SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                           For the        For the      For the         For the           For the
                                                         Period From   Three Months  Three Months    Three Months      Period From
                                                       March 16, 1996     Ended         Ended           Ended         March 16, 1996
                                                          to May 31,     August 31,  November 30,    February 28,    to February 28,
(Dollar amounts in thousands, except per share data)        1996           1996         1996             1997               1997
                                                        ---------------------------------------------------------------------------
<S>                                                     <C>           <C>          <C>              <C>              <C>      
Selected Statement of Income Data:
Revenues:
  Mortgage servicing fees .............................    $41,485       $83,349      $91,636          $95,871         $312,341
  Amortization of mortgage servicing rights ...........    (16,442)      (40,464)     (48,831)         (50,090)        (155,827)
                                                        ---------------------------------------------------------------------------
    Net servicing revenue .............................     25,043        42,885       42,805           45,781          156,514
  Interest income .....................................     12,719        22,270       25,241           21,277           81,507
  Interest expense ....................................    (14,962)      (23,920)     (22,321)         (26,497)         (87,700)
                                                        ---------------------------------------------------------------------------
    Net interest revenue ..............................     (2,243)       (1,650)       2,920           (5,220)          (6,193)
  Net mortgage origination revenue ....................     10,810        16,273       16,521           22,469           66,073
  Other income ........................................        107           355           79              141              682
                                                        ---------------------------------------------------------------------------
    Total revenues ....................................     33,717        57,863       62,325           63,171          217,076
  Salaries and employee benefits ......................     11,480        21,177       20,650           19,669           72,976
  Occupancy and equipment .............................      1,846         3,084        3,337            3,503           11,770
  Servicing losses on investor-owned loans and
    foreclosure-related expenses ......................      3,938         4,058        4,957            4,981           17,934
  Other expenses ......................................      5,345        12,523       11,711           12,135           41,714
                                                        ---------------------------------------------------------------------------
    Total expenses ....................................     22,609        40,842       40,655           40,288          144,394
Income before income taxes and extraordinary
  loss on early extinguishment of debt ................     11,108        17,021       21,670           22,883           72,682
Income tax expense ....................................      4,554         6,954        9,015            8,750           29,273
                                                        ---------------------------------------------------------------------------
Income before extraordinary loss on early
  extinguishment of debt ..............................      6,554        10,067       12,655           14,133           43,409
Extraordinary loss on early extinguishment 
  of debt, net of tax .................................        --            --           --              6,440            6,440
                                                        ---------------------------------------------------------------------------
Net income ............................................     $6,554       $10,067      $12,655           $7,693          $36,969
                                                        ===========================================================================

Per Share Data:
Income per share before extraordinary loss ............      $0.34         $0.29        $0.36            $0.37            $1.33
Net income per share ..................................      $0.34         $0.29        $0.36            $0.20            $1.13
Weighted average shares outstanding ................... 19,246,902    34,973,790   34,996,360       38,279,486       32,687,780
                                                        ===========================================================================
Selected Balance Sheet Data at End of Period:
Mortgage loans held for sale ..........................   $974,484    $1,290,841   $1,101,229         $805,274         $805,274
Mortgage servicing rights .............................  1,235,708     1,428,117    1,339,819        1,614,307        1,614,307
Total assets ..........................................  2,666,771     2,934,938    2,858,711        2,752,182        2,752,182
Warehouse credit facility .............................    954,994     1,245,591    1,074,583          835,396          835,396
Long-term debt ........................................  1,168,059     1,064,067    1,157,508        1,134,235        1,134,235
Total liabilities .....................................  2,301,817     2,559,817    2,470,785        2,239,886        2,239,886
Total stockholders' equity ............................    364,954       375,121      387,926          512,296          512,296
                                                        ===========================================================================

Selected Operating Data:
Volume of loan production ............................. $3,780,236    $5,492,199   $5,540,875       $6,064,225      $20,877,535
Loan servicing portfolio (at period end) .............. 78,391,496    85,835,155   88,706,478       90,192,247       90,192,247
Loan servicing portfolio (average during the period) .. 44,718,020(a) 82,247,794   87,537,188       90,540,220       75,692,214(b)
Weighted average interest rate of the servicing 
   portfolio (at period end) ..........................      7.86%         7.92%        7.91%            7.92%            7.92%
Weighted average servicing fee of the servicing 
   portfolio (at period end) ..........................     0.367%        0.363%       0.359%           0.359%           0.359%
</TABLE>
------------
(a)  Period information is for March 1, 1996 through May 31, 1996.
(b)  Period information is for March 1, 1996 through February 28, 1997.

                                                                               9

                                 HomeSide, Inc.

<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations

HomeSide--For the Period From March 16, 1996 to February 28, 1997


General

HomeSide,  Inc. ("HomeSide" or the "Company") was formed on December 11, 1995 by
an investor  group,  consisting of Thomas H. Lee Company and its  affiliates and
Madison  Dearborn  Partners  (collectively,   the  "Investors"),  and  signed  a
definitive  stock  purchase  agreement  with The First  National  Bank of Boston
("Bank of Boston" or "BKB") for the  purpose  of  acquiring  certain  assets and
liabilities of the mortgage banking  business  ("BBMC") owned by Bank of Boston.
Bank of Boston  received  cash and an  ownership  interest  in the  Parent.  The
transaction  closed on March 15, 1996 and HomeSide began operations on March 16,
1996.

On May 31, 1996,  Barnett Banks,  Inc.  ("Barnett") sold certain of its mortgage
banking operations ("BMC"), primarily its mortgage servicing portfolio, mortgage
servicing  operations and proprietary  mortgage  banking  software  systems,  to
HomeSide.  Barnett received cash and an ownership interest in HomeSide.  Barnett
Mortgage  Company was  subsequently  renamed  HomeSide  Holdings,  Inc. For more
information on these acquisitions, see Note 4 of Notes to Consolidated Financial
Statements.

HomeSide  has  adopted a February  28 fiscal year end.  The  purchase  method of
accounting was used for the BBMC and BMC acquisitions,  and accordingly,  assets
acquired and liabilities assumed were recorded at their estimated fair values at
the date of acquisition.

HomeSide's  operating  results  are not  directly  comparable  to  BBMC  and BMC
historical operating results due, in part, to different balance sheet valuations
(estimated  fair value as compared to  historical  cost).  In addition,  certain
production  channels were retained by Bank of Boston and all of BMC's production
channels were retained by Barnett. Accordingly, comparative financial statements
for the same  period  in the  prior  year have not been  presented.  Instead,  a
comparison  is presented of the four  quarters in the period from March 16, 1996
to February 28, 1997. Results of operations prior to May 31, 1996 do not include
the results of operations of BMC, which was acquired on May 31, 1996.

Mortgage  banking is a  specialized  branch of the financial  services  industry
which  primarily   involves  (i)  originating  and  purchasing   mortgage  loans
("origination"  and/or  "production");  (ii) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing");  (iii)  servicing  of  mortgage  loans on  behalf  of the  ultimate
purchasers,  which  includes  the  collection  and  disbursement  of payments of
mortgage  principal  and  interest,  the  collection  of  payments  of taxes and
insurance  premiums to pay property taxes and insurance  premiums and management
of certain loan default  activities  (collectively,  "servicing");  and (iv) the
purchase and sale of the rights to service mortgage loans.

Mortgage bankers originate loans generally  through two channels:  wholesale and
direct.  Wholesale  origination  involves the origination of mortgage loans from
sources other than  homeowners,  including  mortgage  brokers and other mortgage
lenders.  Direct  origination  typically  includes  (i)  networks of retail loan
offices  with sales  staff that  solicit  business  from  homeowners,  realtors,
builders   and  other  real  estate   professionals,   (ii)   centers  that  use
telemarketing,  direct mail and  advertising  to market  loans  directly to home
buyers or  homeowners,  (iii)  affinity and  co-branding  partnerships  and (iv)
corporate  relocation programs.  Once originated or purchased,  mortgage bankers
hold the  loans  temporarily  ("warehousing")  until  they are  sold,  typically
earning an interest  spread equal to the difference  between the loan's interest
rate and the cost of financing the loan.  Each loan is sold either  excluding or
including the associated right to service the loan.

Mortgage bankers rely mainly on short-term borrowings,  such as warehouse lines,
to finance the origination of mortgages that are then typically  sold.  Mortgage
bankers also borrow on a longer term basis to finance their servicing assets and
working capital  requirements.  Revenues  consist  primarily of those related to
servicing and, to a lesser extent,  fees and interest spreads from originations.
The major expenses of a mortgage  banker  include costs of financing,  operating
costs related to  origination  and servicing  and the  amortization  of mortgage
servicing  rights.  Included in costs of financing  is the benefit  derived from
holding  custodial  deposits.   Custodial  deposits  are  comprised  of  amounts
collected from borrowers and not yet remitted to investors,  taxing  authorities
and other third parties.

Mortgage  bankers  typically seek to retain the rights to service the loans they
originate and to acquire rights to service additional loans in order to generate
recurring fee income.  The purchase and sale of servicing  rights can occur on a
loan-by-loan  basis  or on a  portfolio  (group  of  loans)  basis.  Prices  for
servicing rights are typically stated as a multiple of the servicing fee or as a
percentage of the outstanding  unpaid principal  balance for a group of mortgage
loans. Values of servicing portfolios are determined on the basis of the present
value of the servicing fee income stream (net of servicing costs) expected to be
received over the estimated life of the loans.  The assets of a mortgage banking
company  consist  primarily of loans in warehouse and the value of the servicing
rights purchased ("purchased mortgage servicing rights" or "PMSR") or originated
("originated mortgage servicing rights" or "OMSR").

The following information regarding loan production activities and the servicing
portfolio  for  HomeSide is  presented  to aid in  understanding  the results of
operations  and  financial  condition  of HomeSide for the period from March 16,
1996 to May 31, 1996,  each of the three months ended August 31, 1996,  November
30,  1996 and  February  28, 1997 and the period from March 16, 1996 to February
28, 1997.


