mr. Meek is focusing on increasing the Company's loan
originations.

     The Bank's  Senior  Loan  Committee,  comprised  of  Chairman  Beal,  Chief
Executive Officer Meek,  President/Chief  Operating Officer Hartman, Senior Vice
President - Lending Saurenmann, Senior Vice President - Commercial Loans Enright
and Senior Vice President - Compliance  Curl, may approve all loan purchases and
originations up 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 up to $1.0 million. (Any three members shall constitute a quorum.)

      The Bank's  Executive Loan  Committee,  comprised of Chairman Beal,  Chief
Executive  Officer Meek and Directors  Blanton,  Fults,  Goldstein and Weinstein
(with Directors Hartman,  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,  1998,  the  Company  purchased  $387.9  million of loans,  net of
discount compared to $130.4 million during the year ended December 31, 1997, and
originated  $85.4  million  of loans  for the years  ended  December  31,  1998,
compared to $76.6 million during the year ended December 31, 1997.



                                      10

<PAGE>



      The Company services $642.0 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  166 other
entities to service the  remaining  $607.0  million of its gross loans.  Of this
amount, at December 31, 1998, six entities  individually service loans in excess
of $9.8 million,  aggregating  $486.0  million,  or 80.1% 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         Year
                                                     Ended         Ended         Ended
                                                   December 31,  December 31,  December 31,
                                                   -----------   -----------   ------------
                                                      1996           1997          1998
                                                   -----------   -----------   ------------
<S>                                                <C>           <C>           <C>

ORIGINATIONS BY TYPE:
 ADJUSTABLE RATE:
  Real estate - one- to four-family ............   $   2,013     $      --     $      --
                - multi-family .................       4,835         4,684         2,915
                - commercial ...................       4,438         4,651         6,075
                - construction or development ..      97,174        47,342        16,828
                - land .........................       7,700            --        23,484
   Commercial Business .........................          --         5,000            59
                                                   ---------     ---------     ---------
         Total adjustable-rate .................     116,160        61,677        49,361
 FIXED RATE:
  Real estate - one- to four-family ............          --            --            --
                - multi-family .................         485            --         4,000
                - commercial ...................      12,369         2,147            --
                - construction .................          --            --        10,013
                - land .........................          --        10,785         4,500
  Consumer - one- to four-family junior liens ..          42            --            --
                - other ........................       2,935         1,984         2,173
  Commercial Business ..........................         517            --        15,336
                                                   ---------     ---------     ---------
         Total fixed-rate ......................      16,348        14,916        36,022
                                                   ---------     ---------     ---------
         Total loans originated ................     132,508        76,593        85,383
PURCHASES:
  Real estate - one- to four-family ............      40,095         9,166       348,644
                - multi-family .................     206,066        24,740         6,791
                - commercial ...................     100,978       112,873         9,584
                - construction .................          --           716            --
                - land .........................      10,412         8,233         2,596
  Consumer  - one- to four-family - junior liens      38,829           520            --
                - automobile. .................           --            --        36,022
                - other.........................         116            14            --
  Commercial business ..........................      12,418         1,447           277
                                                   ---------     ---------     ---------
         Total loans purchased, gross ..........     408,914       157,709       403,914
  Purchase discounts ...........................     100,900        27,291        16,056
                                                   ---------     ---------     ---------
         Total loans purchased, net ............     308,014       130,418       387,858
                                                   ---------     ---------     ---------
  Percentage of purchase discounts
    to total gross loans purchased .............        24.7%         17.3%          4.0%
SALES AND REPAYMENTS:
  Real estate - one- to four-family ............       1,002            --            --
                - multi-family .................       9,698            --            --
                - commercial ...................       2,498            --            --
  Consumer - one- to four-family - junior liens            3            --            --
  Commercial business ..........................          --            --            --
                                                   ---------     ---------     ---------
         Total loans sold ......................      13,201            --            --
   Principal repayments ........................     330,819       333,592       340,569
                                                   ---------     ---------     ---------
         Total sales and repayments ............     344,020       333,592       340,569
  Other reductions (additions):
         Transfers to real estate owned ........      41,876        83,144        16,283
         Unearned discounts ....................     (52,946)      (44,673)      (44,633)
         Decrease in other items, net ..........       1,734         2,596         1,354
                                                   ---------     ---------     ---------
   Net Increase (decrease) .....................   $ 105,838     $(167,648)    $ 159,668
                                                   =========     =========     =========
</TABLE>

                                       12
<PAGE>



      ACQUISITION  OF LOANS.  Many of the loans  purchased  by the  Company  are
performing  loans.  In order to determine the amount that it will bid to acquire
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.  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 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

                                      13

<PAGE>



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  non-performing  loans  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 non-performing  single-family  residential
loans,  however,  non-performing  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, 1998,
the Company's  one- to  four-family  residential  mortgage  loans totaled $490.7
million,  or 38.9% of the  Company's  gross loan  portfolio.  At that date,  the
Company's net one- to four-family  residential  mortgage loan portfolio  totaled
$457.3  million,  or 43.7% 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 individually from correspondent  financial institutions and
brokers and has  purchased  large pools of these  loans at  approximately  their
aggregate  principal  balance at the time of purchase.  During 1998, the Company
purchased  $348.6  million  of  predominately   performing  one-to  four  family
residential mortgage loans. 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.   The  Company  has
historically   originated   a  limited   amount  of  loans  for  the   purchase,
construction,  refurbishing and development of commercial and multi-family  real
estate.  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, 1998,  $236.3
million,  or 18.7% of the  Company's  gross loan  portfolio,  consisted of loans
secured by commercial real estate and $270.3 million,  or 21.5% of the Company's
gross loan  portfolio,  consisted of loans secured by  multi-family  residential
properties.  At that date,  $188.9  million,  or 18.1% of the Company's net loan
portfolio,  consisted  of loans  secured by  commercial  real  estate and $184.6
million,  or  17.7% of the  Company's  net loan  portfolio,  consisted  of loans
secured by multi-family residential properties.

      Included  in  the   multi-family   residential   portfolio  are  48  loans
aggregating $143.1 million in gross principal amount at December 31, 1998 ($85.3
million net of purchase discount). These loans were purchased from HUD primarily
in three purchases occurring in October 1995,  September 1996 and December 1996.

                                      14

<PAGE>



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 21 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, 1998, $148.6 million, or 29.3% of
the multi-family and commercial real estate gross loan portfolio, 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 $84.4 million.


                                      15

<PAGE>



      CONSTRUCTION,   DEVELOPMENT  AND  LAND  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, 1998,  development loans totaled $55.0
million or 4.4% of its gross loan portfolio and $46.5  million,  net, or 4.4% of
the  Company's  net  loan  portfolio.  At  December  31,  1998  the Bank had six
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  and one  development  property  located in Louisiana.  See
"Lending  Activities - General." All of these loans are performing in accordance
with their respective repayment terms.

      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,  1998,  land loans
totaled $87.1 million,  or 6.9% of the Company's gross loan  portfolio.  At that
date,  net land loans totaled $69.8  million,  or 6.7% of the Company's net loan
portfolio.  At December 31, 1998 the Bank had seven land loans in excess of $2.0
million,  with aggregate net balances of $44.7 million, the largest of which has
a net  balance of $11.8  million.  All of these loans are secured by land in the
metropolitan  areas of Los  Angeles  and Dallas.  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
Non-Performing Assets."

      At December  31, 1998,  there were no  single-family  construction  loans,
three  development  loans with an aggregate gross principal  balance of $325,000
and 25 land  loans with  aggregate  gross  principal  balances  of $8.0  million
delinquent 90 days or more. At that date, net non-performing  land loans totaled
$4.8 million.

      CONSUMER  LENDING.  At December 31, 1998,  the  Company's  consumer  loans
totalled $85.4 million or 6.8% of the Company's gross loan  portfolio,  of which
$48.0 million were  purchased  one-to four family  junior lien loans,  and $31.9
million were purchased  sub-prime  automobile  loans. At that date, net consumer
loans totaled  $70.7  million,  or 6.8% of the  Company's net loan  portfolio of
which $41.7 million were one-to-four  family junior lien loans and $25.9 million
were automobile loans.

      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

                                      16

<PAGE>



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.

      During 1998, the Company  purchased a pool of sub-prime  automobile loans.
These loans were made to borrowers  unable to qualify for traditional  financing
generally due to negative or insufficient credit history or high debt- to-income
or  payment--to-income  ratios.  The Company  does not  anticipate  purchasing a
significant amount of additional automobile loans.

      Consumer loans may entail greater risk than do residential mortgage loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly depreciable  assets, such as automobiles.  In such cases, the collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the  outstanding  loan balance as a result of the greater  likelihood of damage,
loss or  depreciation.  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, 1998,
there were 768 consumer loans with aggregate  gross  principal  balances of $8.5
million delinquent in excess of 90 days.

      COMMERCIAL  BUSINESS LENDING.  At December 31, 1998, the Company had $35.5
million in commercial business loans outstanding, or 2.8% of the Company's gross
loan  portfolio.  At that date,  the Company had $27.9 million of net commercial
business loans  outstanding,  or 2.7% 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.  At that date
46 commercial  business loans with an aggregate gross principal balance of $10.0
million  were  delinquent  90 days or more.  Included  in this  amount is a $4.4
million loan  originated  under the Company's now  discontinued  foreign lending
program.

      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.

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 ten 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.


                                      17

<PAGE>



      The following table sets forth the Company's loan  delinquencies  by type,
by amount and by percentage of type at December 31, 1998.


<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
                           ------  ------  -------- ------  -------  ---------  ------  -------  --------
<S>                         <C>   <C>       <C>     <C>     <C>       <C>       <C>     <C>      <C>

REAL ESTATE:
  One- to four-family -
    first liens .......     179   $5,428    1.11%     524   $ 21,391    4.36%      703  $ 26,819    5.47%
  Commercial ..........       8      962     .41       57     26,552   11.24        65    27,514   11.65
  Multi-family ........       2    1,229     .45       43    122,060   45.15        45   123,289   45.61
  Construction or
    development .......      --       --      --        3        325     .59         3       325     .59
  Land ................       1       88     .10       24      7,862    9.03        25     7,950    9.13
                          -----   ------   -----   ------   --------   -----    ------  --------   -----
    Total real estate .     190    7,707     .68      651    178,190   15.64       841   185,897   16.32

OTHER LOANS:
 Consumer Loans:
  One-to four-family
    junior lien .......      51      938    1.95      297      6,243   13.01       348     7,181   14.96
  Timeshares ..........       3       21     .86      334        963   39.60       337       984   40.46
  Automobile ..........      90      628    1.97      111      1,072    3.36       201     1,700    5.33
  Other ...............       1       43    1.38       26        248    7.95        27       291    9.32
                          -----   ------   -----   ------   --------   -----    ------  --------   -----
   Total consumer loans     145    1,630    1.91      768      8,526    9.98       913    10,156   11.89
Commercial business ...       6      156     .44       46      9,997   28.13        52    10,153   28.57
                          -----   ------   -----   ------   --------   -----    ------  --------   -----
   Total other loans ..     151    1,786    1.48      814     18,523   15.31       965    20,309   16.79
                          -----   ------   -----   ------   --------   -----    ------  --------   -----
   Total loans ........     341    9,493     .75    1,465    196,713   15.61     1,806   206,206   16.36
LESS:
Unearned discounts .                 835                      76,033                      76,868
                                  ------                    --------                    --------
    Total Loans, net              $8,658     .83%           $120,680   11.54%           $129,338   12.37%
                                  ======  ======            ========   =====            ========   =====
</TABLE>

     At December 31, 1998, the Company's non-performing loans included 235 loans
aggregating  $40.7 million in gross loan ($26.1  million of net loans) for which
foreclosure  proceedings  had been  commenced.  At that date, 506 loans involved
borrowers involved in bankruptcy proceedings  representing  approximately $115.5
million in gross loans ($80.1  million of net loans) 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,
                                        ----------------    ------------------------------
                                         1995       1996     1996       1997        1998
                                        ------    ------    ------    --------    --------
                                                    (Dollars in Thousands)
<S>                                     <C>       <C>        <C>          <C>       <C>