                                HomesSide, Inc.
10

<PAGE>



Loan Production Activities
<TABLE>
<CAPTION>
                                         For the              For the             For the            For the            For the
                                        Period From         Three Months       Three Months       Three Months        Period From
                                      March 16, 1996            Ended              Ended              Ended        March 16, 1996 to
                                      to May 31, 1996      August 31, 1996   November 30, 1996  February 28, 1997  February 28, 1997
                                     -----------------------------------------------------------------------------------------------
                                                                          (dollars in millions)
<S>                                        <C>                 <C>                 <C>               <C>                <C>    
Total production and acquisitions          
Correspondent (includes volumes
  purchased from BKB and Barnett) ..       $1,893               2,950              $3,249            $3,021             $11,113 
Co-issue(a) ........................        1,419               2,208               1,985             2,610               8,222
Broker .............................          220                 155                 168               300                 843
                                     -----------------------------------------------------------------------------------------------
Total Wholesale ....................        3,532               5,313               5,402             5,931              20,178  
Direct .............................          248                 179                 139               134                 700
                                     -----------------------------------------------------------------------------------------------
Total production ...................        3,780               5,492               5,541             6,065              20,878
Bulk acquisitions ..................           --               4,073                  --               --                4,073
                                     -----------------------------------------------------------------------------------------------
Total production and acquisitions ..       $3,780              $9,565              $5,541            $6,065             $24,951
                                     ===============================================================================================
</TABLE>
------------
(a)  Co-issue  production  represents  the purchase of  servicing  rights from a
     correspondent  under contracts to deliver specified volumes on a monthly or
     quarterly  basis.  The substance of this  transaction  is the purchase of a
     loan and mortgage  servicing right with the instantaneous  sale of the loan
     with the servicing right retained.  Amounts  represent the unpaid principal
     balance of mortgage debt to which the acquired servicing rights relate.


Total loan  production  increased from $3.8 billion in the period from March 16,
1996 to May 31, 1996 to $5.5  billion in the second and third  quarters and $6.1
billion for the three months ended February 28, 1997.  These  increases were due
to the additional  production  resulting from the  acquisition of BMC on May 31,
1996 and growth in HomeSide's existing wholesale channels. In addition, HomeSide
made bulk  servicing  acquisitions  of $4.1 billion during the second quarter of
fiscal 1997.


<PAGE>


Servicing Portfolio
<TABLE>
<CAPTION>
                                        For the            For the              For the            For the             For the
                                      Period From       Three Months        Three Months       Three Months         Period From
                                     March 1, 1996          Ended               Ended              Ended         March 1, 1996 to
                                    to May 31, 1996    August 31, 1996    November 30, 1996  February 28, 1997   February 28, 1997
                                    -----------------------------------------------------------------------------------------------
                                                                          (dollars in millions)
<S>                                     <C>               <C>                  <C>                <C>                 <C>    
Balance at beginning of period ...      $42,907           $78,391              $85,835            $88,706             $42,907
Acquisition of BMC ...............       33,082                --                   --                 --              33,082
Other additions ..................        4,102             9,842                5,244              6,064              25,252
                                    -----------------------------------------------------------------------------------------------
    Total additions ..............       37,184             9,842                5,244              6,064              58,334
                                    -----------------------------------------------------------------------------------------------
Scheduled amortization ...........          235               494                  517                576               1,822
Prepayments ......................        1,321             1,702                1,529              1,674               6,226
Foreclosures .....................          130               137                  106                141                 514
Sales of servicing ...............           14                65                  221              2,187(a)            2,487(a)
                                    -----------------------------------------------------------------------------------------------
Total reductions .................        1,700             2,398                2,373              4,578              11,049
                                    -----------------------------------------------------------------------------------------------
Balance at end of period .........      $78,391           $85,835              $88,706            $90,192             $90,192
                                    ===============================================================================================
</TABLE>
------------
(a)  Includes  $1.9  billion of  servicing  sold as part of the sale of Honolulu
     Mortgage Company.

The number of loans being serviced at February 28, 1997 was 1,087,336,  compared
to 1,085,000 as of November 30, 1996,  1,059,000 as of August 31, 1996,  984,000
as of May 31,  1996 and 510,000 as of March 1, 1996.  HomeSide's  strategy is to
build its mortgage  servicing  portfolio and benefit from the economies of scale
inherent in the business.


Results of Operations

Summary

HomeSide  reported  net income  before an  extraordinary  item of $14.1  million
during  the  fourth  quarter  of fiscal  1997,  compared  to net income of $12.6
million during the third quarter of fiscal 1997, $10.1 million during the second
quarter of fiscal 1997 and $6.6 million during the first quarter of fiscal 1997.
Net income  before an  extraordinary  item for the period from March 16, 1996 to
February 28, 1997 was $43.4 million.  Included in net income for fiscal 1997 and
the fourth fiscal quarter is an extraordinary charge. HomeSide used a portion of
the proceeds from the sale of common stock to pre-pay $70.0 million of Notes. In
connection  with the early  repayment of notes,  HomeSide wrote off a portion of
the unamortized  debt-issue cost related to the Notes and incurred a pre-payment
penalty of $7.9 million.  The 

                                                                              11

                                 HomeSide, Inc.
<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

extraordinary loss amounted to $6.4 million net of tax of $4.3 million, or $0.13
per share.  For the fourth fiscal  quarter,  net income after the  extraordinary
item was $7.7 million. Net income after the extraordinary item was $37.0 million
for fiscal 1997.

Total  revenues  during  fiscal 1997  increased  from $33.7 million in the first
quarter  to $57.9  million  in the second  quarter,  $62.3  million in the third
quarter and $63.2  million in the fourth  quarter.  The primary  reasons for the
increase of $0.9 million in total  revenue in the fourth  quarter as compared to
the  third  quarter  of fiscal  1997 were an  increase  of $3.0  million  in net
servicing  revenue and an increase of $6.0 million in net  mortgage  origination
revenue,  offset by a decrease  of $8.1  million in net  interest  revenue.  The
increase  in net  servicing  revenue  was due to an  increase in the size of the
servicing  portfolio,  and the increase in net mortgage  origination revenue was
accounted for by increased  loan  production.  Net interest  revenue  decreased,
because the  average  balances  of  mortgage  loans held for sale and  custodial
balances declined from quarter to quarter.

The  primary  reason for the  increase of $4.4  million in total  revenue in the
third  quarter as compared to the second  quarter of fiscal 1997 was an increase
of $4.6 million in net interest revenue.  Interest income increased in the third
quarter as compared  with the second  quarter of fiscal 1997 as the result of an
increase  in the  average  balance  of  mortgage  loans  held  for  sale.  Lower
short-term interest rates, improved pricing on borrowings under the bank line of
credit and higher balances of custodial  deposits  lowered the interest  expense
for the third quarter of fiscal 1997 compared to the second quarter.

The  increase  of $24.2  million  in total  revenues  in the  second  quarter as
compared  to the first  quarter  of fiscal  1997 was  primarily  a result of the
acquisition  of BMC on May 31, 1996.  Results of operations for BMC are included
from the date of  acquisition  and,  therefore,  are not included in  HomeSide's
first  quarter of fiscal 1997  results.  The BMC  servicing  portfolio was $33.1
billion  at May 31,  1996 and its  acquisition  increased  HomeSide's  servicing
portfolio  by 75% on that date and also  increased  net  servicing  revenue from
$25.0 million in the first quarter of fiscal 1997 to $42.9 million in the second
quarter of fiscal 1997. Also as part of the BMC  acquisition,  Barnett agreed to
sell HomeSide the loans  produced by the loan  production  networks  retained by
Barnett. This additional production increased net mortgage origination revenue.


Net Servicing Revenue

Net  servicing  revenue  increased  from $25.0  million in the first  quarter of
fiscal 1997 to $42.9 million in the second  quarter,  $42.8 million in the third
quarter and $45.8 million in the fourth quarter.  Net servicing  revenue for the
period  from March 16, 1996 to February  28, 1997 was $156.5  million.  Mortgage
servicing  fees  generally  range from 0.25% to 0.50% per annum of the declining
principal  balances of the loans.  HomeSide's  weighted  average  servicing fee,
excluding  ancillary  income,  during each of the quarters of fiscal 1997 was as
follows:  0.367% during the first  quarter,  0.363%  during the second  quarter,
0.359%  during the third  quarter  and 0.359%  during  the fourth  quarter.  The
decrease in the weighted  average  servicing  fee from the first  quarter to the
second  quarter of fiscal 1997 was due to the servicing  rights  acquired in the
BMC  acquisition.  These servicing rights generally had lower servicing fees due
to the lower  proportion of  government  loans in BMC's  servicing  portfolio as
compared to the servicing  portfolio acquired from BBMC and serviced by HomeSide
during the first  quarter.  Likewise,  the second  quarter bulk  acquisition  of
servicing  rights  consisted  of a relatively  lower  proportion  of  government
servicing,  further reducing the weighted average  servicing fee from the second
quarter to the third quarter.  The acquisition took place on August 31, 1996 but
was not  transferred  to  HomeSide's  servicing  system  until the third  fiscal
quarter.  Mortgage  servicing  fees  increased  from $41.5  million in the first
quarter to $83.3 million in the second quarter, primarily as a result of the BMC
acquisition.  The increases in mortgage servicing fees from $83.3 million in the
second  quarter to $91.6  million in the third  quarter and $95.9 million in the
fourth  quarter  are the  result  of  increases  in the  size  of the  servicing
portfolio. Amortization of mortgage servicing rights, which is recorded over the
estimated   servicing  period  in  proportion  to  estimated  servicing  revenue
increased  throughout  the period from March 16, 1996 to February  28, 1997 as a
result of a higher average servicing portfolio balance.


Risk Management Activities

HomeSide has a risk management program designed to protect the economic value of
its  mortgage  servicing  portfolio  from  declines in value due to increases in
estimated loan prepayment speeds,  which are primarily influenced by declines in
interest  rates.  When  loans  prepay  faster  than  anticipated,  the cash flow
HomeSide  expects to receive from servicing such loans is reduced.  The value of
mortgage  servicing rights is based on the present value of the cash flows to be
received  over the life of the loan and  therefore,  the value of the  servicing
portfolio declines as prepayments increase.

During the period from March 16, 1996 to February 28, 1997,  HomeSide  purchased
options on U.S.  Treasury bond futures to protect a  significant  portion of the
market value of its mortgage  servicing  portfolio from a decline in value.  The
option  contracts used by HomeSide have  characteristics  such that they tend to
increase in value as interest rates decline.  Conversely, these option contracts
tend to decline in value as interest rates rise.  Accordingly,  changes in value
of  these  securities  will  tend to move  inversely  with  changes  in value of
HomeSide's mortgage servicing rights.


12

                                 HomeSide, Inc.
<PAGE>


These option  contracts  are  designated as hedges on the purchase date and such
designation  is at a level at least as specific  as the level at which  mortgage
servicing  rights  are  evaluated  for  impairment.  The  option  contracts  are
marked-to-market  with changes in market value  deferred as an adjustment to the
carrying  value of the related  mortgage  servicing  right  asset being  hedged.
Changes in market  value that are  deferred  are  amortized  and  evaluated  for
impairment  in the same manner as the related  mortgage  servicing  rights.  The
effectiveness of HomeSide's  hedging activity can be measured by the correlation
between  changes  in the  value  of the  options  and  changes  in the  value of
HomeSide's  mortgage  servicing  rights.  This  correlation  is  assessed  on  a
quarterly  basis to ensure that high  correlation is maintained over the term of
the  hedging  program.  During  each  of the  periods  presented,  HomeSide  has
experienced  a high  measure  of  correlation  between  changes  in the value of
mortgage  servicing  rights and the  option  contracts.  However,  in periods of
rising interest rates,  the increase in value of mortgage  servicing  rights may
outpace  the decline in value of the option  contracts,  because the loss on the
options is limited to the premium paid.

Since  HomeSide's  inception,  cumulative  net deferred gains and losses on risk
management  contracts  resulted  in a $121.6  million  net loss.  Of the  $121.6
million net loss,  $11.0 million was amortized and  recognized as a component of
amortization  of mortgage  servicing  rights,  resulting in a net deferred hedge
loss of $110.6  million,  which is  included in the  carrying  value of mortgage
servicing  rights at February 28, 1997. The increase in the estimated fair value
of the mortgage  servicing rights  approximated  the net hedge loss.  HomeSide's
future cash needs as they relate to its hedging  program will be  influenced  by
such factors as long-term  interest rates,  loan production levels and growth in
the  mortgage  servicing  portfolio.  The  fair  value of open  risk  management
contracts  at  February  28,  1997 was $45.2  million,  which was equal to their
carrying amount because the options are marked-to-market at each reporting date.
See  "--Liquidity  and Capital  Resources" for further  discussion of HomeSide's
sources  and  uses of  cash.  See  Note 3 of  Notes  to  Consolidated  Financial
Statements  for a  description  of  HomeSide's  accounting  policy  for its risk
management contracts. See Notes 14, 15 and 16 of Notes to Consolidated Financial
Statements for additional fair value disclosures with respect to HomeSide's risk
management contracts.


Net Interest Revenue

Net interest  revenue is driven by the level of interest rates, the direction in
which  rates are moving and the spread  between  short- and  long-term  interest
rates. These factors influence the size of the residential  mortgage origination
market,  HomeSide's  production volumes and the interest rates HomeSide earns on
loans and pays to its lenders.

Loan  refinancing  levels are the biggest  contributor to changes in the size of
the mortgage  origination  market.  To reduce the cost of their home  mortgages,
borrowers  tend to refinance  their loans during  periods of declining  interest
rates,  increasing  the size of the market and  HomeSide's  production  volumes.
Higher  production  volumes result in higher average  balances of loans held for
sale and  consequently  higher levels of interest income from interest earned on
such loans prior to their  sale.  This  higher  level of interest  income due to
increased volumes is partially offset by the lower rates earned on the loans.

Overall   borrowing  costs  also  fluctuate  with  changes  in  interest  rates.
Currently, the interest expense HomeSide pays to finance mortgage loans held for
sale and other net assets is generally  calculated  with reference to short-term
interest rates. In addition,  because mortgage loans held for sale earn interest
based on longer term interest rates,  the level of net interest  revenue is also
influenced by the spread between long-term and short-term interest rates.

Net interest  revenue  during  fiscal 1997 was $(2.2)  million  during the first
quarter, $(1.7) million during the second quarter, $2.9 million during the third
quarter and $(5.2) million during the fourth quarter.  Net interest  revenue for
the period from March 16, 1996 to February 28, 1997 was $(6.2) million. Interest
income and interest  expense  increased during the second quarter of fiscal 1997
as  compared  with the first  quarter as a result of an  increase in the average
balance of mortgage loans held for sale from $770.0 million in the first quarter
of fiscal 1997 to $1.3 billion  during the second  quarter of fiscal 1997 and an
increase in the average  balance of notes  payable to banks from $1.3 billion to
$2.0  billion  from the first  quarter  to the second  quarter  of fiscal  1997,
respectively.  The  acquisition  of BMC  on  May  31,  1996  contributed  to the
increased  balances of  mortgage  loans held for sale and  borrowings.  Interest
income  during the second  quarter  was also  positively  affected  by a general
increase in long-term interest rates during the second quarter.

Interest income increased,  while interest expense  decreased,  during the third
quarter of fiscal 1997 as compared with the second  quarter of fiscal 1997.  The
increase  in  interest  income  during  the third  quarter  was the result of an
increase  in the  average  balance  of  mortgage  loans  held for sale from $1.3
billion in the second quarter to $1.4 billion during the third quarter of fiscal
1997. Lower  short-term  interest rates and improved pricing on borrowings under
the bank line of credit  contributed to the reduction in interest expense in the
third quarter of fiscal 1997 as compared with the second quarter of fiscal 1997.
In addition,  the average  balance of  custodial  deposits  increased  from $1.3
billion in the second fiscal quarter to $1.4 billion in the third fiscal quarter
of 1997.  Interest  expense is reduced by credits  received  on  borrowings  for
custodial deposits.

Interest  income  decreased,  while interest  expense  increased,  in the fourth
quarter of fiscal 1997 as compared  with the third  quarter of fiscal 1997.  The
decrease in interest  income during the fourth quarter was the result of a lower
average  balance  of  


                                                                              13
                                 HomeSide, Inc.

<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

mortgage  loans held for sale  during the fourth  quarter  compared to the third
quarter.  During  the  fourth  quarter,  more  mortgage  loans  were sold  under
repurchase  agreements  than in  previous  quarters in fiscal  1997.  Repurchase
agreements  provide an alternative to the bank line of credit for mortgage loans
held for sale. Under these  agreements,  mortgage loans are sold earlier and not
held as long in the warehouse.  These  agreements  have the effect of increasing
gains on sales of loans and reducing  interest income.  The increase in interest
expense in the fourth  quarter of fiscal 1997 as compared with the third quarter
reflects the lower  average  balances for custodial  deposits.  The benefit from
custodial deposits reduces interest expense.


Net Mortgage Origination Revenue

Net mortgage  origination revenue is comprised of fees earned on the origination
of  mortgage  loans,  gains and  losses on the sale of loans,  gains and  losses
resulting from hedges of secondary marketing activity and fees charged to review
loan documents for purchased loan production.

Net mortgage origination revenue increased during fiscal 1997 from $10.8 million
during the first  quarter to $16.3  million  during  the second  quarter,  $16.5
million  during the third quarter and $22.5 million  during the fourth  quarter.
Total net  mortgage  origination  revenue  for the period from March 16, 1996 to
February 28, 1997 was $66.1 million. As noted above, loan production,  exclusive
of bulk servicing  acquisitions,  increased during fiscal 1997 from $3.8 billion
in the first quarter to $5.5 billion in the second quarter,  $5.5 billion in the
third  quarter  and $6.1  billion in the fourth  quarter.  The  increase in loan
production  from the first to the second quarter of fiscal 1997 is reflective of
production from the preferred seller  relationship  with Barnett  established as
part of the BMC acquisition.  HomeSide's primary  origination  activities during
fiscal 1997 were through  correspondent and co-issue channels.  HomeSide expects
these  channels to continue to be the primary  loan  origination  sources in the
future.


Salaries and Employee Benefits

Salaries and employee benefits expense increased from $11.5 million in the first
quarter of fiscal 1997 to $21.2  million in the second  quarter of fiscal  1997,
decreased to $20.6 million during the third quarter of fiscal 1997 and decreased
to $19.7 million during the fourth quarter of fiscal 1997. Salaries and employee
benefits  for the period  from March 16,  1996 to  February  28, 1997 were $73.0
million.  The increase in salaries and employee  benefits from the first quarter
to the  second  quarter  of  fiscal  1997 was due to  growth  in the  number  of
employees as a result of the acquisition of the mortgage servicing operations of
BMC on May 31, 1996. The average number of full time  equivalent  employees grew
from 1,096  during the first  quarter of fiscal 1997 to 1,879  during the second
quarter of fiscal 1997.  The  subsequent  decreases  were due to the  continuing
integration of the BMC servicing  operations and the corresponding  reduction in
the number of employees.  The average number of full time  equivalent  employees
fell from 1,879 during the second  quarter to 1,708 during the third quarter and
1,689 during the fourth quarter.


Occupancy and Equipment Expense

Occupancy and equipment expense primarily  includes rental expense,  repairs and
maintenance  costs,  certain  computer  software  expenses and  depreciation  of
HomeSide's  premises and  equipment.  Occupancy  and  equipment  expense for the
period from March 16, 1996 to February 28, 1997 was $11.8 million. Occupancy and
equipment  expense grew during  fiscal 1997 from $1.9  million  during the first
quarter to $3.1 million during the second quarter, $3.3 million during the third
quarter and $3.5 million during the fourth quarter.

The  increase in  occupancy  and  equipment  expense was due to the premises and
equipment acquired in the  BMCacquisition  and increases in information  systems
required to handle the growing mortgage servicing portfolio.


Servicing Losses on Investor-Owned Loans and
Foreclosure-Related Expenses

Servicing  losses  on  investor-owned  loans  and  foreclosure-related  expenses
represent  anticipated  losses  primarily  attributable  to servicing FHA and VA
loans for investors.  These amounts include actual losses for final  disposition
of loans,  accrued  interest for which payment has been denied,  non-recoverable
foreclosure  costs  and  estimates  for  potential  losses  based on  HomeSide's
experience as a servicer of government loans.

During  fiscal  1997  the   servicing   losses  on   investor-owned   loans  and
foreclosure-related  expenses  increased from $3.9 million for the first quarter
to $4.1 million for the second  quarter,  $4.9 million for the third quarter and
$5.0 million for the fourth quarter.  Servicing losses on  investor-owned  loans
and foreclosure-related  expenses for the period from March 16, 1996 to February
28,  1997 was $17.9  million.  The  increases  are largely  attributable  to the
acquisition  of the BMC  servicing  portfolio  and the  growth of the  servicing
portfolio resulting from loan production.

Included in the balance of accounts payable and accrued  liabilities at February
28, 1997 is a reserve for estimated servicing losses on investor-owned  loans of
$21.7 million.  The reserve has been established for potential losses related to
the  mortgage  servicing  portfolio.  Increases  to the  reserve  are charged to
earnings as servicing losses on  investor-owned  loans. The reserve is decreased
for  actual  losses  incurred  related  to  the  mortgage  servicing  portfolio.
HomeSide's  historical loss experience on VA loans generally has been consistent
with industry experience.


14

                                 HomeSide, Inc.
<PAGE>


Other Expenses

Other expenses  consist mainly of  professional  fees,  communications  expense,
advertising  and public  relations,  data  processing  expenses and certain loan
origination expenses.  The level of other expenses fluctuates in part based upon
the  level of  HomeSide's  mortgage  servicing  portfolio  and  loan  production
volumes.

Other expenses during fiscal 1997 were $5.4 million for the first quarter, $12.5
million for the second  quarter,  $11.7  million for the third quarter and $12.1
million for the fourth  quarter.  Other  expenses  for the period from March 16,
1996 to February 28, 1997 were $41.7  million.  The  increase in other  expenses
from the  first to the  second  quarter  of  fiscal  1997 was the  result of the
acquisition of BMC.