Non-accruing loans:
Real estate:
One- to four-family - first liens...... $ 11,093  $    --   $     --   $ 18,292   $ 21,391
Commercial ............................   16,816   35,004     59,903     37,345     23,525
Multi-family ..........................    9,507   51,934    174,046    108,493    119,222
Construction ..........................       93      156         --         --        325
Land ..................................    8,056    7,961      4,687      6,245      4,835
Consumer:
One- to four-family - junior liens.....    2,850   10,157     13,863     11,347      6,243
Timeshares ............................    1,673    1,630      1,624      1,026        963
Automobile.............................       17       41         13         --      1,072
Other..................................      528      600      1,822        519        248
Commercial business ...................    7,357    7,777      9,562      7,554      9,997
                                         -------  -------   --------   --------    -------
Purchase discounts.....................  (22,011) (59,978)  (122,283)   (77,827)   (72,783)
                                         -------  -------   --------   --------    -------
Total (net) ...........................   35,979   55,282    143,237    112,994    115,038
                                         -------  -------   --------   --------    -------
Accruing loans delinquent more than
 90 days:
Real estate:
One- to four-family - first liens .....       --   21,159     30,382         --         --
Multi-family ..........................       --   55,247     30,318     15,901      2,838
Commercial ............................       --   17,811     23,818      1,740      3,027
Land ..................................       --    5,444      4,760      3,978        557
Purchase discounts ....................       --  (32,363)   (29,221)    (4,681)      (780)
                                         -------  -------   --------    -------    -------
Total (net) ...........................       --   67,298     60,057     16,938      5,642

Foreclosed assets:
Real estate:
One- to four-family - first liens......    1,525    1,799      4,858      5,379      3,517
Commercial ............................    3,026    9,148     13,466     41,341     23,668
Multi-family ..........................    3,633   15,010     24,781     64,461     20,263
Construction or development ...........       --      300        250        245         --
Land ..................................      570    1,456        872      2,867      4,765
Consumer:
Timeshares ............................       36       32        402         21         --
Automobile ............................       --       --         --         --        245
Other .................................       --       --         --         --         71
                                         -------  -------   --------    -------    -------
Total (net) ...........................    8,790   27,745     44,629    114,314     52,529
                                         -------  -------   --------    -------    -------
Total non-performing assets............  $44,769 $150,325   $247,923   $244,246   $173,209
                                         =======  =======   ========    =======    =======
Total as a percentage of total assets..     7.07%   11.84%     17.77%     17.86%     12.80%
                                            ====    =====      =====      =====      =====


</TABLE>

                                      19

<PAGE>



      For the year ended  December  31, 1998 gross  interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms amounted to $15.3 million.  The amount that was included in
interest  income on such loans was $8.1 million for the year ended  December 31,
1998.

      OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the  previous  table,  as of  December  31,  1998 the  Company  had six loans
totaling  $25.6  million of net  loans,  all of which are land loans made to the
Company's  largest  borrower,  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
Company is  monitoring  these loans due to periodic  delinquencies.  The Company
believes  the value of the  collateral  securing  these loans is  sufficient  to
prevent the Company from incurring any losses related to these loans.

      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:


                                                    December 31, 1998
                                                  ----------------------
                                                  (Dollars In Thousands)

             Substandard .............................   $94,289
             Doubtful ................................     1,142
                                                         -------
                  Total Classified Assets ............   $95,431
                                                         =======

      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,  the current loan
portfolio and current  economic  conditions are considered.  These policies also

                                      20

<PAGE>



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.

      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,
                               -------------------  ------------    ---------------
                                 1995      1996        1996         1997       1998
                               --------   -------   ------------    ------    -----
                                             (Dollars in Thousands)
<S>                                <C>    <C>             <C>           <C>    <C>
Balance at beginning of period  $3,547    $ 6,137     $ 10,406     $13,189   $11,912

Charge-offs:
  One- to four-family.........     440        845        1,366       2,177     1,370
  Commercial..................     534         28          232         740       812
  Multi-family................     ---         80           90         ---       179
  Construction and development     ---         35          ---         ---       ---
  Land........................      39        362           60         687       228
  Consumer....................     449        858          805       1,169     1,401
  Commercial business.........     ---      1,177        1,121         183       ---
                                ------    -------      -------     -------   -------
                                 1,462      3,385        3,674       4,956     3,990
Recoveries:
  One- to four-family.........       2          1          ---         112       ---
  Consumer....................       5         18           32         157       368
  Commercial business.........     ---         17            3         ---       ---
                                ------    -------      -------     -------   -------

Net charge-offs...............   1,455      3,349        3,639       4,687     3,622
Additions charged to operations  4,045      9,044        6,422       3,410     5,577
                                ------    -------      -------     -------   -------
Balance at end of period......  $6,137    $11,832      $13,189     $11,912   $13,867
                                ======    =======      =======     =======   =======

Ratio of net charge-offs during
 the period to average loans
 outstanding during the period     .40%       .44%         .38%        .49%      .43%

Ratio of net charge-offs during
 the period to average
 non-performing assets.......     4.52%      2.95%        1.84%       1.96%     1.52%
</TABLE>

                                      21

<PAGE>


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

<TABLE>
<CAPTION>
                                                   JUNE 30,
                             --------------------------------------------------------
                                      1995                             1996
                             ---------------------------     --------------------------
                                                Percent                        Percent
                                                of Loans                       of Loans
                                       Loan     in Each               Loan     in Each
                             Amount of Amounts  Category    Amount of Amounts  Category
                             Loan Loss   by     to Total    Loan Loss   by     to Total
                             Allowance Category Loans       Allowance Category Loans
                             --------- -------- --------    --------- -------- --------
                                                 (Dollars in Thousands)
<S>                           <C>       <C>        <C>       <C>       <C>      <C>
One- to four-family.....     $1,881    $237,585  35.70%     $ 3,153   $  273,780  22.47
Multi-family............        604     109,080  16.39          239      341,696  28.05
Commercial real estate..      1,276     124,985  18.78        2,788      321,385  26.38
Construction and development     88      51,284   7.71           19       85,133   6.99
Land....................        474      35,997   5.41          752      100,047   8.21
One- to four-family junior
 liens..................        577      44,999   6.76        1,873       50,146   4.12
Timeshares..............        595      11,668   1.75          374        7,809    .64
Automobile..............          5          95    .01            8           59     --
Other consumer..........        261       4,696    .71        1,130        8,314    .68
Commercial business.....        376      45,060   6.77        1,496       29,886   2.45
Unallocated.............        ---         ---    ---          ---          ---    ---
                             ------    --------  -----      -------   ----------  -----
     Total..............     $6,137     665,449 100.00%     $11,832    1,218,255 100.00%
                             ======             ======      =======              ======
LESS:
Loans in process........                 21,217                           27,172
Loans held for sale, net                    866                              ---
Deferred fees and
 discounts.............                 144,927                          281,837
Allowance for loan losses                 6,137                           11,832
                                      ---------                       ----------
     Total loans
      receivable, net..                $492,302                       $  897,414
                                      =========                       ==========




                                                               December 31,
                               ----------------------------------------------------------------------------------------
                                         1996                             1997                            1998
                               --------------------------     ----------------------------   --------------------------
                                                   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)

One- to four-family.....       $ 3,183  $   276,591  19.37%  $ 4,051 $  213,584  18.60%    $ 5,136   $  490,717  38.93%
Multi-family............         1,157      466,697  32.68     1,316    321,423  27.99       1,055      270,337  21.45
Commercial real estate..         2,706      388,460  27.20     1,986    337,825  29.42       1,481      236,252  18.74
Construction and development         7       74,437   5.21        16     98,503   8.58           9       55,040   4.37
Land....................           596       95,684   6.70       898     71,379   6.22         820       87,068   6.91
One- to four-family junior
 liens..................         1,680       77,528   5.43     1,756     71,465   6.22       2,312       47,992   3.81
Timeshares..............           372        6,446    .45       642      3,615    .31         839        2,432    .19
Automobile..............             3           19     --        --          1     --         773       31,878   2.53
Other consumer..........         1,135        7,076    .50       684      5,002    .44         720        3,121    .25
Commercial business.....         2,353       35,131   2.46       563     25,554   2.23         722       35,537   2.82
Unallocated.............           ---          ---    ---       ---        ---    ---         ---          ---    ---
                               -------  -----------  -----   ------- ----------  -----     -------   ---------- ------
     Total..............       $13,189    1,428,069 100.00%  $11,912 $1,148,351 100.00%    $13,867   $1,260,374 100.00%
                               =======              ======   =======            ======     =======              ======
LESS:
Loans in process........                     16,364                      16,806                           7,493
Loans held for sale, net                        ---                         ---                             ---
Deferred fees and
 discounts.............                     344,312                     231,800                         193,468
Allowance for loan losses                    13,189                      11,912                          13,867
                                         ----------                  ----------                      ----------
     Total loans
      receivable, net..                  $1,054,204                  $  887,833                      $1,045,546
                                         ==========                  ==========                      ==========
</TABLE>

                                               22

<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, 1998,  the Bank's  liquidity  ratio was 18.0%.  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.

                                           DECEMBER 31,
                       -------------------------------------------------------
                               1996                1997             1998
                       -------------------------------------------------------
                           Book     % of      Book     % of      Book    % of
                          VALUE    TOTAL      VALUE    TOTAL     VALUE   TOTAL
                         -------    -----     -----    -----     -----   -----
                                      (Dollars in Thousands)

FHLB stock............ $   9,618   100.00%  $ 10,203   100.00%  $ 9,877  100.00%
                       =========   ======   ========   ======   =======  ======
Interest-bearing
 deposits with banks.. $  65,491   100.00%  $150,219   100.00%  $66,599  100.00%
                       =========   ======   ========   ======   =======  ======

Mortgage-backed
 securities:
GNMA.................  $ 125,386   101.17%  $110,079    98.84%  $87,715   97.92%
Gross unrealized gain
  (loss).............      1,090      .88      3,722     3.34     3,909    4.36
Unamortized premium
   (discount)........     (2,537)   (2.05)    (2,425)   (2.18)   (2,043)  (2.28)
                       ---------   ------   --------    -----   -------  ------
Total mortgage-backed
securities...........  $ 123,939   100.00%  $111,376   100.00%  $89,581  100.00%
                       =========   ======   ========   ======   =======  ======

      The  Company's  investment  securities  portfolio  at December  31,  1998,
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.


                                      23

<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,  the Bank  obtains  wholesale  deposits
through  deposit  brokers which  solicit funds from their  customers for deposit
with the Bank. Brokered deposits amounted to $207.6 million or 20.6% of deposits
at December 31, 1998. 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.
The amount of brokered  deposits will vary depending on cost and 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.


                                      24

<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>
                                                    DECEMBER 31,
                            --------------------------------------------------------------
                                     1996                1997               1998
                            --------------------   -----------------  --------------------
                                         PERCENT            PERCENT              PERCENT
                                AMOUNT  OF TOTAL   AMOUNT  OF TOTAL   AMOUNT     OF TOTAL
                            ----------- --------   ------- ---------  --------  ----------
<S>                               <C>    <C>           <C>     <C>       <C>        <C>
                                                 (Dollars in Thousands)
TRANSACTIONS AND
SAVINGS DEPOSITS:
Money Market Accounts.......$  188,468    18.06% $  169,321   16.91%  $ 180,154     17.91%
Commercial Demand ..........     2,871      .28      14,272    1.42      12,667      1.26
Savings Deposits ...........       653      .06       1,193     .12       3,118       .31
                            ----------  -------    --------  ------   ---------    ------

Total Non-Certificates .....   191,992    18.40     184,786   18.45%    195,939     19.48
                            ----------  -------    --------  ------   ---------    ------
CERTIFICATES:
2.01 - 4.00% ...............       ---      ---           2     ---         ---       ---
4.01 - 6.00% ...............   687,755    65.97     785,865   78.47     797,002     79.26
6.01 - 8.00% ...............   163,688    15.69      30,823    3.08      12,676      1.26
8.01 - 10.00% ..............       ---      ---         ---     ---         ---       ---
                            ----------  -------    --------  ------   ---------    ------
Total Certificates .........   851,443    81.60     816,690   81.55     809,678     80.52
                            ----------  -------    --------  ------   ---------    ------
Total Deposits(1)...........$1,043,435   100.00% $1,001,476  100.00% $1,005,617    100.00%
                            ==========  =======  ==========  ======  ==========    ======
----------------

(1)   At December 31, 1998,  the average rates paid on  non-certificate  deposit
      accounts and certificate accounts were 4.18% and 5.23%, respectively.
</TABLE>

      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.