Income Tax Expense

HomeSide's  income tax  expense  was $4.6  million  during the first  quarter of
fiscal 1997, $7.0 million during the second fiscal quarter,  $9.0 million during
the third fiscal  quarter and $8.7  million  during the fourth  fiscal  quarter.
Income tax  expense  was $29.3  million  for the period  from March 16,  1996 to
February  28,  1997,  all of which was  deferred.  The  increases  in income tax
expense were  attributable to the increases in net income.  The effective income
tax rate for fiscal 1997 was approximately 40%.


Liquidity and Capital Resources

Operations 

Net cash provided by operations was $203.8 million for the period from March 16,
1996 to February 28, 1997.  The primary uses of cash in operations  were to fund
loan originations and pay corporate expenses.  These uses of cash were offset by
cash provided from  servicing fee income,  loan sales and principal  repayments.
Cash flows from loan originations are dependent upon current economic conditions
and the level of long-term interest rates. Decreases in long-term interest rates
generally  result in higher loan  refinancing  activity  which results in higher
cash demands to meet increased loan  production  levels.  Cash needs in times of
increased production are primarily met through borrowings and loan sales.


Investing

Net cash used in investing  activities was $862.2 million during the period from
March 16, 1996 to February  28,  1997.  Cash used in  investing  activities  was
primarily used for the purchase and origination of mortgage servicing rights and
the  purchase of options on U.S.  Treasury  bond  futures as part of  HomeSide's
hedging  program.  During the period from March 16, 1996 to February  28,  1997,
HomeSide  also made  payments of $133.4  million  and $106.2  million to acquire
certain mortgage banking operations of BBMC and BMC, respectively (see Note 4 of
Notes to Consolidated Financial  Statements).  Future uses of cash for investing
activities will be dependent on the mortgage  origination  market and HomeSide's
hedging  needs.  HomeSide is not able to estimate  the timing and amount of cash
uses  for  future  acquisitions  of other  mortgage  banking  entities,  if such
acquisitions were to occur.


Financing

During the period from March 16, 1996 to February 28, 1997,  HomeSide had $711.1
million of net cash  provided by financing  activities.  The primary  sources of
cash from  financing  activities  during the period  were  $269.6  million  from
proceeds from issuance of common stock, net borrowings under HomeSide's lines of
credit of $334.2  million and $200.0  million from the  issuance of Notes.  Cash
used in  financing  activities  was used to repay a $90.0  million  bridge loan,
$70.0  million of the Notes  issued  earlier in the year and the payment of debt
issue costs.

Cash from financing  activities was provided by the three-year  senior revolving
credit facility that was entered into on March 15, 1996 and re-issued on January
31,  1997.  The  line of  credit  is  subject  to a $2.5  billion  limit  and is
unsecured.  Under certain  circumstances,  amounts  outstanding under the credit
facility become secured obligations. The $2.5 billion commitment is comprised of
a servicing-related  credit facility,  capped at $950.0 million, and a warehouse
loan  commitment.  Such borrowings bear interest at rates per annum based on, at
HomeSide's  option,  (A) the highest of (i) the lead bank's prime rate, (ii) the
secondary  market rate of  certificates  of deposit plus 100 basis  points,  and
(iii) the  federal  funds  rate in  effect  from time to time plus 0.5% or (B) a
eurodollar  rate.  Cash  provided  by the bank line of  credit is the  result of
borrowings  needed to finance loan  origination  activity.  In periods of higher
loan origination  activity,  cash needs are greater and,  accordingly,  HomeSide
must borrow under the credit  facility in order to meet  production  demand.  In
periods of reduced loan demand, proceeds from loan sales can be used to pay down
the bank line of credit.  In future periods,  it is expected that cash financing
needs  will  primarily  be met from  drawings  under the bank line of credit and
other  facilities  which may be entered into from time to time,  as well as from
the issuance of debt securities in the public markets. There can be no assurance
that such additional  facilities will be available or that market  conditions at
any given time will be such that  public  issuances  of debt  securities  can be
effected on  favorable  terms.  On January 15,  1997,  HomeSide  entered  into a
short-term credit facility in an aggregate principal amount of $85.0 million. On
March 14, 1997,  HomeSide entered into another  short-term credit facility in an
aggregate  principal  amount of $100.0 million.  These facilities each expire on
the earlier to occur of May 1, 1997, or the  consummation of the initial sale of
the medium-term debt securities. Drawings under both the facilities are based on
a variety of indices,  including  the bank's prime rate,  federal  funds and the
secondary market rate for certificates of deposit.


                                                                              15

                                 HomeSide, Inc.

<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)


In  February  1997,  HomeSide  Lending,   Inc.,   HomeSide's  primary  operating
subsidiary,  filed a shelf  registration  statement in connection  with a public
offering of various  debt  securities.  The  proceeds  from the issuance of such
securities,  if drawn upon, will be used to reduce amounts outstanding under the
bank line of credit or to repay other  outstanding  indebtedness and for working
capital and  general  corporate  purposes,  including  the  purchase of mortgage
servicing rights.

During the period from March 16, 1996 to February 28, 1997, net cash provided by
operations  was $203.8  million,  cash used in investing  activities  was $862.2
million and cash provided by financing activities was $711.1 million,  resulting
in a net increase in cash of $52.7 million.  HomeSide expects that to the extent
cash generated from operations is inadequate to meet its liquidity needs,  those
needs can be met through  financing from its bank credit facility,  other credit
facilities  which may be entered into from time to time and the public  issuance
of debt securities.  Accordingly, HomeSide does not currently anticipate that it
will make sales of servicing rights to any significant degree for the purpose of
generating cash.  Nevertheless,  in addition to its cash and mortgage loans held
for sale balances,  HomeSide's portfolio of mortgage servicing rights provides a
potential source of funds to meet liquidity requirements,  especially in periods
of rising interest rates when loan origination  volume slows.  Future cash needs
are highly dependent on future loan production and servicing results,  which are
influenced by changes in long-term interest rates.


Cautionary Statement Pursuant to Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995

This  report  contains  "forward-looking  statements"  within the meaning of the
federal  securities  laws.  Forward-looking  statements in this report regarding
trends in interest rates, loan production  levels,  values of mortgage servicing
rights and potential  acquisitions are subject to risks and  uncertainties  that
could cause  actual  results to differ  materially  from those  expressed  in or
implied by the statements.


16

                                 HomeSide, Inc,

<PAGE>


Management's Discussion and Analysis of Financial
Condition and Results of Operations

BBMC--For  the Periods  January 1, 1996 to March 15, 1996 and January 1, 1995 to
March 31, 1995 and for the Two Years Ended December 31, 1995


General

Prior to March 15, 1996, BBMC was a wholly-owned subsidiary of Bank of Boston, a
subsidiary of Bank of Boston Corporation  ("BKBC").  On March 15, 1996, BBMC was
acquired  by  HomeSide.  The  interim  financial  statements  of BBMC  have been
prepared for the period  January 1, 1996 to March 15, 1996 to coincide  with the
closing of the BBMC Acquisition. Results of operations for periods subsequent to
March 15, 1996 are included in the financial statements of HomeSide.  Results of
operations  for the three  months ended March 31, 1995 have been  presented  for
comparative  purposes.  Unless otherwise noted,  references to the first quarter
1996  pertain to the period  January 1, 1996 to March 15,  1996.  BBMC  reported
earnings on a calendar year basis.

BBMC operates as a  full-service  mortgage  banking firm  emphasizing  wholesale
mortgage  originations  and low cost mortgage  servicing.  Servicing  activities
represent  BBMC's primary  revenue  source.  BBMC also generates  revenue,  to a
lesser extent,  from mortgage loan  origination  fees.  BBMC incurs expenses for
amortization of mortgage  servicing  rights,  interest on its line of credit and
general corporate activities.

On June 1, 1995, BBMC purchased  certain assets and assumed certain  liabilities
of  Bell  Mortgage  Company  ("Bell   Mortgage"),   a  privately-held   mortgage
origination company located in Minneapolis,  Minnesota.  The acquisition of Bell
Mortgage was accounted for under the purchase  method of accounting.  Results of
operations  of Bell  Mortgage  are included in the 1995  consolidated  financial
statements  from the date of  acquisition.  See Note 16 of Notes to Consolidated
Financial  Statements of BancBoston Mortgage  Corporation on page 51 for further
discussion.


Results of Operations

Summary

BBMC reported net income of $58.8 million in 1995 and $5.4 million in 1994.  Net
income in 1994  included an after tax  positive  effect of $3.5  million  from a
change in the accounting for mortgage servicing fee income.  Prior to the effect
of such adjustment, BBMC had income of $58.8 million in 1995 and $2.0 million in
1994.  See Note 2 of Notes to  Consolidated  Financial  Statements  for  further
discussion of BBMC's accounting changes.

The  increase  in net income in 1995 as compared  to 1994 was  primarily  due to
factors that resulted  from a decrease in interest  rates coupled with growth in
BBMC's servicing  portfolio.  The lower interest rate environment  resulted in a
gain related to BBMC's risk management  activities in 1995 as compared to a loss
in  1994.  BBMC  also  benefited  from  a 9%  increase  in  the  balance  of its
residential servicing portfolio from $38.0 billion at December 31, 1994 to $41.6
billion at December 31, 1995.

The increases were  partially  offset,  however,  by higher  mortgage  servicing
rights amortization charges as a result of larger mortgage servicing volumes and
higher prepayment activity in 1995.

Long-term interest rates declined through mid-February 1996, the continuation of
a trend which began in 1995.  This decline led to an increase in loan production
to $4.2 billion  during the first  quarter of 1996 from $1.2 billion  during the
first  quarter of 1995,  and  resulted  in growth in BBMC's  mortgage  servicing
portfolio,  which  increased  from $41.6  billion at December  31, 1995 to $44.2
billion at March 31, 1996.  Beginning in late  February and  continuing  through
March 1996,  long-term  interest rates increased and negatively  affected BBMC's
results of operations for the first  quarter.  BBMC reported a net loss of $73.9
million during the first quarter of 1996, compared to net income of $3.4 million
in the first  quarter of 1995.  The decrease in net income was  primarily due to
losses of $128.8 million on BBMC's risk  management  contracts  during the first
quarter of 1996,  a result of  increasing  interest  rates in late  February and
March 1996.