                                 Twelve
                                 Months
                                  Ended             Year Ended
                               December 31,         December 31,
                               ------------   -------------------------
                                  1996           1997           1998
                               ------------   -----------    ----------
                                        (Dollars in Thousands)

Opening balance............... $   985,961    $1,043,435     $1,001,476
New deposits, net.............      26,406       (70,120)       (21,211)
Interest credited.............      31,068        28,161         25,352
                               -----------    ----------     ----------
Ending balance................ $ 1,043,435    $1,001,476     $1,005,617
                               ===========    ==========     ==========
Net increase (decrease)....... $    57,474    $  (41,959)    $    4,141
                               ===========    ==========     ==========
Percent increase (decrease)...        5.83%        (4.02)%          .41%
                                      ====         =====         ======


                                      25

<PAGE>



      The  following  table shows rate and maturity  information  for the Bank's
certificates of deposit as of December 31, 1998.

                            4.00-    6.00-               Percent
                            5.99%    7.99%     Total    of Total
                         ---------  ------    -------   --------
                                  (Dollars in Thousands)
CERTIFICATE ACCOUNTS
 MATURING IN
 QUARTER ENDING:
March 31, 1999.......... $359,345  $ 3,298   $362,643       44.79%
June 30, 1999...........  169,490      431    169,921       21.00
September 30, 1999......   81,390      750     82,140       10.14
December 31, 1999.......  162,944    2,502    165,446       20.43
March 31, 2000..........    2,160    4,208      6,368         .79
June 30, 2000...........      286    1,017      1,303         .16
September 30, 2000......    1,550      784      2,334         .29
December 31, 2000.......   11,005    4,008     15,013        1.85
March 31, 2001..........    1,070      ---      1,070         .13
June 30, 2001...........      936      ---        936         .11
September 30, 2001......      122      ---        122         .02
December 31, 2001.......    1,165      ---      1,165         .14
Thereafter..............    1,217      ---      1,217         .15
                         --------  -------   --------      ------
   Total................ $792,680  $16,998   $809,678      100.00%
                         ========  =======   ========      ======

   Percent of Total.....    97.90%    2.10%    100.00%
                                               ======

      The following  table  indicates the amount of the Bank's  certificates  of
deposit by time remaining until maturity as of December 31, 1998.

<TABLE>
<CAPTION>
                                                 MATURITY
                                --------------------------------------------------
                                              Over      Over
                                  3 Months   3 to 6    6 to 12    Over
                                   or Less   Months    Months   12 Months   Total
                                ----------  --------   -------  ---------  -------
                                              (Dollars in Thousands)
<S>                                <C>         <C>     <C>         <C>       <C>
Certificates of deposit
 less than $100,000........     $234,665  $ 91,364  $157,357   $17,229    $500,615
Certificates of deposit
 of $100,000 or more.......      127,978    78,558    90,228    12,299     309,063
                                 -------  --------  --------   -------    --------
Total certificates of
 deposit...................     $362,643  $169,922  $247,585   $29,528    $809,678
                                ========  ========  ========   =======    ========

</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.  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, 1998,
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 investment 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 remaining net
proceeds of the Senior Notes were retained by Beal Financial for the maintenance

                                      26

<PAGE>



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.

      At December 31, 1998, FHLB advances  totaled $80.0 million.  FHLB advances
were used for liquidity and loan investment purposes. For additional information
relating to borrowings, see Notes G and H to the Notes to Consolidated Financial
Statements of the Company.

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

                                  Twelve
                                  Months
                                   Ended        Year Ended
                                December 31,   December 31,
                                ------------ ----------------
                                   1996       1997      1998
                                ------------ -------   ------
                                    (Dollars In Thousands)

MAXIMUM BALANCE:
  FHLB advances.................  $185,000  $146,000  $176,000
  Senior notes, net.............    57,094    57,188    57,295
  Other borrowings..............    21,756    14,748     7,583

AVERAGE BALANCE:
  FHLB advances.................  $ 41,146   $19,181  $ 39,822
  Senior notes, net.............    57,042    57,141    57,233
  Other borrowings..............    28,931    10,401     7,249


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

                                               December 31,
                                        -----------------------
                                          1996    1997     1998
                                        -----------------------
                                          (Dollars in Thousands)

FHLB advances.......................... $146,000 $110,000 $ 80,000
Senior notes, net......................   57,094   57,188   57,295
Other borrowings.......................   14,748    7,599    7,083
                                        -------- -------- --------
     Total borrowings.................. $217,842 $174,787 $144,378
                                        ======== ======== ========
Weighted average interest rate of
 FHLB advances.........................     6.33%    6.65%    4.87%

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

Weighted average interest rate of
 other borrrowings....................      8.24%    8.03%    7.95%

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 expected to engage in any  activities  other than holding the
stock of the Bank.


                                      27

<PAGE>



      In addition,  Beal  Financial  has a single  purpose  subsidiary to invest
approximately $575,000 in a limited partnership to develop property in McKinney,
Texas and other inactive subsidiaries.

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, 1998, the net book value
of the Bank's  investment in its subsidiaries was  approximately  $539.2 million
(including $25.8 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  $431.2  million  and  $4.3  million,
respectively, at December 31, 1998.

      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,  1998,  the
Bank's  investment  in BMI, BPI and BHS totaled $8.2  million,  $4.0 million and
$13.5 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." BMI,
BPI and BHS have conducted  substantially  all of their real estate  development
activities within the Dallas/Fort Worth and Houston metropolitan areas.

     BMI also holds  $14.0  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, 1998, Beal Bank Center II had a book value of $8.4
million  (subject to a $5.9 million  first  mortgage  lien from an  unaffiliated
lender)  and  was  85%  occupied.  Five  remaining  properties  held  by BMI for
investment, had book values aggregating $5.6 million at December 31, 1998.


                                      28

<PAGE>



      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, 1998,  the
Bank's  investment  in LAC totaled  $252,000.  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, 1998, BRE held 16 mortgage  loans (11  single-family
and five  multi-family  and commercial  real estate loans) totaling $2.3 million
and six foreclosed real estate  properties (two land and four  multi-family  and
commercial properties) totaling $7 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, 1998, the Bank's investment in BRE totaled $9.6 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% 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,
1998, the Company's investment in BAH totaled $26.5 million.

      It is  anticipated  that BAH is entitled  to tax credits of  approximately
$2.4 million per year, for the next nine years, to the extent that they are able
to utilize  them.  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, 1998.

      The Bank  also  owns  other  single  purpose  subsidiaries  formed to hold
foreclosed property for tax planning purposes. The Bank's net investment in such
subsidiaries at December 31, 1998 was $41.5 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, 1998, the Company, including its subsidiaries, had a total
of 98 employees.  The Company's  employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.


                                      29

<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 deposits of the
Bank are  insured  and 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.

      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  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, 1998, the Bank's lending limit under this  restriction was $24.8
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.

                                      30

<PAGE>



     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."

      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

                                      31

<PAGE>



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 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, 1998, totaled
$608,600.

      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 premium schedule for BIF and SAIF insured  institutions  ranges from 0
to 27  basis  points.  SAIF-insured  institutions  are also  required  to pay an
assessment  for the repayment of interest on  obligations  issued by a federally
chartered  corporation  to provide  financing  ("FICO") for resolving the thrift
crisis in the 1980's,  in the amount equal to approximately six basis points for
each $100 in domestic deposits. While BIF-insured institutions pay an assessment
equal to approximately 1.5 basis points for each $100 in domestic deposits.  The
assessment  of   SAIF-insured   institutions   is  expected  to  be  reduced  to
approximately  two basis points for each $100 in domestic deposits no later than
January 1, 2000, by which point BIF-insured  institutions will participate fully
in the FICO bond interest  repayment.  These  assessments,  which may be revised
based upon the level of BIF and SAIF  deposits,  will  continue  until the bonds
mature in 2017.

      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%


                                      32

<PAGE>


has adopted final  regulations 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 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;

                                      33

<PAGE>



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.

      The following  table sets forth the Bank's  compliance with its regulatory
capital requirements at December 31, 1998:

                                       At December 31, 1998
                                 ---------------------------------
                                    Required          Actual
                                 ---------------  ----------------
                                 Amount  Percent  Amount   Percent
                                 ------  -------  ------   -------
                                      (Dollars in Thousands)

Leverage capital...............  $67,133   5.00% $171,834    12.80%
Tier 1 risk-based capital......   59,565   6.00   171,834    17.31
Total risk-based capital.......  $99,275  10.00% $184,261    18.56%


      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

                                      34

<PAGE>



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 applicable 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.

      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 February 3,
1999,  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, 1999.

      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,  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,  1998,  the
Bank's liquidity ratio was 18.0%.

      QUALIFIED  THRIFT LENDER TEST.  All  institutions  with holding  companies
governed by the OTS, 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  institution 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, 1998, 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."


                                      35

<PAGE>



      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
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
this 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.  The Bank
has received approval from the FDIC to be designated as a wholesale  institution
for purposes of evaluation under the revised CRA.

      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 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, 1998, 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.  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 generally become subject to additions or restrictions.

      If the Bank fails the QTL test,  the Company  must  register  as, and will
become subject to, the restrictions applicable to bank holding companies.

      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.


                                      36

<PAGE>



      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, 1998, the Bank was in compliance with these
reserve  requirements.  The 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  institutions  are  authorized to borrow from the Federal  Reserve
Bank "discount  window," but Federal Reserve Board  regulations  require savings
institutions 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 institutions.  Each FHLB serves as a reserve or central bank
for its members  within its assigned  region.  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 must be used for  residential
home financing.

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of Dallas.  At December 31, 1998,  the Bank had $9.9 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 5.81% and were 5.94% for calendar year 1998.

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.,  which  elected  to remain  Subchapter  C  Corporations  for  federal  tax
purposes.  These  subsidiaries   subsequently  filed  in  March  1999  to  elect
Subchapter S status for federal income tax purposes  effective  January 1, 1999.
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
subsequent years.

      In the future,  Beal Financial and all subsidiaries  electing Subchapter S
status  will  generally  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  December  31,  1998,  the  Company had net
unrealized  built-in gains of  approximately  $55.2 million.  For the year ended
December 31, 1998, the Company recorded federal tax expense of $3.7 million.

      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  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.


                                      37

<PAGE>



      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.  The
Bank has met the residential lending requirement and recapture was delayed until
the 1998 taxable year. 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, 1998,  the Bank's  Excess for tax
purposes totaled approximately $10.0 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  December 31,
1996.  With  respect to years  examined by the IRS, all  deficiencies  have been
resolved.  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 $1,000 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.  For the year ended
December 31, 1998, total state taxes were $2.4 million.

      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.


                                      38

<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, 1998.

                                    Owned     Total
                           Year      or     Approximate
Location                 Acquired  Leased  Square Footage   Book Value
-----------------------  --------  ------  --------------   ----------
                                                          (In Thousands)
Corporate Headquarters:
Beal Bank Center I        1992     Owned     167,138          $4,597
15770 North Dallas
Parkway
Dallas, Texas

Branch Office:
5100 Westheimer           1995    Leased       5,064             ---
Houston, Texas


      The Company  acquired  Beal Bank Center I in 1992 and  currently  occupies
35,270 square feet in the building.  At December 31, 1998,  the building was 79%
occupied.  At December 31, 1998, the Company's total  investment in the property
was $6.3 million with a net book value of $4.6 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, 1998 was $5.7 million.


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.


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, 1998.


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."


                                      39

<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,
                                    --------------       ------------------------------
                                     1995     1996        1996        1997       1998
                                    ------  -------      -------    --------    -------
                                                (Dollars In Thousands)
<S>                                <C>       <C>         <C>        <C>          <C>
Selected Financial
 Condition Data:
Total assets..............        $632,866  $1,269,279  $1,394,906  $1,365,754  $1,353,474
Loans receivable, net.....         493,168     897,414   1,054,204     887,833   1,045,546
Securities available for
   sale...................          40,714     194,699     123,939     111,376      89,581
Deposits..................         458,165     891,304   1,043,433   1,001,476   1,005,617
Total borrowings..........         115,898     263,519     217,842     174,787     144,378
Stockholders' equity......          52,400      93,172     116,797     160,820     191,226

</TABLE>

                                                Twelve
                                                Months
                                                Ended          Year Ended
                           Year Ended June 30, December 31,    December 31,
                           ------------------- ------------  -----------------
                              1995     1996        1996         1997    1998
                           --------   -------- ------------  -------- --------
                                       (Dollars In Thousands)
Selected Operations Data:

Total interest income.....  $63,795 $140,948   $177,339     $169,181  $149,966
Total interest expense....   20,981   56,818     67,708       67,856    57,817
                            ------- --------   --------     --------  --------
Net interest income.......   42,814   84,130    109,631      101,325    92,149
Provision for loan losses.    4,045    9,044      6,423        3,410     5,577
                            ------- --------   --------     --------  --------
Net interest income after
 provision for loan losses   38,769   75,086    103,208       97,915    86,572
Gain on sales of interest-
 earning assets...........    9,408    8,413      6,101          550       ---
Gain on sales of real
 estate                       4,412    7,068     10,776       13,708    39,155
Other non-interest income.      109    1,202      2,615        3,013     6,055
                            -------- -------   --------     --------  --------
Total non-interest income.   13,929   16,683     19,492       17,271    45,210
Total non-interest expense   12,145   22,456     38,588       22,144    20,513
                            -------  -------   --------     --------  --------
Income before income taxes   40,553   69,313     84,112       93,042   111,269
Income taxes..............   15,176   25,153     30,280        6,408     6,049
                            -------  -------   --------     --------  --------
Net income................  $25,377  $44,160   $ 53,832     $ 86,634  $105,220
                            =======  =======   ========     ========  ========

                                      40

<PAGE>



                                                          Twelve
                                                          Months        Year
                                                          Ended        Ended
                                   Year Ended June 30, December 31, December 31,
                                   ------------------- ------------ ------------
                                       1995    1996       1996      1997   1998
                                   --------- --------- ------------ ----- ------


SELECTED FINANCIAL RATIOS
 AND OTHER DATA:
Performance Ratios:
   Return on assets (ratio
    of net income to
    average total assets).........       5.76%   4.46%     4.36%   6.66%   8.98%
   Return on equity (ratio
    of net income to
    average equity)...............      64.76   64.51     57.10   59.77   61.32
   Interest rate spread
    information, average
    during period.................      10.50    9.43      9.64    8.72    8.80
   Net interest margin(1).........      10.65    9.32      9.68    8.86    9.07
   Ratio of operating expense
    to average total
    assets........................       2.74    2.27      3.13    1.71    1.75
   Ratio of average interest
    -earning assets to
    average interest-bearing
    liabilities...................     102.89   98.30    102.29  102.60  104.78

Quality Ratios:
   Net non-performing assets to
    total assets, at
    end of period.................       7.07   11.84     17.77   17.88   12.80
   Allowance for loan losses
    to net non- performing loans..      17.06    9.65      6.49    9.17   11.49
   Allowance for loan losses to
    loans receivable, net.........       1.24    1.32      1.25    1.34    1.33
   Net charge-offs to average
    loans, net....................        .41     .39       .38     .49     .43

Equity Ratios:
   Equity to total assets, at
    end of period.................       8.28    7.34      8.37   11.78   14.13
   Average equity to average assets      8.84    6.91      7.64   11.19   14.65

Ratio of Earnings to Fixed Charges:
   Excluding interest on deposits.       6.6:1   7.4:1     8.1:1 10.4:1  11.4:1
   Including interest on deposits.       2.3:1   1.4:1     1.4:1  1.5:1   2.1:1

Other Data:
   Number of full-service offices.           2       3         3      3       2

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


                                      41

<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 in  prior  years,  the  gains
recognized  upon the sales of such loans or the underlying  collateral have been
significant.

      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, 1998 and December 31, 1997,  respectively.  The asset  composition  changed,
however,  with net loans increasing  approximately  $157.7 million,  due to loan
purchases  exceeding  loan  payoffs.  This  increase  was funded  primarily by a
decline  in cash  balances  of $78.7  million  and  proceeds  received  upon the
disposition of $70.3 million real estate held for investment or sale.

      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  liabilities  decreased  $42.7  million  from  December  31, 1997 to
December  31,  1998,  primarily  due to a  decrease  in  Federal  Home Loan Bank
advances of $30.0 million and a $16.4 million decrease in other liabilities.

      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.


                                      42

<PAGE>



      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.

      Stockholders'  equity increased $30.4 million or 18.9% from $160.8 million
at December  31,  1997 to $191.2  million at December  31,  1998.  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.  These  increases  were due to
earnings, net of dividends paid to stockholders.  Dividends paid to stockholders
totaled $87.6 million and $33.0 million during the years ended December 31, 1998
and  1997,  respectively.   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,  1998,  under  the  terms of the  Indenture,  the  Company  would  have been
permitted to dividend an additional $7.3 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.


                                      43

<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 daily average balances.  Non-accruing  loans have been included in the table
as loans carrying a zero yield.

<TABLE>
<CAPTION>
                             Twelve Months Ended December                             Year Ended December 31,
                             -----------------------------    ------------------------------------------------------------------
                                         1996                            1997                                 1998
                             -----------------------------    -------------------------------    -------------------------------
                               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)........  $  947,653  $164,675   17.38%  $  967,265     $157,458    16.28%   $  853,697    $139,456   16.34%
 Mortgage-backed securities.     145,995    10,434    7.15      117,141        8,407     7.18       101,805       7,334    7.20
 Interest-earning deposits..      31,463     1,781    5.66       49,653        2,730     5.50        52,940       2,709    5.12
 FHLB stock.................       7,649       449    5.87        9,835          586     5.96         7,887         467    5.92
                              ----------  --------           ----------     --------             ----------    --------
Total interest-earning
   assets(1)................  $1,132,760   177,339   15.66   $1,143,894      169,181    14.79    $1,016,329    $149,966   14.76
                              ==========  --------           ==========     --------             ==========    ========

Interest-Bearing
 Liabilities:
 Savings deposits...........     158,392     8,111    5.12      185,233        9,025     4.87       173,491       8,323    4.80
 Certificate accounts.......     821,848    47,781    5.81      847,937       48,955     5.77       692,172      38,770    5.60
 Senior notes, net..........      57,042     7,918   13.88       57,131        7,986    13.98        57,233       8,077   14.11
 Borrowings.................      70,077     3,898    5.56       28,286        1,890     6.68        47,071       2,647    5.62
                              ----------  --------           ----------     --------             ----------    --------
  Total interest-bearing
   liabilities..............  $1,107,359    67,708    6.11   $1,118,587       67,856     6.07    $  969,967      57,817    5.96
                              ==========  --------           ==========     --------             ==========    --------

Net interest income.........              $109,631                          $101,325                           $ 92,149
                                          ========                          ========                           ========
Net interest rate spread....                          9.55%                              8.72%                             8.80%
Net earning assets..........  $   25,401                     $   25,307                          $   46,362
                              ==========                     ==========                          ==========
Net yield on average
 interest-earning assets....                          9.68%                              8.86%                             9.07%
Average interest-earning
 assets to average
 interest-bearing
 liabilites.................                102.29%                           102.26%                           104.78%

</TABLE>

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


                                       44

<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
                                         Year Ended               December 31, 1997 vs
                                      December 31, 1997             December 31, 1998
                                 ----------------------------   -----------------------
                                     Increase                     Increase
                                    (Decrease)        Total      (Decrease)        Total
                                      Due to        Increase       Due to        Increase
                                   Volume    Rate  (Decrease)   Volume   Rate   (Decrease)
                                  --------  ------ ---------- --------  ------  -----------
                                                  (Dollars in Thousands)
<S>                                <C>      <C>      <C>       <C>        <C>    <C>
Interest-Earning Assets:
 Loans receivable................ $    34 $  1,021   $ 1,055  $(16,528) $ (1,434) $(17,962)
 Loans receivable - discount.....   3,479  (11,751)   (8,272)   (2,026)    1,986       (40)
                                  -------  -------   -------  --------  --------  --------
 Loans receivable - total........   3,513  (10,730)   (7,217)  (18,554)      552   (18,002)
 Mortgage-backed securities......  (2,071)      44    (2,027)   (1,105)       32    (1,073)
 Interest-earning deposits.......     999      (50)      949       448      (469)      (21)
 Other...........................     130        7       137      (115)       (4)     (119)
                                  -------   ------   -------  --------  --------  --------
   Total interest-earning assets. $ 2,571 $(10,729)   (8,158)  (19,326)      111   (19,215)
                                  ======= ========   -------  --------  --------  --------

Interest-Bearing Liabilities:
 Savings deposits................ $ 1,281 $   (367)  $   914  $   (565) $   (137) $   (702)
 Certificate accounts............   1,503     (329)    1,174    (8,762)   (1,423)  (10,185)
 Senior notes, net...............      12       56        68        14        77        91
 Borrowings......................  (3,031)   1,023    (2,008)      994      (237)      757
                                  ------- --------   -------  --------  --------  --------

   Total interest-bearing
    liabilities.................. $  (235)$    383       148  $ (8,319) $ (1,720)  (10,039)
                                  ======= ========   -------  ========  ========  --------

Change in net interest income....                    $(8,306)                     $ (9,176)
                                                     =======                      ========
</TABLE>


                                      45

<PAGE>



COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997

      NET INCOME.  For the fiscal year ended  December 31,  1998,  net income of
$105.2 million  represented  an increase of $18.6  million,  or 21.5% from $86.6
million for the year ended December 31, 1997. As discussed in more detail below,
the  increase  in net income was  primarily  due to an  increase in gain on real
estate transactions of $25.4 million. This increase,  coupled with a decrease of
$1.6 million in  non-interest  expense,  offsets a $2.2 million  increase in the
provision for loan losses and a $19.2 million decrease in total interest income.

      NET INTEREST INCOME. Net interest income decreased $9.2 million,  or 9.1%,
from $101.3  million at December 31, 1997 to $92.1 million at December 31, 1998,
primarily  due to a $127.6  million or 11.2%  decline in the average  balance of
interest-earning assets. The net interest spread, however, increased slightly to
8.8% for the year ended  December 31, 1998 from 8.7% for the twelve months ended
December 31, 1997.

      INTEREST INCOME.  Interest income decreased $19.2 million,  or 11.4%, from
$169.2  million at December  31, 1997 to $150.0  million at December  31,  1998.
Interest on loans,  including fees, decreased $18.0 million primarily due to the
decrease  in the average  balance of loans  receivable.  Interest on  investment
securities  decreased  $1.2 million and purchased  discount  accretion  remained
virtually unchanged.

      INTEREST EXPENSE.  Interest expense decreased $10.0 million or 14.8%, from
$67.8  million at  December  31,  1997 to $57.8  million at  December  31,  1998
primarily due to a $10.9 million decrease in interest  expense on deposits.  The
average balance of interest-bearing  liabilities decreased $148.6 million during
the year ended December 31, 1998 reflecting the reduction in the average balance
of 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 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 increased $2.2 million, or 63.6% for the twelve months
ended  December  31,  1998  primarily  as a result of an  increase  in net loans
receivable during this period.

      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 11.5%
at December 31, 1998 as compared to 9.2% 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 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 increased $27.9 million, or
161.8% from $17.3  million at December 31, 1997 to $45.2 million at December 31,
1998.  This  increase was  primarily  due to an increase of $25.4 million in the
income  attributable  to gain on real  estate  transactions  and a $3.0  million
increase in other real estate operations, net.

      NON-INTEREST EXPENSE. Non-interest expense decreased $1.6 million, or 7.4%
from $22.1  million at December 31, 1997 to $20.5  million at December 31, 1998,
primarily due to a decrease in other  operating  expenses of $1.1 million during
the twelve month period ended December 31, 1998.


                                      46

<PAGE>



      INCOME TAXES.  Income taxes decreased slightly by $359,000 during the year
ending December 31, 1998 as compared to the previous year.

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 .8%
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 17.4% for the twelve months ended December 31, 1996 to
16.3% 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 slight decrease in
the  average  cost  of  interest-bearing  liabilities  during  this  period  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.

      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.


                                      47

<PAGE>



      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.

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 years ended December 31,
1998 and 1997 and the  twelve  months  ended  December  31,  1996,  the  Company
purchased  $387.9  million,  $130.4  million  and  $308.0  million of net loans,
respectively.  Loan  originations for the years ended December 31, 1998 and 1997
and the twelve months ended December 31, 1996 were $85.4 million,  $76.6 million
and $132.5 million, respectively.