Net Servicing Revenue

Net  servicing  revenue  increased  from  $67.0  million to $173.7  million,  an
increase  of $106.7  million  or  159.3%,  from 1994 to 1995.  This  growth  was
comprised of a $115.4 million increase in gain on risk management  contracts and
a $32.5 million increase in mortgage  servicing fees,  offset by a $41.2 million
increase  in  amortization  of  mortgage  servicing  rights.  The  gain  on risk
management  contracts resulted primarily from a decline in interest rates in the
fourth quarter of 1995 and was substantially offset by a related decrease in the
economic value of the servicing  portfolio,  which was not reflected in earnings
for the  period.  The cost of  acquiring  the right to  service  mortgage  loans
originated  by others is  capitalized  and amortized as a reduction of servicing
fee revenue  over the  estimated  servicing  period.  The  increases in mortgage
servicing fees and amortization of mortgage  servicing rights were primarily due
to growth in BBMC's average servicing  portfolio during 1995.  Average servicing
fees,  excluding  ancillary  income,  decreased  slightly from 0.389% in 1994 to
0.383% in 1995.

At December 31, 1995, BBMC serviced approximately 510,000 loans, including loans
purchased not yet on BBMC's servicing  system,  with an unpaid principal balance
("UPB") of $41.6 billion,  compared to  approximately  484,000 loans with UPB of
$38.0 billion at December 31, 1994, an increase of $3.6  billion,  or 9.5%.  The
average  servicing  volume increased from $33.2 billion in 1994 to $39.3 billion
in 1995,  an  increase  of $6.1  billion  or 18.4%.  Growth in BBMC's  servicing
portfolio was primarily  generated by wholesale loan production,  which includes
correspondent,  co-issue  and broker  channels.  BBMC also  purchased  servicing
rights in bulk from other mortgage servicing  entities.  Bulk purchases totalled
$5.5 billion and $0.7 billion in 1994 and 1995, respectively.

                                                                              17

                         BancBoston Mortgage Corporation
                  (Acquired by HomeSide, Inc. on March 15, 1996
                and now known as HomeSide Lending, Inc.-- Note 1)


<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)


In addition to growth in the servicing portfolio, an increase in late fee income
contributed to the rise in mortgage servicing revenue during 1995. Late fees are
included as a component of mortgage servicing  revenue.  BBMC instituted efforts
to  improve  the  collection  of  ancillary  fee  income  during  the year which
contributed  to an increase in late fee charges  collected from $10.5 million in
1994 to $14.4  million in 1995.  Late fee income also  increased  as a result of
increases in BBMC's  servicing  portfolio size and average loan size. The higher
average loan size  translates  into higher loan  payments on which late fees are
based.  There  was  little  or no  change  in the rate on which  late  fees were
computed during 1995 as compared to 1994.

During the first  quarter of 1996,  BBMC had net  servicing  revenues of $(97.1)
million, as compared to servicing revenues of $24.2 million in the first quarter
of 1995.  The net  negative  amount  recorded as  servicing  revenue in 1996 was
primarily  due to losses on BBMC's  risk  management  contracts.  Excluding  the
effect of risk management contracts,  net servicing revenue increased from $20.6
million in the first quarter 1995 to $31.7 million in the first quarter 1996. In
the first quarter of 1995, BBMC recorded gains on risk  management  contracts of
$3.6 million.  Due to an increase in long-term  interest  rates in late February
and early March 1996, BBMC  experienced  losses on risk management  contracts of
$128.8  million  during the  quarter.  Changes  in the value of BBMC's  mortgage
servicing  rights  substantially  offset the loss on risk management  contracts.
However,  such  changes  in  value  were not  fully  recorded  in the  financial
statements  of BBMC  because  servicing  rights  were  recorded  at the lower of
amortized cost or market value.

The decrease in net  servicing  revenue was  partially  offset by a reduction in
amortization  of  mortgage  servicing  rights  from  $23.1  million in the first
quarter of 1995 to $7.2 million in the first  quarter of 1996.  The reduction in
amortization  was due to the increase in long-term  interest  rates noted above,
which had a favorable  effect on the  prepayment  estimates  used in calculating
BBMC's periodic  amortization  expense.  Because  mortgage  servicing rights are
amortized  over the  expected  period of service fee  revenues,  a reduction  in
mortgage prepayment activity typically results in a longer estimated life of the
mortgage  servicing  asset  and,   accordingly,   lower  amortization   expense.
Amortization  charges are highly dependent upon the level of prepayments  during
the  period and  changes in  prepayment  expectations,  which are  significantly
influenced by the direction and level of long-term interest rate movements.


Risk Management Activities

BBMC had a risk management program designed to protect the economic value of its
mortgage  servicing  portfolio  from  declines  in  value  due to  increases  in
estimated  prepayment  speeds,  which are  primarily  influenced  by declines in
interest rates.  When loans prepay faster than  anticipated,  the cash flow BBMC
would expect to receive from servicing such loans was reduced. Because the value
of the mortgage  servicing  rights is based on the present value of the net cash
flows to be  received  over the life of the  loan,  the  value of the  servicing
portfolio declines as prepayments increase.

Prior to 1994,  risk  management  of the  mortgage  servicing  rights  value was
principally  conducted by BKB as part of a consolidated risk management program.
Through the third quarter of 1995, BKB continued to manage a portion of the risk
associated with the servicing portfolio.

To implement its risk  management  objectives,  BBMC purchased  risk  management
contracts  that increased in value when long-term  interest rates  declined,  or
when prepayment speeds increased above a specified level.  During 1994 and 1995,
BBMC  purchased  options on long-term  United  States  Treasury  bond futures to
protect a  significant  portion of the market  value of its  mortgage  servicing
portfolio from a decline in value. The value of BBMC's risk management  position
was designed to perform  inversely  with changes in value of mortgage  servicing
rights due to the  effects of the changes in interest  rates.  The options  were
marked to market  at each  reporting  date with  changes  in value  reported  in
revenues.  BBMC recognized a gain on risk management contracts of $108.7 million
in 1995. While the value of the servicing portfolio declined, the full effect of
such decline was not reflected in BBMC's financial  results because the value of
the associated  service rights exceeded its book value. Due to a rising interest
rate  environment,  BBMC  experienced  a $6.7  million  loss related to its risk
management contracts in 1994.

BBMC recognized a gain on risk  management  contracts of $108.7 million in 1995,
of which  $86.5  million  was  unrealized.  During  the first  quarter  of 1996,
long-term  interest  rates  increased,   reversing  the  declining  trend  which
prevailed  during  1995.  As a result,  through  the date of the sale of BBMC in
March  1996,  BBMC  recognized  a loss on risk  management  contracts  of $128.8
million,  which  included  a  reversal  of such $86.5  million  unrealized  gain
recognized  during  1995.  In 1995 and  1996,  changes  in the  value of  BBMC's
mortgage  servicing  rights  substantially  offset the gain and loss on the risk
management contracts.  However, such changes in value were not fully recorded in
the financial  statements of BBMC because  servicing  rights are recorded at the
lower of amortized cost or market value.


Net Interest Revenue/Expense

Net interest expense was $2.4 million in 1994 and $2.8 million in 1995. Interest
income  decreased  $7.3  million in 1995 as compared  with 1994,  primarily as a
result of a decrease in the average rate earned on warehouse loans from 9.52% in
1994 to 7.78% in 1995. The reduction in interest  income on warehouse  loans was
partially offset by a $2.1 million increase in interest earned on mortgage loans
held for investment. Interest expense decreased $6.8 million in 1995 as compared
with 1994 as a 

18

                         BancBoston Mortgage Corporation
                  (Acquired by HomeSide, Inc. on March 15, 1996
                and now known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


result of a decline in the average rate paid on BBMC's  borrowings from 7.14% in
1994 to 6.89% in 1995.

Net interest expense decreased from $2.0 million in the first quarter of 1995 to
$1.7  million in the first  quarter of 1996.  Interest  income  increased in the
first  quarter of 1996 as compared with the first quarter of 1995 as a result of
an increase in the average  balance of mortgage  loans held for sale from $124.6
million  during  the first  quarter of 1995 to $535.6  million  during the first
quarter of 1996.  Increased loan production  volumes,  $4.2 billion in the first
quarter of 1996 compared to $1.2 billion in the first  quarter of 1995,  created
the increased  average balance of mortgage loans held for sale. In addition,  an
increase in long-term interest rates during February and March 1996 improved the
yield on its mortgage loans held for sale.  Interest  expense incurred on BBMC's
credit  facility  with Bank of Boston  increased in the first quarter of 1996 as
compared  with the  first  quarter  of 1995 as a result of the  increase  in the
average  balance of BBMC's loans held for sale.  In the first quarter of 1996 as
well as the first  quarter of 1995,  interest  earned on loans held for sale was
less than interest expense on borrowings,  thereby creating net interest expense
for BBMC; but the increase in long-term interest rates during February and March
1996,  without a  corresponding  increase in  short-term  rates on BBMC's credit
facility, resulted in a decrease in net interest expense in the first quarter of
1996 as compared with the first quarter of 1995.


Net Mortgage Origination Revenue

Net mortgage  origination  revenue  decreased  from $5.0 million in 1994 to $3.4
million in 1995. Lower  production  volumes and gains on sales of mortgage loans
were the primary reasons for this decline.

Net mortgage  origination revenue (expense) increased from $(1.1) million in the
first quarter of 1995 to $7.6 million in the first quarter of 1996. The increase
in net origination revenue during the first quarter of 1996 was partially due to
the adoption of SFAS No. 122,  "Accounting for Mortgage  Servicing Rights" as of
January 1, 1996,  which had the effect of  increasing  net mortgage  origination
revenue by $3.1 million.  In previous  periods,  the cost of mortgage  servicing
rights for originated  loans was included in the basis of the related loan. SFAS
No. 122 requires  that the cost of an originated  loan be allocated  between the
loan sold and the servicing  rights  retained.  Consequently,  the cost basis of
loans  originated in 1996 was lower than the basis that would have been recorded
prior to the  adoption of SFAS No. 122 and  resulted in  additional  gain on the
sale of loans. The remaining increase was due to increases in origination income
resulting from higher loan production volumes.


Gain on Sales of Servicing Rights

Gain on sales of servicing  rights decreased from $10.9 million in 1994 to $10.2
million in 1995.  Gains on sales of  servicing  rights  represent  the excess of
proceeds  from the sale  over the cost  basis of the  assets.  Gains  tend to be
higher on sales of  servicing  rights with  little or no cost basis,  as was the
case for BBMC's sales in 1994.  The servicing  rights sold during 1994 consisted
primarily of retail  originated  loans and  consequently had relatively low cost
basis.  The servicing  rights sales in 1995 consisted of a higher  percentage of
servicing on purchased loans,  which had a higher basis because servicing rights
on purchased loans are capitalized.

Gain on sales of  servicing  rights  during  the first  quarter of 1995 was $4.3
million.  There were no sales of servicing  rights  during the first  quarter of
1996.