      The Company's  primary  financing  activity is the attraction of deposits.
During the years ended  December  31, 1998 and 1997 and the twelve  months ended
December 31, 1996, the Company experienced a net increase (decrease) in deposits
of $4.1 million,  $(42.0) million and $57.5 million,  respectively.  The Company
also utilizes FHLB advances to fund the Bank's discounted loan purchases. During
the years ended  December 31, 1998 and 1997 and the twelve months ended December
31, 1996, the Company's net financing  activity  (proceeds less repayments) with
the  FHLB  totaled  $(30.0)  million,   $(36.0)  million  and  $(39.0)  million,
respectively.  The Company had other borrowings of $64.4 million at December 31,
1998, including $57.3 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,  1998,  the  Company  had  an  undrawn  advance
arrangement with the FHLB for $178.9 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 its average  daily  deposits for the
most  recently   completed  calendar  quarter  in  cash  or  readily  marketable
securities. At December 31, 1998, the Bank's liquidity ratio was 18.0%.

      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 December 31, 1998, 1997 and
1996 cash and cash equivalents  totaled $72.1 million,  $150.8 million and $65.9
million, respectively.

      The Company  anticipates  that it will have sufficient  funds available to
meet its current commitments.  At December 31, 1998, the Company had commitments
to originate  four loans  aggregating  $53.4 million.  Certificates  of deposits
which are  scheduled  to mature in one year or less at December 31, 1998 totaled
$780.2 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.


                                      48

<PAGE>



      At  December  31,  1998,  the  Bank  exceeded  each of its  three  capital
requirements.  The  following  is a summary  of the  Bank's  regulatory  capital
position at December 31, 1998.

                                          At December 31, 1998
                                 ----------------------------------------
                                       Required            Actual
                                 ------------------  --------------------
                                  Amount   Percent    Amount     Percent
                                 --------  --------  ---------   --------
                                          (Dollars in Thousands)
Leverage capital...............  $67,133     5.00%   $171,834      12.80%
Tier 1 risk-based capital......   59,565     6.00     171,834      17.31
Total risk-based capital.......   99,275    10.00     184,261      18.56


      Due to the amount of dividends to stockholders  expected to be declared by
the  Board of  Director's  in 1999,  the  Company  anticipates  that the  Bank's
regulatory  capital  ratios  will be  reduced  if the  Bank  were to  experience
significant  growth. 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.
Investment rates do not necessarily  change 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, 1998 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.


                                     For the Year
                                        Ended
                                  December 31, 1998
                                  -----------------
Excluding interest on
 deposits..................             11.4:1
Including interest on
 deposits..................              2.1:1


                                      49

<PAGE>



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  and two  outside  Directors.  The  Bank's  Chief
Executive   Officer,   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 to
enhance net interest  income than on matching the interest rate  sensitivity  of
its assets and liabilities.  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,  1998,  the  Bank's
interest-bearing   liabilities   repricing   in  one   year  or  less   exceeded
interest-earning  assets  maturing  during  the same  period by $296.7  million,
resulting  in a one-year  negative  gap equal to 26.7% 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.

      The following table sets forth the interest rate sensitivity of the Bank's
net assets and  liabilities  at December 31, 1998 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.


                                      50

<PAGE>


<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 Years  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.......        $ 32,844    $38,847    $27,565   $72,644   $58,722   $132,986  $  363,607
Adjustable rate one- to four-
 family, commercial real estate
 and construction loans...         442,292      1,973     35,315     9,611     1,421        278     490,890
Commercial business loans.          17,911        174        451       221     1,493        965      21,215
Consumer loans............          25,764      3,070      6,229    22,799     3,677      7,124      68,663
Interest-earning deposits.          66,599        ---        ---       ---       ---        ---      66,599
FHLB Stock................           9,877        ---        ---       ---       ---        ---       9,877
Securities available for sale and
  other investments.......          89,581        ---        ---       ---       ---        ---      89,581
                                  --------    -------    -------   -------   -------   --------  ----------
     Total interest-earning
       assets............          684,868     44,063     69,560   105,275    65,313    141,353   1,110,432

Money market accounts.....         108,092     36,031     36,031       ---       ---        ---     180,154
Commercial demand.........          12,667        ---        ---       ---       ---        ---      12,667
Savings deposits..........             623        623        623     1,248       ---        ---       3,117
Certificate accounts......         780,151     25,018      3,293     1,217         0          0     809,679
Subordinated debt, net....             ---        ---     57,295       ---       ---        ---      57,295
FHLB advances.............          80,000        ---        ---       ---       ---        ---      80,000
Other borrowings..........               0        912      5,852         0         0        319       7,083
                                  --------    -------    -------   -------   -------   --------  ----------
     Total interest-bearing
       liabilities........         981,533     62,584    103,094     2,465         0        319   1,149,995

Interest-earning assets less
 interest-bearing
 liabilities..............       ($296,665)  ($18,521)  ($33,534) $102,810   $65,313   $141,034    ($39,563)

Cumulative interest-rate
 sensitivity gap..........       ($296,665) ($315,186) ($348,720)($245,910)($180,597)  ($39,563)   ($39,563)

Cumulative interest-rate gap
 as a percentage of total assets
 at December 31, 1998.....          (21.92)%   (23.29)%   (25.76)%  (18.17)%  (13.34)%    (2.92)%     (2.92)%

Cumulative interest-rate gap as
 a percentage of interest-earning
 assets at December 31, 1998        (26.72)%   (28.38)%   (31.40)%  (22.15)%  (16.26)%    (3.56)%     (3.56)%

Cumulative interest-rate gap as a
 percentage of interest-bearing
 liabilities at
 December 31, 1998......            (25.80)%   (27.41)%   (30.32)%  (21.38)%  (15.70)%    (3.44)%     (3.44)%
</TABLE>

      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.

                                      51

<PAGE>



      The table below sets forth, as of December 31, 1998, 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,  1998,
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, 1998, annualized.

<TABLE>
<CAPTION>
                  Percentage Change In:                           Change      Change               Dollar      Percent
Change in      Net Interest Income       MVPE              Net    in Net      in Net               Change      Change
Interest Rates  Board   Projected   Board  Projected     Interest Interest    Interest             in          in
(Basis Points) Limit%(1) Change%   Limit % Change %      Income   Income      Income %    MVPE     MVPE        MVPE
-------------- --------- -------   ------- ---------   ---------- ---------   --------  --------   ----------  -------
                                                 (Dollars in Thousands)
<S>                 <C>    <C>        <C>    <C>          <C>       <C>         <C>       <C>       <C>          <C>
     +400      (75)%    (10.6)%      (75)%  (31.5)%    $ 82,516   $ (9,793)    (10.6)%  $120,524   $ (55,365)  (31.5)%
     +300      (50)      (7.9)       (50)   (24.4)       84,996     (7,313)     (7.9)    132,929     (42,960)  (24.4)
     +200      (35)      (5.2)       (35)   (16.9)       87,466     (4,843)     (5.2)    146,235     (29,654)  (16.9)
     +100      (25)      (2.6)       (25)    (8.7)       89,927     (2,382)     (2.6)    160,524     (15,365)   (8.7)
        0        0          0          0        0        92,309          0         0     175,889           0       0
     -100      (25)       9.3        (25)     8.3       100,879      8,507       9.3     190,479      14,590     8.3
     -200      (35)      21.4        (35)    15.3       112,094     19,785      21.4     202,860      26,971    15.3
     -300      (55)      36.4        (50)    20.5       125,927     33,618      36.4     211,891      36,002    20.5
     -400      (75)      55.6        (75)    23.0       143,596     51,287      55.6     216,375      40,486    23.0
</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 23.0% increase in MVPE and a 55.6% increase
in net interest  income in a declining rate  environment and a 31.5% decrease in
MVPE and a 10.6% 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
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.

                                      52

<PAGE>



ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION


                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          PAGE
                                                                          ----

Report of Independent Certified Public Accountants......................   54

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1998 and 1997............   55

Consolidated  Statements  of Income for the years  ended  December  31,
  1998 and 1997, the six months ended December 31, 1996 and the year
  ended June 30, 1996...................................................   56

Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 1998 and 1997,  the six months  ended  December 31, 1996
 and the year ended June 30, 1996.......................................   57

Consolidated  Statements of Cash Flows for the years ended December 31,
 1998 and 1997, the six months ended December 31, 1996 and the year
 ended June 30, 1996....................................................   58

Notes to Consolidated Financial Statements..............................   61



                                      53

<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, 1998 and 1997, and the related
consolidated  statements of income,  stockholders' equity and cash flows for the
years then ended, the six months ended December 31, 1996 and the year 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, 1998 and 1997, and the
consolidated  results of their operations and their  consolidated cash flows for
the years then ended,  the six months ended December 31, 1996 and the year ended
June 30, 1996, in conformity with generally accepted accounting principles.


/s/ Grant Thornton LLP


Dallas, Texas
February 12, 1999



                                       54
<PAGE>



<TABLE>
<CAPTION>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

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


                                                                       December 31,
                                                               ------------------------
                                                                  1998            1997
                                                               ---------     ----------
ASSETS
<S>                                                           <C>            <C>
    Cash                                                      $    5,540     $      630
    Interest-bearing deposits with Federal Home Loan Bank         66,599        150,219
                                                              ----------     ----------
                  Cash and cash equivalents                       72,139        150,849

    Accrued interest receivable                                   12,983         13,071
    Securities - available for sale                               89,581        111,376
    Loans receivable, net                                      1,045,546        887,833
    Federal Home Loan Bank stock                                   9,877         10,203
    Real estate held for investment or sale                      106,353        176,682
    Premises and equipment, net                                    5,699          6,351
    Other assets                                                  11,296          9,389
                                                              ----------     ----------
                                                              $1,353,474     $1,365,754
                                                              ==========     ==========

LIABILITIES
    Deposit accounts                                          $1,005,617     $1,001,476
    Federal Home Loan Bank advances                               80,000        110,000
    Senior notes, net                                             57,295         57,188
    Other borrowings                                               7,083          7,599
    Other liabilities                                             12,253         28,673
                                                              ----------     ----------
                  Total liabilities                            1,162,248      1,204,936

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
    Accumulated other comprehensive income                         3,909          3,722
    Retained earnings                                            184,277        154,056
                                                              ----------     ----------
                  Total stockholders' equity                     191,226        160,818
                                                              ----------     ----------
                                                              $1,353,474     $1,365,754
                                                              ==========     ==========

</TABLE>

        The accompanying notes are an integral part of these statements.


                                       55
<PAGE>





<TABLE>
<CAPTION>
                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

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



                                                             Year Ended         Six Months
                                                             December 31,         Ended       Year Ended
                                                       ----------------------   December 31,   June 30,
                                                         1998         1997          1996         1996
                                                       --------     --------     --------     --------

<S>                                                    <C>          <C>          <C>          <C>
Interest income:
    Loans, including fees and purchase
       discount accretion                              $139,456     $157,458     $ 82,177     $131,544
    Investment securities                                10,510       11,723        5,875        9,404
                                                       --------     --------     --------     --------
          Total interest income                         149,966      169,181       88,052      140,948

Interest expense:
    Deposits                                             47,093       57,980       28,221       45,915
    Federal Home Loan Bank advances
       and other borrowings                               2,647        1,890        1,758        3,999
    Senior notes                                          8,077        7,986        3,962        6,904
                                                       --------     --------     --------     --------
          Total interest expense                         57,817       67,856       33,941       56,818
                                                       --------     --------     --------     --------
          Net interest income                            92,149      101,325       54,111       84,130

Provision for loan losses                                 5,577        3,410        3,314        9,044
                                                       --------     --------     --------     --------
          Net interest income after provision
              for loan losses                            86,572       97,915       50,797       75,086

Noninterest income:
    Gains on real estate transactions                    39,155       13,708        6,434        7,068
    Other real estate operations, net                     5,466        2,486        1,202        1,108
    Gain on sales of loans                                   --          550        1,701        8,413
    Other operating income                                  589          527          723           94
                                                       --------     --------     --------     --------
          Total noninterest income                       45,210       17,271       10,060       16,683

Noninterest expense:
    Salaries and employee benefits                        8,083        8,318       15,615        8,232
    Occupancy and equipment                               2,185        2,392        1,143        2,049
    SAIF deposit insurance premium                          609          676        2,605        1,332
    Loss on sales of securities available for sale           --           --          437          587
    Other operating expense                               9,636       10,758        6,851       10,256
                                                       --------     --------     --------     --------
          Total non-interest expenses                    20,513       22,144       26,651       22,456
                                                       --------     --------     --------     --------
          Income before income taxes                    111,269       93,042       34,206       69,313

Income taxes                                              6,049        6,408       12,152       25,153
                                                       --------     --------     --------     --------

          NET INCOME                                   $105,220     $ 86,634     $ 22,054     $ 44,160
                                                       ========     ========     ========     ========
Basic income per common share                          $ 350.73     $ 288.78     $  73.51     $ 147.20
                                                       ========     ========     ========     ========
Weighted average number of common
    shares outstanding                                      300          300          300          300
                                                       ========     ========     ========     ========
</TABLE>

         The accompanying notes are an integral part of this statement.


                                       56
<PAGE>


<TABLE>
<CAPTION>
                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (In thousands)
                                                                            Accumulated
                                                                Additional    other
                                              COMMON STOCK      paid-in     comprehensive  Retained
                                           SHARES     AMOUNT     CAPITAL    INCOME (LOSS)  EARNINGS     TOTAL
<S>                                      <C>        <C>         <C>         <C>          <C>          <C>
Balance at July 1, 1995                       300   $     300   $   2,740   $      --    $  49,360    $  52,400
  Comprehensive income:
    Net income                                 --          --          --          --       44,160       44,160
    Unrealized loss on securities
       available for sale, net of
       reclassification adjustment
       and tax effects                         --          --          --        (862)          --         (862)
                                        ---------   ---------   ---------   ---------    ---------    ---------
           Total comprehensive income                                                                    43,298
                                                                                                      ---------
  Dividends declared                           --          --          --          --       (2,526)      (2,526)
                                        ---------   ---------   ---------   ---------    ---------    ---------
Balance at June 30, 1996                      300         300       2,740        (862)      90,994       93,172
  Comprehensive income:
    Net income                                 --          --          --          --       22,054       22,054
    Unrealized gain on securities
       available for sale, net of
       reclassification adjustment
       and tax effects                         --          --          --       1,571           --        1,571
                                        ---------   ---------   ---------   ---------    ---------    ---------
          Total comprehensive income                                                                     23,625
                                                                                                      ---------

Balance at December 31, 1996                  300         300       2,740         709      113,048      116,797
  Comprehensive income:
    Net income                                 --          --          --          --       86,634       86,634
    Unrealized gain on securities
       available for sale, net of
       reclassification adjustment
       and tax effects                         --          --          --       3,013           --        3,013
                                        ---------   ---------   ---------   ---------    ---------    ---------
          Total comprehensive income                                                                     89,647
                                                                                                      ---------
  Dividends declared                           --          --          --          --      (45,626)     (45,626)
                                        ---------   ---------   ---------   ---------    ---------    ---------
Balance at December 31, 1997                  300         300       2,740       3,722      154,056      160,818
  Comprehensive income:
    Net income                                 --          --          --          --      105,220      105,220
    Unrealized gain on securities
       available for sale, net of
       reclassification adjustment
       and tax effects                         --          --          --         187           --          187
                                        ---------   ---------   ---------   ---------    ---------    ---------
         Total comprehensive income                                                                     105,407
                                                                                                      ---------
  Dividends declared                           --          --          --          --      (74,999)     (74,999)
                                        ---------   ---------   ---------   ---------    ---------    ---------
Balance at December 31, 1998                  300   $     300   $   2,740   $   3,909    $ 184,277    $ 191,226
                                        =========   =========   =========   =========    =========    =========

</TABLE>

         The accompanying notes are an integral part of this statement.



                                       57
<PAGE>


<TABLE>
<CAPTION>
                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


                                                                         Six months
                                                        Year ended        ended      Year ended
                                                       December 31,     December 31,  June 30,
                                                  --------------------  ------------ -----------
                                                    1998         1997       1996         1996
                                                  --------    --------  ------------ -----------
<S>                                              <C>         <C>         <C>         <C>
Operating activities
    Net income ................................  $ 105,220   $  86,634   $  22,054   $  44,160
    Adjustments to reconcile net income
       to net cash provided by (used in)
       operating activities
          Depreciation and amortization .......      2,014       2,468       1,071       1,791
          Accretion of purchase discount ......    (44,633)    (44,673)    (30,451)    (38,926)
          Provision for loan losses ...........      5,577       3,410       3,314       9,044
          Amortization of bond discount
              and underwriting costs ..........        746         654         297         477
          Gains on real estate transactions ...    (39,155)    (13,708)     (6,434)     (7,068)
          Gain on sales of loans ..............       --          (550)     (1,701)     (8,413)
          Loss on sales of securities
              available for sale ..............       --          --           437         587
          Loss on sales of premises and
              equipment .......................        189           7          71        --
    Changes in operating assets and liabilities
       Accrued interest receivable ............       (738)     (1,361)     (1,249)    (11,102)
       Prepaid expenses and other assets ......       (606)       (334)       (191)     (4,515)
       Other liabilities and accrued expenses .     (6,154)      2,225      (7,573)     14,842
                                                 ---------   ---------   ---------   ---------
              Net cash provided by (used in)
                   operating activities .......     22,460      34,772     (20,355)        877
                                                 =========   =========   =========   =========

</TABLE>

         The accompanying notes are an integral part of this statement.

                                       58
<PAGE>


<TABLE>
<CAPTION>
                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                 (In thousands)


                                                           Year ended          Six months
                                                          December 31,           ended      Year ended
                                                     ---------------------     December 31,  June 30,
                                                         1998       1997          1996         1996
                                                     ---------    ---------    ---------    ----------
<S>                                                  <C>          <C>          <C>          <C>
Investing activities
    Proceeds from sales of loans                     $      --    $      26    $   8,477    $  19,045
    Proceeds from:
       Sales of securities available for sale               --           --       68,134      151,744
       Maturities of securities available for sale      22,363       15,306        4,674       10,954
       Sales of real estate                            112,222       34,929       16,446       11,067
       Sale of Federal Home Loan Bank stock              4,181           --           --           --
    Purchases of:
       Loans and bid deposits on loan purchases       (387,858)    (130,418)    (273,885)    (541,173)
       Securities available for sale                        --           --           --     (318,769)
       Federal Home Loan Bank stock                     (3,855)        (585)        (278)      (1,865)
       Real estate held for investment or sale          (3,541)     (17,395)     (10,525)     (18,519)
       Premises and equipment, net                        (404)        (443)        (412)      (1,406)
    Loan originations and advances, less loan
       collections                                     269,697      266,850      111,791      136,265
                                                     ---------    ---------    ---------    ---------
              Net cash provided by (used in)
                  investing activities                  12,805      168,270      (75,578)    (552,657)
                                                     =========    =========    =========    =========

</TABLE>

     The accompanying notes are an integral part of these statements.



                                       59
<PAGE>


<TABLE>
<CAPTION>

                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                 (In thousands)


                                                                             Six months
                                                          Year ended          ended       Year ended
                                                          December 31,       December 31,  June 30,
                                                   ----------------------    ------------ -----------
                                                      1998         1997         1996         1996
                                                   ---------    ---------    ------------ -----------
<S>                                                <C>          <C>          <C>         <C>
Financing activities
    Net increase (decrease) in deposit accounts    $   4,141    $ (41,958)   $ 152,130    $ 433,168
    Proceeds from long-term debt                          --          162        1,158       17,776
    Repayments of long-term debt                        (516)      (7,311)      (7,785)      (3,767)
    (Repayments) advances from the Federal
       Home Loan Bank                                (30,000)     (36,000)     (39,000)      74,000
    Proceeds from issuance of senior notes                --           --           --       54,492
    Cash dividend paid                               (87,600)     (33,026)          --          (26)
                                                   ---------    ---------    ---------    ---------
          Net cash provided by (used in)
              financing activities                  (113,975)    (118,133)     106,503      575,643
                                                   ---------    ---------    ---------    ---------
          Increase (decrease) in cash and cash
              equivalents                            (78,710)      84,909       10,570       23,863

Cash and cash equivalents at beginning of period     150,849       65,940       55,370       31,507
                                                   ---------    ---------    ---------    ---------
Cash and cash equivalents at end of period         $  72,139    $ 150,849    $  65,940       55,370
                                                   =========    =========    =========    =========

Supplemental disclosure of cash flow information
    Cash paid during the period for
       Interest                                    $  57,124    $  66,661    $  36,319    $  19,049
       Income taxes                                $  11,541    $   2,215    $  18,780    $   5,550

Supplemental disclosures of noncash investing
    and financing activities
       Real estate acquired in foreclosure
          or in settlement of loans                $  17,813    $  89,850    $  27,615    $   6,752

Assumption of majority stockholders'
    indebtedness in lieu of cash dividend          $      --    $      --    $      --    $   2,500

</TABLE>

         The accompanying notes are an integral part of this statement.


                                       60
<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 (the Bank), collectively,  (the Corporation) operates
    two  branches in Dallas and  Houston,  Texas.  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.   The   amortization  of  discounts  is
    discontinued  when  the  net  carrying  value  of the  loan  equals  the net
    realizable  value  of  the  underlying   collateral  or,  if  earlier,   the
    contractual maturity of the loan.


                                       61
<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  other
    comprehensive income.

    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 OR 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:  Basic  income  per common  share is based on the
    weighted average number of common shares outstanding during each year. There
    are no potentially dilutive common shares.

    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.



                                       62
<PAGE>



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:

       Buildings and improvements            10-45 years
       Furniture and equipment                3-10 years

     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  are  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.

     SEGMENT  INFORMATION:  The Corporation  operates in one principal  business
     segment,  acquiring and  providing  loans and banking  services  within the
     United States.

     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.




                                       63
<PAGE>



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, 1998.


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. 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.




                                       64
<PAGE>



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:


                                                         December 31,
                                                 --------------------------
                                                     1998           1997
                                                 -----------    -----------
Real estate loans
   One-to-four family first liens                $   490,717    $   213,584
   Multifamily                                       270,337        321,423
   Commercial                                        236,252        337,825
   Construction and development                       55,040         98,503
   Land                                               87,068         71,379
                                                 -----------    -----------
        Total real estate loans                    1,139,414      1,042,714

Other loans
   Consumer loans
      One-to-four family junior liens                 47,992         71,465
      Automobiles                                     31,878              1
      Timeshares                                       2,432          3,615
      Other                                            3,121          5,002
                                                 -----------    -----------
         Total consumer loans                         85,423         80,083

   Commercial business loans                          35,537         25,554
                                                 -----------    -----------
          Total other loans                          120,960        105,637
                                                 -----------    -----------
           Total loans                             1,260,374      1,148,351

Less:
   Loans in process                                   (7,493)       (16,806)
   Deferred fees and discounts                      (193,468)      (231,800)
   Allowance for loan losses                         (13,867)       (11,912)
                                                 -----------    -----------
           Total loans receivable, net           $ 1,045,546    $   887,833
                                                 ===========    ===========


The  amount of loans  being  serviced  by the  Corporation  for  others was
approximately $33,861 and $36,484 at December 31, 1998 and 1997, respectively.


                                       65
<PAGE>



NOTE C - LOANS RECEIVABLE - Continued

    Transactions in the allowance for loan losses were as follows:

                                      Year ended      Six months
                                     December 31,       ended       Year ended
                               --------------------   December 31,   June 30,
                                  1998        1997       1996         1996
                               --------    --------    --------    --------

Balance at beginning of year   $ 11,912    $ 13,189    $ 11,832    $  6,137
   Provision for loan losses      5,577       3,410       3,314       9,044
   Charge-offs                   (3,990)     (4,956)     (1,978)     (3,385)
   Recoveries                       368         269          21          36
                               --------    --------    --------    --------

Balance at end of year         $ 13,867    $ 11,912    $ 13,189    $ 11,832
                               ========    ========    ========    ========


    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, 1998 and 1997,  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, 1998        December 31, 1997
                                                ----------------------   ---------------------
                                                 Recorded    Valuation    Recorded   Valuation
                                                Investment   Allowance   Investment  Allowance
                                                ----------   ---------   ----------  ---------

<S>                                               <C>         <C>        <C>         <C>
Impaired loans - valuation allowance required     $ 5,503     $2,545     $ 9,412     $2,186
Impaired loans - no valuation allowance            87,044         --      79,914         --
                                                  -------     ------     -------     ------
Total impaired loans                              $92,547     $2,545     $89,326     $2,186
                                                  =======     ======     =======     ======

</TABLE>


                                       66
<PAGE>



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 years ended
     December 31, 1998 and 1997,  the six months ended December 31, 1996 and the
     year ended June 30, 1996,  was  $91,037,  $132,277,  $136,000,  and $94,007
     respectively.  Interest  income  on  impaired  loans  for the  years  ended
     December 31, 1998 and 1997,  the six months ended December 31, 1996 and the
     year  ended  June  30,  1996  was  $7,300,   $8,576,   $3,830,  and  $8,206
     respectively. Interest income foregone under the original terms of impaired
     loans for the years ended  December 31, 1998 and 1997, the six months ended
     December  31,  1996,  and the year ended June 30, 1996 was $7,500,  $4,189,
     $4,341 and $5,400, respectively.