Salaries and Employee Benefits

Salaries and employee  benefits  increased  from $40.4  million in 1994 to $45.4
million in 1995, or 12.4%.  Including  capitalized direct loan origination costs
(principally  salary and employee  benefits),  salaries  and  employee  benefits
increased  from $51.5 million to $56.5  million from 1994 to 1995, or 9.7%.  The
increase  included  a $3.9  million  increase  in  salaries  and a $1.1  million
increase in  benefits  and were the result of a larger  staff  needed to support
BBMC's growing servicing portfolio.  The increases in salaries and benefits were
partially  offset by the outsourcing of certain default  administration  and tax
payment  administration   activities  during  1995.  BBMC  determined  that  the
performance of these services on a contracted basis was more cost effective than
maintaining  the  personnel  and  infrastructure  necessary  to carry  out these
functions in-house.

Salaries and employee benefits decreased from $11.7 million in the first quarter
of 1995 to $10.3 million in the first quarter of 1996, or 12.1%.  If capitalized
direct loan origination costs  (principally  salary and employee  benefits) were
included, the salaries and employee benefits increased from $12.8 million in the
first  quarter of 1995 to $13.5  million in the first  quarter of 1996, or 5.8%.
The increase  reflected  general salary and benefit increases as compared to the
first  quarter  of 1995  and a  slight  increase  in the  number  of  full  time
equivalent  employees from 1,117 as of March 31, 1995 to approximately  1,120 as
of March 15, 1996.


Occupancy and Equipment Expense

Occupancy and  equipment  expense  increased  from $9.0 million in 1994 to $10.0
million in 1995, or 11.1%, due primarily to the acquisition of Bell Mortgage and
the larger servicing operations.

                                                                              19

                         BancBoston Mortgage Corporation
                  (Acquired by HomeSide, Inc. on March 15, 1996
                and now known as HomeSide Lending, Inc.-- Note 1)

<PAGE>

Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)


Occupancy and equipment  expense  decreased $0.4 million,  from $2.4 million for
the first  quarter of 1995 to $2.0  million for the first  quarter of 1996.  The
decrease  was  primarily  due to a decline in equipment  repair and  maintenance
expenses in the first quarter of 1996 as compared to the first quarter of 1995.

Servicing Losses on Investor-Owned Loans

Servicing losses on investor-owned loans primarily represent  anticipated losses
attributable to servicing FHA and VA loans for investors.  These amounts include
actual losses for final disposition of loans, accrued interest for which payment
has been denied and  estimates  for  potential  losses based on  experience as a
servicer of government loans.  Servicing losses on investor-owned  loans totaled
$7.2  million  and  $10.0  million  for 1994 and 1995,  respectively,  primarily
representing  losses on VA loans. In 1994 and 1995, BBMC recorded  provisions in
excess  of  actual  foreclosure  losses.  Management  believes  that BBMC had an
adequate level of reserve based on its servicing volume,  portfolio composition,
credit quality and historical  loss rates,  as well as estimated  future losses.
For an  analysis of changes in the reserve  for  estimated  servicing  losses on
investor-owned loans for each of the two years ended December 31, 1995, see Note
4  of  Notes  to  Consolidated   Financial  Statements  of  BancBoston  Mortgage
Corporation.

Servicing  losses on  investor-owned  loans  increased  from $0.7 million in the
first quarter of 1995 to $5.6 million in the first quarter of 1996. The increase
was  primarily due to a change in the VA's method of  calculating  the amount it
will  guarantee  on any loan,  coupled with planned  military  base  closings in
California  that may have an  impact  on the  performance  of  certain  VA loans
serviced by BBMC. The increase in the VA marketing rate effectively represents a
potential  increase in BBMC's  exposure on  properties  conveyed to the VA. BBMC
analyzed the effect of these  factors on the level of its reserve for  estimated
servicing losses and recorded a higher provision in the first quarter of 1996 in
order to bring the reserve to an acceptable level.


Real Estate Owned Expense

Real estate owned expense increased from $0.3 million in 1994 to $1.1 million in
1995. Real estate owned expense is incurred from foreclosed  properties on which
BBMC has taken title and includes declines in the value of the property, as well
as the incurrence of property holding and maintenance  costs. The change in real
estate  owned  expense in 1995 was due  primarily  to an increase in the average
balance of real estate  owned from $1.4 million in 1994 to $1.6 million in 1995.
As part of the BBMC Acquisition, BKB retained all real estate owned.

Real estate owned  expense  increased  from $0.2 million in the first quarter of
1995 to $0.3  million  in the first  quarter  of 1996.  The change was due to an
increase in the average  balance of real estate owned from $1.2  million  during
the first quarter of 1995 to $2.6 million during the first quarter of 1996.


Other Expenses

Other expenses  increased from $19.3 million to $21.9  million,  or 13.3%,  from
1994 to  1995.  The  increase  in  other  expenses  from  1994 to 1995  included
increases of $1.1 million in advertising and public  relations,  $1.0 million in
contracted  services,  $0.9  million  in  software  costs  and $0.6  million  in
communication expenses.  These increases were partially offset by a $0.7 million
reduction  in  loan-related  expenses.  The increase in  advertising  and public
relations  expense was due to a major  advertising  campaign  carried out during
1995 in addition to normal advertising  activity.  Contracted services increased
due to an increase in bank service  charges for loan payment  processing,  which
also increased with the larger BBMC servicing  volume.  Software costs increased
as BBMC  continued  to expand and  redesign  its  computer  platform in order to
deliver more  efficient  and reliable  service.  The increase in  communications
expense was due to higher telephone postage and delivery expenses resulting from
higher loan production levels.

Other expense increased $2.7 million, from $4.7 million during the first quarter
of 1995 to $7.4  million in the first  quarter  of 1996.  The  increase  was the
result of a $0.5 million increase in  communications  expense and a $0.4 million
increase in loan expense,  coupled with a decrease in expense credits  resulting
from a decline  in early pool  buyout  activity  in 1996.  These  increases  are
reflective of the increase in BBMC's servicing portfolio, $44.2 billion at March
31,  1996 as  compared  to $37.8  billion at March 31,  1995,  and  higher  loan
production  levels in the first quarter of 1996 as compared to the first quarter
of 1995.


Provision for (Benefit from) Income Taxes

BBMC recorded a provision for income taxes of $2.5 million and $37.9 million for
1994 and 1995,  respectively.  The effective income tax rate was 39.2% and 56.4%
for 1995 and 1994,  respectively.  The  difference  between  these rates and the
statutory  federal tax rate was  primarily  due to state  income  taxes,  net of
federal tax benefit. The changes in the provisions for, and benefit from, income
taxes were the result of variances in BBMC's pre-tax income and loss for each of
the years presented. For additional information regarding income taxes, refer to
Note 10 of Notes to  Consolidated  Financial  Statements of BancBoston  Mortgage
Corporation on pages 47 and 48.

BBMC's  benefit from income taxes was $42.5 million  during the first quarter of
1996 as compared to a provision  for income  taxes of $2.3  million in the first
quarter of 1995.  The change in BBMC's  income tax provision was the result of a
decline in pre-tax  income  during the first  quarter of 1996 as compared to the
first  quarter of 1995,  and a  decrease  in the  effective  tax rate from 39.9%
during the first quarter of 1995 to 36.5% during the first quarter of 1996.

20

                         BancBoston Mortgage Corporation
                  (Acquired by HomeSide, Inc. on March 15, 1996
                and now known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


Accounting Changes

On January 1, 1994, BBMC changed its method of accounting for mortgage servicing
fees  from  the  cash  basis  to the  accrual  basis.  See  Note 2 of  Notes  to
Consolidated  Financial Statements of BancBoston Mortgage Corporation on page 45
for further  discussion  of BBMC's  accounting  changes.  See  "--Liquidity  and
Capital  Resources--New  Accounting  Standard"  for a discussion of Statement of
Financial  Accounting  Standards  No. 122,  "Accounting  for Mortgage  Servicing
Rights," which was adopted by BBMC in 1996.


Liquidity and Capital Resources

Overview

BBMC's  primary  sources of cash were  revenues  earned  from the  servicing  of
mortgage  loans,  sales of mortgage  loans and servicing  rights and  borrowings
under BBMC's warehouse line of credit.  BBMC's primary uses of cash were to fund
loan  originations  and  purchases,  purchase bulk servicing  rights,  repay its
warehouse  line of credit and pay  general  corporate  expenses.  BBMC had a net
increase (decrease) in cash of ($4.8 million) and $0.3 million in 1995 and 1994,
respectively,  and ($4.4 million) and $22.4 million in the first quarter of 1995
and the first quarter of 1996, respectively.

The net decrease in cash in 1995 compared  with 1994 was primarily  attributable
to the use of cash to meet growth in loan  origination  volume and  purchases of
mortgage  servicing  rights,  coupled  with a reduction  in proceeds on sales of
mortgage  loans.  Declining  interest rates in 1995  increased  loan  production
across  the  industry.  Cash  inflows  in 1995 were  positively  affected  by an
increase in the proceeds  from risk  management  contracts,  which  increased in
value as a result of the decline in interest rates.

Prior to the BBMC Acquisition,  a line of credit with Bank of Boston was used to
fund the origination and purchase of mortgage loans until the loans were sold to
investors.  The  proceeds  of such  sales  were  typically  used to pay down the
related  warehouse debt, with any excess  retained by BBMC.  Maximum  borrowings
under the line of credit were $1.25  billion.  The higher level of borrowings in
1995 was indicative of higher loan  production and purchase  volumes during that
year as compared to 1994.

Net cash provided by operating  activities and investing activities decreased in
the  first  quarter  of 1996  as  compared  with  the  first  quarter  of  1995,
principally as a result of an increase in net cash used in the  origination  and
purchase of loans held for sale and in the purchase and  origination of mortgage
servicing rights and the purchase of risk management contracts.  These increases
were the  result  of  higher  loan  production  levels  and an  increasing  loan
servicing portfolio.  As a result of increased loan production and held for sale
balances in the first  quarter of 1996 as compared to the first quarter of 1995,
BBMC had net  borrowings  of $290.0  million on its line of credit  with Bank of
Boston during the first quarter of 1996, as opposed to net  repayments of $130.5
million on the line of credit during the first quarter of 1995.


Impact of Inflation

Inflation  affects BBMC  primarily  through its effect on interest rates because
interest rates normally  increase  during periods of high inflation and decrease
during periods of low inflation.


New Accounting Standard

In May 1995,  FASB issued  SFAS No.  122,  "Accounting  for  Mortgage  Servicing
Rights."  This  Statement,  among other  provisions,  requires that the value of
mortgage servicing rights associated with mortgage loans originated by an entity
be capitalized as assets,  which results in an increase in mortgage  origination
revenues.  The value of originated  mortgage  servicing  rights is determined by
allocating  the total  costs of the  mortgage  loans  between  the loans and the
mortgage  servicing  rights  based on their  relative  fair  values.  Also,  the
Statement requires that capitalized servicing rights be evaluated for impairment
based  on the fair  value  of these  rights.  For the  purposes  of  determining
impairment, mortgage servicing rights that are capitalized after the adoption of
this  Statement  are  stratified  based on one or more of the  predominant  risk
characteristics  of the  underlying  loans.  Impairment is recognized  through a
valuation  allowance  for each  impaired  stratum.  BBMC adopted this  Statement
effective January 1, 1996.