NOTE D - REAL ESTATE HELD FOR INVESTMENT OR SALE

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

                                                              DECEMBER 31,
                                                       ------------------------
                                                          1998           1997
                                                       ---------      ---------

Real estate held for development and rental            $  54,642      $  64,390
Real estate held for sale                                 53,223        113,852
                                                       ---------      ---------
                                                         107,865        178,242
   Less accumulated depreciation                          (1,512)        (1,560)
                                                       ---------      ---------

     Total real estate held for investment or sale     $ 106,353      $ 176,682
                                                       =========      =========

    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.



                                       67
<PAGE>



NOTE E - SECURITIES AVAILABLE FOR SALE

    Securities available for sale consist of the following:

                                                 Gross        Gross
                                    Amortized  unrealized   unrealized    Fair
                                      Cost       Gains        Losses     Value
                                    ---------  ----------   ----------   -----
   Mortgage-backed securities:
      December 31, 1998             $ 85,672     $3,909       $--     $ 89,581
      December 31, 1997              107,654      3,722        --      111,376

    At December 31, 1998,  mortgage-backed  securities  valued at  approximately
    $18,660 were pledged to another institution for the benefit of a customer of
    the Bank.

    The mortgage-backed  securities at December 31, 1998 are scheduled to mature
    in 2025 and 2026.


NOTE F - DEPOSITS

                                                          DECEMBER 31,
                                                1998                1997
                                          ----------------     ----------------
                                          AMOUNT   PERCENT     AMOUNT   PERCENT
                                          ------   -------     ------   -------


Noninterest-bearing demand deposits    $   12,667    1.3% $      14,272     1.4%
Statement savings deposits (4.8% at
   December 31, 1998)                       3,118      .3         1,193      .1
Money market demand deposit accounts
   (4.5% at December 31, 1998)            180,154    17.9       169,321    17.0
                                       ----------   -----    ----------   -----
                                          195,939    19.5       184,786    18.5

Certificates of deposit
   4.01% to 4.50%                           2,702      .3             3      --
   4.51% to 5.00%                         367,685    36.5         1,524      .2
   5.01% to 5.50%                         222,985    22.2       198,607    19.8
   5.51% to 6.00%                         203,630    20.2       585,733    58.4
   6.01% to 6.50%                           2,489      .3        13,329     1.3
   6.51% to 7.00%                           1,124      .1         2,960      .3
   7.01% to 7.50%                           9,063      .9        14,522     1.5
   7.51% to 8.00%                              --      --            12      --
                                       ----------   -----    ----------   -----

   Total certificates of deposit          809,678    80.5       816,690    81.5
                                       ----------   -----    ----------   -----

   Total deposits                      $1,005,617   100.0%   $1,001,476   100.0%
                                       ==========   =====    ==========   =====



                                       68
<PAGE>



NOTE F - DEPOSITS - Continued

    The aggregate amount of deposits with a minimum denomination of $100 or more
    was approximately $309,164 at December 31, 1998 and $377,183 at December 31,
    1997.

    At December 31, 1998, the scheduled  maturities of  certificates  of deposit
    were as follows:

                         DECEMBER 31,
                         ------------

                            1999            $780,150
                            2000              25,018
                            2001               3,293
                            2002                 700
                            2003                 517
                                            --------
                                            $809,678
                                            ========


    Interest expense on deposits consists of the following:

                                                Six months
                              Year ended          ended        Year ended
                              December 31,      December 31,     June 30,
                          ------------------   ------------    ----------
                            1998      1997         1996           1996
                          -------   -------    ------------    ----------

Savings deposits          $ 8,323   $ 9,025      $ 4,683         $ 6,675
Certificates of deposit    38,770    48,955       23,538          39,240
                          -------   -------      -------         -------
                          $47,093   $57,980      $28,221         $45,915
                          =======   =======      =======         =======


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
     qualifying  first  mortgage  loans,   with  a  total  collateral  value  of
     approximately  $276,831 at December 31, 1998.  The FHLB advances of $80,000
     at December 31, 1998 bears  interest at 4.87% per annum and mature in April
     1999.


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.


                                       69
<PAGE>


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, 1998, 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, 1998 and 1997,  the
    Bank's liquidity ratio was 17.97% and 19.11%, 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>       <C>

December 31, 1998
   Total risk based capital    184.261   18.56%    79,420     >8%     99,275   >10%
   Tier I risk based capital   171,834   17.31%    39,710     >4%     59,565   >6%
   Leverage capital            171,834   12.80%    53,703     >4%     67,133   >5%

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

</TABLE>


                                       70
<PAGE>


NOTE J - INCOME TAXES

    Taxes on income consist of the following:

                                                 Six months
                                    Year ended      ended     Year ended
                                   December 31,  December 31,  June 30,
                               ----------------  -----------  ----------
                                 1998     1997      1996         1996
                                ------   ------  -----------  ----------
Federal
   Current                      $3,682   $3,249    $11,214    $ 21,095
   Deferred                         --       --     (1,251)      1,249
                                ------   ------   --------    --------
                                 3,682    3,249      9,963      22,344
State - current and deferred     2,367    3,159      2,189       2,809
                                ------   ------   --------    --------
                                $6,049   $6,408   $ 12,152    $ 25,153
                                ======   ======   ========    ========

    On March 13,  1997,  the  Company  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 Company except Beal Affordable Housing, Inc., and BRE-N, Inc.

     As a result of the aforementioned  application,  beginning January 1, 1997,
     the Company 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 years
     ended  December  31,  1998 and 1997 the  Corporation  recorded  federal tax
     expense of $2,400 and $3,249 related to the  recognition of built-in gains.
     Except as discussed  above,  beginning  January 1, 1997,  the liability for
     federal income taxes on the income of the Corporation is 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:

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

Computed tax at statutory Federal income tax rate   $ 11,972      $ 24,260
Increase (decrease) in taxes resulting from
   State tax, net of federal tax benefit               1,246         2,195
   Tax credits                                        (1,182)       (1,469)
   Other                                                 116           167
                                                    --------      --------
          Total                                     $ 12,152      $ 25,153
                                                    ========      ========




                                       71
<PAGE>


NOTE K - OTHER OPERATING EXPENSE

    Other operating expense consists of the following:

                                                        Six months
                                         Year ended       ended      Year ended
                                         December 31,   December 31,  June 30,
                                     -----------------  ------------ ----------
                                       1998      1997       1996        1996
                                     -------   -------  ------------ ----------

Advertising and promotion            $   266   $   248   $   448     $   714
Office supplies and expense              175       250       127         394
Legal and professional                 5,849     6,448     3,327       3,599
Expenses related to loan purchases       262       630     1,108       2,409
Loan servicing fees                    2,076     2,376     1,332       2,278
Other                                  1,008       806       509         862
                                     -------   -------   -------     -------
                                     $ 9,636   $10,758   $ 6,851     $10,256
                                     =======   =======   =======     =======


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, 1998,  there were  commitments  to
    purchase  loans of  $10,143.  Unfunded  commitments  to extend  credit  were
    $19,561.

    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.

    On  December  8,  1998,  the  Beal  Financial  Corporation  entered  into an
    agreement to loan up to $60,000 to its majority shareholder. No amounts were
    outstanding at December 31, 1998.




                                       72
<PAGE>



NOTE M - COMPREHENSIVE INCOME

    The Corporation adopted Statement of Financial Accounting Standards No. 130,
    "Reporting  Comprehensive  Income,"  (SFAS  130)  as  of  January  1,  1998.
    Accounting  principles generally require that recognized revenue,  expenses,
    gains and losses be included in net income.  Although certain changes in net
    assets   and   liabilities,   such  as   unrealized   gains  and  losses  on
    available-for-sale  securities,  are reported as a separate component of the
    equity section of the balance sheet, such items,  along with net income, are
    components of comprehensive  income.  The adoption of SFAS 130 had no effect
    on the Corporation's net income or stockholders' equity.

    The components of other comprehensive  income and related tax effects are as
follows:

<TABLE>
<CAPTION>
                                                             Six months
                                             Year ended        ended         Year ended
                                             December 31,    December 31,      June 30,
                                         ------------------  ------------    ----------
                                           1998      1997        1996           1996
                                         -------   -------   ------------    ----------
<S>                                      <C>       <C>         <C>             <C>

Unrealized holding gains (losses) on
   available-for-sale securities         $   187   $ 2,632     $ 1,981         $(1,915)

Reclassification adjustment for losses
   realized in income                         --        --         437             587
                                         -------   -------     -------         -------
Net unrealized gains (losses)                187     2,632       2,418          (1,328)

Tax effect                                    --       381        (847)            466
                                         -------   -------     -------         -------
Net-of-tax amount                        $   187   $ 3,013     $ 1,571         $  (862)
                                         =======   =======     =======         =======

</TABLE>


NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>

                                       December 31, 1998        December 31, 1997
                                     -----------------------   ------------------------
                                      Carrying        Fair      Carrying       Fair
                                       Amount        Value       Amount       Value
                                     -----------  ----------   ----------   -----------
<S>                                  <C>          <C>          <C>          <C>
Financial assets:
   Cash and cash equivalents         $   72,139   $   72,139   $  150,849   $  150,849
   Securities available for sale         89,581       89,581      111,376      111,376
   Loans receivable                   1,045,546    1,111,943      887,833      897,201

Financial liabilities:
   Deposit liabilities                1,005,617    1,005,472    1,001,476    1,002,057
   Federal Home Loan Bank advances       80,000       80,000      110,000      110,000
   Other borrowings                       7,083        7,083        7,599        7,599
   Senior notes                          57,295       59,078       57,188       59,404

</TABLE>


                                       73
<PAGE>


                           Beal Financial Corporation

                                  Balance Sheet


NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

                                                    December 31,
                                               ---------------------
                                                  1998        1997
                                               ---------   ---------
Assets
   Cash                                         $ 68,553   $ 17,906
   Investment in subsidiary                      175,744    189,846
   Loans receivable, net                           4,455         --
   Real estate held for investment                   693     14,190
   Other assets                                    1,925     14,694
                                                --------   --------
                                                $251,370   $236,636

Liabilities and stockholders' equity
   Senior notes                                 $ 57,295   $ 57,188
   Other liabilities                               2,849     18,630
   Stockholder's equity:
       Common stock                                  300        300
       Additional paid-in capital                  2,740      2,740
       Retained earnings                         184,277    154,056
       Accumulated other comprehensive income      3,909      3,722
                                                --------   --------
          Total stockholders' equity             191,226    160,818
                                                --------   --------
                                                $251,370   $236,636
                                                ========   ========


                                       74
<PAGE>


NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued

<TABLE>
<CAPTION>
                               Statement of Income

                                                                   Six months
                                                Year ended          ended       Year ended
                                                December 31,      December 31,   June 30,
                                          ----------------------  ------------  ----------
                                            1998           1997       1996         1996
                                          ---------    ---------  ------------  ----------
<S>                                       <C>          <C>         <C>          <C>

Income
   Equity in undistributed income
      of subsidiary                       $ (31,291)   $  41,771   $      53    $  45,648
   Dividends from subsidiary                133,701       47,369      25,000        3,181
   Interest income                              525        5,817          --           --
   Gain on sale of real estate held
      for investment                         11,046           --          --           --
   Other operating income                        19           --          --           --
                                          ---------    ---------   ---------    ---------
              Total income                  114,000       94,957      25,053       48,829

Interest expense
   Other borrowings                              --           36          66          162
   Senior notes                               8,077        7,986       3,962        6,903
                                          ---------    ---------   ---------    ---------
              Total interest expense          8,077        8,022       4,028        7,065

Noninterest expense
   Salary and employee benefits                  23           --          15            2
   Other operating expenses                     662          285         436          116
                                          ---------    ---------   ---------    ---------
              Total noninterest expense         685          285         451          118
                                          ---------    ---------   ---------    ---------
              Income before taxes           105,238       86,650      20,574       41,646

Income tax expense (benefit)                     18           16      (1,480)      (2,514)
                                          ---------    ---------   ---------    ---------
              Net income                  $ 105,220    $  86,634   $  22,054    $  44,160
                                          =========    =========   =========    =========
</TABLE>