                                                                              21

                         BancBoston Mortgage Corporation
                  (Acquired by HomeSide, Inc. on March 15, 1996
                and now known as HomeSide Lending, Inc.-- Note 1)

<PAGE>

Consolidated Balance Sheet
(Dollars in Thousands, Except Share Data)


<TABLE>
<CAPTION>
                                                                                                     Februay 28, 1997
                                                                                                     ----------------
ASSETS
<S>                                                                                                     <C>        
Cash and cash equivalents ..........................................................................    $    52,691
Mortgage loans held for sale, net ..................................................................        805,274
Mortgage servicing rights, net .....................................................................      1,614,307
Accounts receivable, net ...........................................................................        157,518
Premises and equipment, net ........................................................................         29,515
Other assets .......................................................................................         92,877
                                                                                                        -----------
Total Assets .......................................................................................    $ 2,752,182
                                                                                                        ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ......................................................................................    $ 1,818,503
Accounts payable and accrued liabilities ...........................................................        140,304
Deferred income taxes ..............................................................................        129,951
Long-term debt .....................................................................................        151,128
                                                                                                        -----------
Total Liabilities ..................................................................................      2,239,886
                                                                                                        -----------
Commitments and Contingencies

Stockholders' Equity:
  Common stock, $.01 par value, 119,610,000 shares authorized and 43,375,430 shares
    issued and outstanding .........................................................................            434
  Class C non-voting common stock, $1.00 par value, 195,000 shares authorized, and 97,138 shares
    issued and outstanding .........................................................................             97
  Additional paid-in capital .......................................................................        476,646
  Retained earnings ................................................................................         36,969
                                                                                                        -----------
                                                                                                            514,146
Less: Notes received in payment for capital stock ..................................................         (1,850)
                                                                                                        -----------

Total Stockholders' Equity .........................................................................        512,296
                                                                                                        -----------

Total Liabilities and Stockholders' Equity .........................................................    $ 2,752,182
                                                                                                        ===========
</TABLE>
                                                                               

The  accompanying  notes are an  integral  part of this  consolidated  financial
statement.


22

                                 HomeSide, Inc.

<PAGE>

Consolidated Statement of Income
(Dollars in Thousands, Except Per Share Data)


<TABLE>
<CAPTION>
                                                                                         For the Period From
                                                                                          March 16, 1996 to
                                                                                          February 28, 1997
                                                                                          -----------------
<S>                                                                                           <C>        
REVENUES:
Mortgage servicing fees ..................................................................    $   312,341
Amortization of mortgage servicing rights ................................................       (155,827)
                                                                                              -----------
  Net servicing revenue ..................................................................        156,514
Interest income ..........................................................................         81,507
Interest expense .........................................................................        (87,700)
                                                                                              -----------
  Net interest expense ...................................................................         (6,193)
Net mortgage origination revenue .........................................................         66,073
Other income .............................................................................            682
                                                                                              -----------
  Total Revenues .........................................................................        217,076

EXPENSES:
Salaries and employee benefits ...........................................................         72,976
Occupancy and equipment ..................................................................         11,770
Servicing losses on investor-owned loans and foreclosure-related expenses ................         17,934
Other expenses ...........................................................................         41,714
                                                                                              -----------
  Total Expenses .........................................................................        144,394
Income before income taxes and extraordinary loss on early extinguishment of debt ........         72,682
Income tax expense .......................................................................         29,273
                                                                                              -----------
Income before extraordinary loss on early extinguishment of debt .........................         43,409
Extraordinary loss on early extinguishment of debt, net of tax ...........................          6,440
                                                                                              -----------
Net Income ...............................................................................    $    36,969
                                                                                              ===========

Income Per Share:
  Income before extraordinary loss on early extinguishment of debt .......................    $      1.33
  Extraordinary loss, net of tax .........................................................           0.20
                                                                                              -----------
  Net Income .............................................................................    $      1.13
                                                                                              ===========
</TABLE>

The  accompanying  notes are an  integral  part of this  consolidated  financial
statement.


                                                                              23

                                 HomeSide, Inc.

<PAGE>

Consolidated Statement of Changes in Stockholders' Equity
(Dollars in Thousands)


<TABLE>
<CAPTION>
                                                                                                 Notes     
                              Total          Common Stock                      Additional     Received in    
                            Number of  -------------------------  Subscription   Paid-in      Payment for      Retained
                            Shares(d)  Class A  Class B  Class C   Receivable    Capital     Capital Stock     Earnings    Total
                           --------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>       <C>      <C>     <C>          <C>           <C>             <C>         <C>     
Balance,
  March 15, 1996(a) ....   19,457,724   $193      $--      $97     $(200,000)   $199,710      $    --          $    --    $     --
Subscription payment
  associated with
  acquisition of
  BancBoston Mortgage
  Corporation ..........                                             200,000                   (1,850)                     198,150
Issuance of common
  stock associated
  with acquisition of
  Barnett Mortgage
  Company(b) ...........   15,562,344    156                                     160,135                                   160,291
Public offering of
  common stock(c) ......    8,452,500     85                                     116,801                                   116,886
Net income .............                                                                                        36,969      36,969
                           --------------------------------------------------------------------------------------------------------
Balance,
  February 28, 1997 ....   43,472,568   $434      $--      $97     $      --    $476,646      $(1,850)         $36,969    $512,296
                           ========================================================================================================
</TABLE>


(a)  Total number of shares includes  19,263,448  shares of Class A common stock
     (par value  $.01),  97,138  shares of Class B common stock (par value $.01)
     and 97,138 shares of Class C common stock (par value $1.00).
(b)  Total number of shares includes 15,562,344 shares of Class A common stock.
(c)  Total number of shares includes 8,452,500 shares of Class A common stock of
     which 97,138 shares of Class B common stock were  converted to Class A on a
     1-for-1 basis.
(d)  Number of shares reflects a 17-for-1 stock split resulting from the initial
     public offering.

The  accompanying  notes are an  integral  part of this  consolidated  financial
statement.

24

                                 HomeSide, Inc.

<PAGE>


Consolidated Statement of Cash Flows
(Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                           For the Period From
                                                                                            March 16, 1996 to
                                                                                            February 28, 1997
                                                                                            -----------------
<S>                                                                                            <C>        
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income ................................................................................    $    36,969
Adjustments to reconcile net income to net cash provided by operating activities:
  Amortization of mortgage servicing rights ...............................................        155,827
  Depreciation and amortization ...........................................................          9,015
  Servicing losses on investor-owned loans ................................................         13,683
  Deferred income tax expense .............................................................         24,973
  Capitalized servicing rights ............................................................        (21,015)
  Mortgage loans originated and purchased for sale ........................................    (12,504,567)
  Proceeds and principal repayments of mortgage loans held for sale .......................     12,572,217
  Change in accounts receivable ...........................................................        (63,378)
  Change in other assets and accounts payable and accrued liabilities .....................        (19,900)
                                                                                               -----------
Net cash provided by operating activities .................................................        203,824

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of premises and equipment, net ...................................................         (4,929)
Acquisition of mortgage servicing rights ..................................................       (475,729)
Purchases of risk management contracts, net ...............................................       (141,944)
Acquisition of BancBoston Mortgage Corporation, net of cash acquired ......................       (133,392)
Acquisition of Barnett Mortgage Company, net of cash acquired .............................       (106,244)
                                                                                               -----------
Net cash used in investing activities .....................................................       (862,238)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks .................................................................        334,170
Issuance of bridge financing ..............................................................         90,000
Repayment of bridge financing .............................................................        (90,000)
Issuance of Notes .........................................................................        200,000
Payment of debt issue costs ...............................................................        (22,090)
Repayment of long-term debt ...............................................................        (70,567)
Proceeds from issuance of common stock ....................................................        269,592
                                                                                               -----------
Net cash provided by financing activities .................................................        711,105
Net increase in cash and cash equivalents .................................................         52,691
Cash and cash equivalents at beginning of period ..........................................           --
                                                                                               -----------
Cash and cash equivalents at end of period ................................................    $    52,691
                                                                                               ===========
</TABLE>

The  accompanying  notes are an  integral  part of this  consolidated  financial
statement.


                                                                              25

                                 HomeSide, Inc.

<PAGE>

Notes to Consolidated Financial Statements


1. BASIS OF PRESENTATION

HomeSide,  Inc.  ("HomeSide" or the  "Company"),  through its primary  operating
subsidiary  HomeSide Lending,  Inc., is engaged in the mortgage banking business
and as such originates,  purchases, sells and services mortgage loans throughout
the  United  States.  The  accompanying  consolidated  financial  statements  of
HomeSide  include  the  accounts  of  HomeSide  and  its   subsidiaries,   after
elimination of all material intercompany balances and transactions.  Amounts for
acquired companies have been included from the date of acquisition.

The  accompanying  consolidated  financial  statements  of  HomeSide  have  been
prepared  for the period from March 16,  1996 to  February  28, 1997 to coincide
with the commencement of operations as discussed in Note 2. The carrying amounts
of assets and liabilities in the accompanying  consolidated financial statements
reflect the effects of the purchase  accounting  adjustments  made in connection
with the  acquisition of BancBoston  Mortgage  Corporation  ("BBMC") and Barnett
Mortgage Company ("BMC").


2. ORGANIZATION

On December 11, 1995,  HomeSide was formed by an investor  group,  consisting of
Thomas  H.  Lee  Company  and  Madison  Dearborn  Partners  (collectively,   the
"Investors"),  and signed a definitive  stock purchase  agreement with The First
National Bank of Boston ("Bank of Boston") for the purpose of acquiring  certain
assets and liabilities of the mortgage banking business owned by Bank of Boston.
Bank of  Boston  received  cash  and an  ownership  interest  in  HomeSide.  The
transaction  closed on March 15, 1996 and HomeSide began operations on March 16,
1996 through its primary operating subsidiary, HomeSide Lending, Inc.

On May 31, 1996,  Barnett Banks,  Inc.  ("Barnett") sold certain of its mortgage
banking  operations,  primarily  its  servicing  portfolio,  mortgage  servicing
operations and  proprietary  mortgage  banking  software  systems,  to HomeSide.
Barnett  received cash and an ownership  interest in HomeSide.  The accompanying
financial  statements  reflect the effects of the  acquisitions of BBMC and BMC.
For more information on these acquisitions,  see Note 4. From May 31, 1996 until
the 1997 public  offering of common  stock,  the  Investors as a group,  Bank of
Boston and Barnett each owned approximately one-third of HomeSide. Following the
public offering, the Investors as a group, Bank of Boston and Barnett own in the
aggregate approximately 79% of the outstanding common stock.