                                       75
<PAGE>


NOTE O - 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,
                                                     ----------------------    ------------    ---------
                                                        1998         1997         1996            1996
                                                     ---------    ---------    ------------    ---------
<S>                                                  <C>          <C>          <C>             <C>
Operating activities
    Net income                                       $ 105,220    $  86,634    $  22,054       $  44,160
    Adjustments to reconcile net income to
           net cash used in operating activities
       Equity in undistributed income of
           subsidiary                                   31,291      (54,362)         (53)       (45,648)
       Gain on sales of real estate held for
          investment                                   (11,047)          --           --             --
       Accretion of purchase discount                       --       (4,820)          --             --
       Amortization of bond
          discount and underwriting costs                  746          654          297            477
    Changes in operating assets and liabilities
          Increase (decrease) in other assets            2,377      (13,072)      (3,213)        (3,377)
          Increase (decrease) in other liabilities      (3,181)      15,388          744          2,635
                                                     ---------    ---------    ---------      ---------
                 Net cash provided by (used in)
                     operating activities              125,406       30,422       19,829         (1,753)

Investing activities
    Capital contributed to subsidiary                   (4,400)         (10)          --        (46,252)
    Proceeds from sales of real estate                  21,696           --           --             --
    Purchase of loans                                   (4,455)          --      (18,500)            --
    Repayment of loans                                      --       12,670           --             --
                                                     ---------    ---------    ---------      ---------
                 Net cash provided by (used in)
                      investing activities              12,841       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                                     (87,600)     (33,026)          --            (26)
                                                     ---------    ---------    ---------      ---------
         Net cash provided by (used in)
                     financing activities              (87,600)     (34,800)        (125)        56,425
                                                     ---------    ---------    ---------      ---------
               Net increase in cash and cash
                       equivalents                      50,647        8,282        1,204          8,420

 Cash and cash equivalents, beginning of year           17,906        9,624        8,420             --
                                                     ---------    ---------    ---------      ---------
Cash and cash equivalents, end of year               $  68,553    $  17,906    $   9,624      $   8,420
                                                     =========    =========    =========      =========

</TABLE>



                                       76
<PAGE>



                   BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

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


NOTE P - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued

                                        Year Ended December 31, 1998
                                 --------------------------------------------
                                    1ST          2ND        3RD         4TH
                                 --------    --------    --------    --------

Interest income                  $ 38,828    $ 39,868    $ 34,945    $ 36,325
Interest expense                   15,511      14,304      13,007      14,995
                                 --------    --------    --------    --------
      Net interest income          23,317      25,564      21,938      21,330

(Provision) credit for losses      (1,373)        309        (176)     (4,337)
Other income                        4,641      12,112      23,165       5,292
Other expenses                     (4,709)     (5,179)     (5,048)     (5,577)
                                 --------    --------    --------    --------
      Income before income tax     21,876      32,806      39,879      16,708

Income tax expense                  1,028       1,837         953       2,231
                                 --------    --------    --------    --------
      Net income                 $ 20,848    $ 30,969    $ 38,926    $ 14,477
                                 ========    ========    ========    ========
Income per common share          $  69.49    $ 103.23    $ 129.75    $  48.26
                                 ========    ========    ========    ========


                                        Year Ended December 31, 1997
                                 --------------------------------------------
                                    1ST          2ND        3RD         4TH
                                 --------    --------    --------    --------

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
                                 ========    ========    ========    ========





                                       77
<PAGE>


NOTE Q - 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
     years ended  December  31, 1998 and 1997,  the  Corporation  made  matching
     contributions of $107 and $103, respectively.





                                       78
<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 three
members  including  D. Andrew Beal,  Timothy M. Fults and Bernard L.  Weinstein.
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,  and
Director  Weinstein has served since June 1995.  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.


            Name                   Position With Company
     ------------------       ------------------------------------
     D. Andrew Beal           Chairman of the Board and President
     Timothy M. Fults         Secretary
     Margaret M. Curl         Vice President/Assistant Secretary
     James W. Lewis, Jr.      Vice President/Treasurer

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           46   Chairman of the Board                1985      1999
David C. Meek            54   Chief Executive Officer
                               and Director                        1996      1999
Gerald Hartman           61   President, Chief Operating
                               Officer and Director                1998      1999
Timothy M. Fults         45   Director and Secretary               1985      1999
Bernard L. Weinstein     56   Director                             1991      1999
Susan D. Arnold          56   Director                             1992      1999
Lawrence C. Blanton      62   Director                             1992      1999
R. Michael Eastland      53   Director                             1992      1999
David L. Goldstein, CPA  40   Director                             1993      1999

</TABLE>

------------------
(1)  At December 31, 1998.



                                      79

<PAGE>



      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 and  President  of the
Company and Chairman of the Board of the Bank. 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 Chief  Executive  Officer of the Bank. Mr. Meek
joined the Bank 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.

      GERALD HARTMAN. Mr. Hartman has been President and Chief Operating Officer
of the Bank since joining the Bank in October  1998.  Prior to joining the Bank,
Mr.  Hartman was President of Pacific  Southwest  Bank,  FSB,  located in Corpus
Christi,  Texas,  since May  1994.  From 1981  until  1994 he served in  various
capacities until becoming  President in 1983 of Colonial Savings,  F.A., located
in Fort Worth,  Texas.  Mr.  Hartman was also  formerly a partner with Coopers &
Lybrand and is a certified public accountant.

      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 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 Chairman of the  Montford  Mortgage
Company of Dallas,  Texas,  since August,  1998 and 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

                                      80

<PAGE>



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 44 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  50  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  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 43, 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, FSB, 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 46, 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  55,   has  been  the  Vice
President/Treasurer  of the Company since  October,  1998 and 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  63,  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

                                      81

<PAGE>



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, 1998,  the Board of Directors met eight times during the year ended December
31, 1998. 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, 1998, this committee met one time.

      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 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, 1998.

      The Executive  Loan Committee was formed in December 1994 and is comprised
of Directors Beal, Meek, Fults, Blanton,  Weinstein and Goldstein with directors
Hartman,  Arnold 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, 1998.

      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 five times during the year
ended December 31, 1998.

     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,  Weinstein and  Goldstein.  This Committee met ten times during the
year ended December 31, 1998.

      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 met one time during the year ended December 31, 1998.


                                      82

<PAGE>



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      During the year ended  December 31, 1998, 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, 1998.

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 two most highly  compensated  executive officers
of the Company in 1998 (the "Named Officers").

<TABLE>
<CAPTION>
                             Summary Compensation Table
-------------------------------------------------------------------------------------
                                                  Annual Compensation
                                                  -------------------      All Other
                                                    Salary    Bonus      Compensation
      Name and Principal Position         Year       ($)       ($)          ($)(1)
---------------------------------------   ----    --------  ---------    ------------
<S>                                       <C>     <C>        <C>          <C>
D. Andrew Beal, Chairman of the Board     1998    $120,000   $       --   $   N/A
   and President ......................   1997     120,000           --       N/A
                                          1996     120,000   10,500,000       N/A

David C. Meek, Chief Executive Officer    1998     200,000           --     6,000
  of the Bank ........................    1997     200,000      150,000     6,000
                                          1996     200,000      638,390     4,894

William T. Saurenmann, Senior Vice        1998     100,000       82,500     3,000
  President-Lending ...................   1997     100,000       90,000     3,000
                                          1996     103,845      105,000     2,622

Clark Enright, Senior Vice President/     1998     100,000       75,000     1,500
 Commercial Loans(2) ..................   1997      98,623      185,000     1,538
                                          1996      77,916       82,500     1,250
</TABLE>
--------------
(1) Includes the Company's  contribution  to the 401(k) Plan and life  insurance
premiums  paid.
(2) 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


                                      83

<PAGE>



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.

      As of the  December 31, 1998 the initial loan pool is comprised of certain
loans  originated  by the Company and its  subsidiaries  after  January 1, 1997,
aggregating  approximately  $117.7 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.

      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 $10,000 of his salary for  calendar  1998 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.


                                      84

<PAGE>



      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.


ITEM 12.    STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

      The  following  table sets  forth  information  as of  December  31,  1998
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.


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

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


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

      On  January  20,  1999,  Beal  Financial  made a term loan to its  primary
shareholder,  Mr. D. Andrew Beal (the "Borrower"),  in the amount of $60,000,000
(the "Loan").  The Loan is secured by a first priority  security interest in the
Borrower's  stock or other  ownership  interests  (including  all  products  and
proceeds thereof) in Beal Financial and other companies which are not affiliated
with  Beal  Financial.  Accrued  interest  is paid  quarterly  on the  Loan at a
fixed-rate of 10.5% per annum, and the Loan matures on December 30, 2001.

      Pursuant  to the  Indenture  relating to Beal  Financial's  12 3/4% Senior
Notes due August 15, 2000 (the "Senior Notes"),  Beal Financial has delivered to
the Indenture Trustee an Officer's Certificate  certifying that the Loan: (1) is
on terms that in good faith would be offered in an arm's length transaction to a
person  that is not an  affiliate  of Beal  Financial;  (2)  was  approved  by a
majority  of the  disinterested  board  of  directors,  and  (3) is fair to Beal
Financial  from a  financial  point of view based upon an opinion by a certified
expert with experience in appraising transactions of a type similar to the Loan.
Prior to the closing of the Loan,  the  independent  Board of  Directors of Beal
Financial  approved the Loan based upon,  among other things, a fairness opinion
from Valuation Research  Corporation  stating that (1) the Loan is on terms that
are no less  favorable to Beal Financial than would be available in a comparable
transaction in an arm's length dealing with a person that is not an affiliate of
Beal  Financial  or in good faith  would be  offered to a person  that is not an
affiliate of Beal Financial;  (2) after the Loan is made, Beal Financial remains
solvent under applicable state and Federal law; and (3) the Loan is fair to Beal
Financial and the holders of the Senior Notes from a financial point of view.

      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

                                      85

<PAGE>



those for similar transactions with  non-affiliates.  Except as described above,
at December 31, 1998, there were no loans outstanding to any director, executive
officer,  member  of their  immediate  families  or  business  interest  of such
individuals.


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, 1998 and
        1997
      Consolidated  Statements  of Income for the Year Ended  December 31,
        1998 and 1997, the Six Months Ended December 31, 1996 and the Year Ended
        June 30, 1996
      Consolidated Statements of Changes in Stockholders' Equity for the Years
        Ended December 31, 1998 and 1997, the Six Months Ended December 31, 1996
         and the Year Ended June 30, 1996
      Consolidated  Statements  of Cash Flows for the Years Ended  December  31,
         1998 and 1997,  the Six Months  Ended  December  31,  1996 and the Year
         Ended June 30, 1996
      Notes to Consolidated Financial Statements

      (a)(2) Financial Statement Schedules:

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




                                      86

<PAGE>


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

      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    None
                 vote of security holders
     23        Consents of Experts and Counsel                    None
     24        Power of Attorney                                  Not required
     27        Financial Data Schedule                               ***
     99        Additional Exhibits                                Not applicable

------------------
*     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.
**    Filed as exhibits to the Company's 1997 Annual Report on Form 10-K,  filed
      with the  Securities  and Exchange  Commission on April 14, 1998 (File 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,
1998.



                                      87

<PAGE>



                                 SIGNATURES

      Pursuant to the  requirements of Section 13 or 15(d) of the Securities Act
of 1934,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                    BEAL FINANCIAL CORPORATION



Date:                               By: /s/ D. Andrew Beal
      ---------------------------       --------------------------------------
                                        D. Andrew Beal, President
                                        (Duly Authorized Representative)


      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.



/s/ D. Andrew Beal                      /s/ James W. Lewis
----------------------------------      ---------------------------------------
D. Andrew Beal, Chairman                James W. Lewis, Vice President/Treasurer
                                        (Principal Financial Officer and
                                         Principal Accounting Officer)

Date:                                   Date:
      ----------------------------             ---------------------------------


/s/ Timothy M. Fults                    /s/ Dr. Bernard L. Weinstein
----------------------------------      ---------------------------------------
Timothy M. Fults, Director              Dr. Bernard L. Weinstein, Director


Date:                                   Date:
      ----------------------------            ---------------------------------

                                       
<PAGE>

                               INDEX TO EXHIBITS




    EXHIBIT
     NUMBER                              DOCUMENT
   --------  -------------------------------------------------------------------
      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***


*     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.
**    Filed as exhibits to the Company's 1997 Annual Report on Form 10-K,  filed
      with the  Securities  and Exchange  Commission on April 14, 1998 (File 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.