3. SUMMARY OF SIGNIFICANT
   ACCOUNTING POLICIES

Use of estimates

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


Risk management of mortgage loan originations

HomeSide  utilizes a risk management  program to protect and manage the value of
its mortgage loans held for sale and mortgage commitment pipeline.  As a result,
the Company is party to various derivative  financial  instruments to reduce its
exposure to interest rate risk. These financial  instruments  primarily  include
mandatory  forward  delivery  commitments,  put and call  option  contracts  and
treasury futures contracts. The Company uses these financial instruments for the
purposes of managing its resale pricing and interest rate risks. These financial
instruments  are  designated  as hedges to the extent  they  demonstrate  a high
degree of correlation  with the underlying  hedged items.  Accordingly,  hedging
gains and losses  related  to this risk  management  program  are  deferred  and
recognized as a component of the gain or loss on sale of the underlying mortgage
loans or mortgage-backed  securities.  Such gains and losses are included in net
mortgage  origination  revenue.  Hedge  losses are  recognized  currently if the
deferral of such  losses  would  result in mortgage  loans held for sale and the
pipeline being valued in excess of their estimated net realizable value.

Premiums paid for purchased put and call option  contracts are included in other
assets and amortized  over the options'  contract  periods as a component of net
mortgage origination revenue. Unamortized premiums are recognized as a component
of the gain or loss on sale of mortgage  loans at the earlier of the  expiration
of the  underlying  contract  or when  exercise of the  contract  is  considered
unlikely.


Risk management of mortgage servicing rights

Mortgage  servicing  rights permit HomeSide to receive a portion of the interest
coupon and fees collected from the mortgagor for performing  specified servicing
activities.  The mortgage notes underlying the mortgage  servicing rights permit
the borrower to prepay the loan. As a result,  the value of the related mortgage
servicing  rights tends to diminish in periods of declining  interest  rates and
increase in value in periods of rising rates. This tendency subjects HomeSide to
substantial  interest rate risk and directly  affects the volatility of reported
earnings as mortgage servicing rights are carried at the lower of amortized cost
or fair value.  It is HomeSide's  policy to mitigate and hedge this risk through
its risk management program.

26

                                 HomeSide, Inc.

<PAGE>

Notes to Consolidated Financial Statements (Continued)

The risk management  instruments used by HomeSide have characteristics such that
they tend to increase in value as interest rates decline. Conversely, these risk
management  instruments  tend to  decline  in  value  as  interest  rates  rise.
Accordingly,  changes in value of these  contracts  will tend to move  inversely
with changes in value of mortgage servicing rights.

Historically, option contracts on U.S. Treasury bond futures have been purchased
by HomeSide to manage interest rate risk. When purchased,  the option  contracts
are designated to a specific  strata of mortgage  servicing  rights.  The option
contracts  are  marked-to-market  with  changes  in  market  value  included  as
adjustments to the basis of the related mortgage  servicing rights being hedged.
Deferred  hedge gains and losses are amortized  and evaluated for  impairment in
the same manner as the related mortgage  servicing rights.  Correlation  between
changes  in the  value of the  option  contracts  and  changes  in the  value of
HomeSide's  mortgage servicing rights is assessed on a quarterly basis to ensure
that a high correlation is maintained over the term of the hedging program.


Mortgage loans

Mortgage  loans held for sale are carried at the lower of aggregate cost or fair
value.  Fair value is based on the contract  prices at which the mortgage  loans
will be sold or, if the loans are not  committed  for sale,  the current  market
price.  Deferred hedge gains and losses on risk management hedge instruments are
included  in the cost of the  mortgage  loans  held for sale for the  purpose of
determining the lower of aggregate cost or fair value.

Mortgage loans held for investment are stated at the lower of cost or fair value
at the time the permanent investment decisions are made. Discounts,  if any, are
amortized over the anticipated life of the investment.

Loans are placed on  non-accrual  status  when any portion of the  principal  or
interest  is  ninety  days past due or  earlier  when  concern  exists as to the
ultimate  collectibility  of  principal  or  interest.  When loans are placed on
nonaccrual status, the related interest  receivable is reversed against interest
income in the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the  principal  balance when concern  exists as to the
ultimate  collection of principal;  otherwise,  such payments are  recognized as
interest  income.  Loans are removed from  nonaccrual  status when principal and
interest become current and they are anticipated to be fully collectible.


Mortgage servicing rights

From the period of  inception  through  December 31,  1996,  mortgage  servicing
rights were  capitalized  and  accounted  for in  accordance  with  Statement of
Financial  Accounting  Standards  ("SFAS")  No. 122,  "Accounting  for  Mortgage
Servicing  Rights." The total cost of loans  originated or acquired is allocated
between the  mortgage  servicing  rights and the  mortgage  loans  (without  the
servicing  rights) based on relative fair values.  The value of servicing rights
acquired through bulk transactions is capitalized at cost.

Effective  January 1, 1997, the Company  adopted SFAS No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No.  125  supersedes  SFAS  No.  122 and is  effective  for  transfers  and
servicing of financial assets and extinguishments of liabilities occurring after
December  31,  1996.  SFAS No. 125 is based on a  financial-components  approach
which focuses on control. Under the approach required by this Standard,  after a
transfer of  financial  assets (for  example,  the sale of mortgage  loans),  an
entity  recognizes  the  financial  and  servicing  assets it  controls  and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered and derecognizes liabilities when extinguished.  The capitalization,
amortization  and  impairment  principles  of SFAS  No.  125  are  substantially
consistent with the principles  previously  defined by SFAS No. 122,  insofar as
they relate to the mortgage  banking  activities of HomeSide.  Accordingly,  the
impact of  adopting  SFAS No. 125 was not  material to the  Company's  financial
statements.

Mortgage  servicing rights are amortized in proportion to and over the period of
estimated net servicing revenue.  They are evaluated for impairment by comparing
the carrying amount of the servicing  rights to their fair value.  Fair value is
estimated  using  market  prices  of  similar  mortgage   servicing  assets  and
discounted  future  net cash  flows  considering  market  prepayment  estimates,
historical prepayment rates, portfolio characteristics, interest rates and other
economic factors. For purposes of measuring  impairment,  the mortgage servicing
rights are  stratified by the  predominant  risk  characteristics  which include
product types of the underlying  loans and interest rates of the mortgage notes.
Impairment is recognized  through a valuation  reserve for each impaired stratum
and is included in amortization of mortgage  servicing rights. The components of
HomeSide's mortgage servicing rights are included in Note 5.

Prior to January 1, 1997,  mortgage  servicing  rights  included excess mortgage
servicing  rights,  which represent the present value of servicing fee income in
excess of a normal  servicing  fee rate.  Until the  adoption of SFAS No. 125 on
January 1,  1997,  when loans were sold,  the  estimated  excess  servicing  was
recognized  as income  and  amortized  over the  estimated  servicing  period in
proportion  to the  estimated  future  aggregate  net cash  flows from the loans
serviced.  Remaining  asset  balances  were  evaluated for  impairment  based on
current estimates of future discounted cash flows. Such writedowns were included
in amortization of mortgage servicing rights. Upon the adoption of SFAS No. 125,
previously  recognized  excess mortgage  servicing rights were combined with and
accounted for as mortgage servicing rights.


Accounts receivable

Accounts  receivable  includes  advances,  consisting  primarily of payments for
property  taxes,  insurance  premiums and  principal  and  interest  remitted to
investors  before  collected  from  mortgagors,  made in  connection  with  loan
servicing  activities.  Accounts  receivable  also includes loans purchased from

                                                                              27

                                 HomeSide, Inc.

<PAGE>


mortgage-backed  securities  serviced by HomeSide for others and mortgage claims
filed primarily with the FHA and the VA.


Premises and equipment

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation  is computed  using the  straight-line  method  over the  estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser
of the estimated life of the improvement or the term of the lease.

Long-lived assets are evaluated regularly for  other-than-temporary  impairment.
If  circumstances  suggest that their value may be impaired  and the  write-down
would be material,  an assessment of  recoverability  is performed  prior to any
write-down of the asset.  Impairment,  if any, is recognized through a valuation
allowance with a corresponding charge recorded in the statement of income.


Goodwill

Net assets acquired in purchase transactions (Note 4) are recorded at fair value
at the date of acquisition.  Goodwill,  representing  the excess of the purchase
price  over the fair  value  of the net  assets  purchased,  is  amortized  on a
straight-line basis over 15 years.  Goodwill is reviewed periodically for events
or changes in  circumstances  that may indicate that the carrying amounts of the
assets are not recoverable on an undiscounted cash flow basis.

Goodwill  related  to the BMC  acquisition  is  subject  to change  until  final
estimates are received on the value of certain  assumed  assets and  liabilities
and final settlement with Barnett.


Mortgage servicing fees

Mortgage servicing fees represent  servicing and other fees earned for servicing
mortgage loans owned by investors.  Servicing  fees are generally  calculated on
the outstanding  principal  balances of the loans serviced and are recognized as
income on an accrual basis.

HomeSide's  mortgage  servicing  portfolio totaled $90.2 billion at February 28,
1997. Related custodial  deposits are segregated in trust accounts,  principally
held with  depository  institutions,  and are not  included in the  accompanying
financial statements.


Interest expense

Interest  expense is reduced by credits  received on borrowings  with depository
institutions for custodial balances placed with such institutions.


Net mortgage origination revenue

Net  mortgage  origination  revenue  includes  gains and  losses  from  sales of
mortgage loans and fees associated with the origination and purchase of mortgage
loans.

Servicing losses on investor-owned loans and foreclosure-related expenses
HomeSide  records  losses  attributable  to  servicing  FHA  and  VA  loans  for
investors.  These amounts include actual losses for final  disposition of loans,
foreclosure-related expenses, accrued interest for which payment has been denied
and estimates for potential losses based on HomeSide's  experience as a servicer
of government loans.

A reserve for estimated  servicing losses on  investor-owned  loans is available
for potential losses related to the mortgage servicing portfolio and is included
in accounts payable and accrued
liabilities.


Income taxes

Current tax  liabilities or assets are recognized  through charges or credits to
the current tax provision for the estimated  taxes payable or refundable for the
current year.

Deferred tax  liabilities  are  recognized for temporary  differences  that will
result in amounts  taxable in the future and deferred tax assets are  recognized
for  temporary  differences  and tax benefit  carryforwards  that will result in
amounts  deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized  through charges or credits to the deferred tax provision.
A deferred tax valuation  reserve is  established  if it is more likely than not
that all or a portion of the deferred  tax assets will not be realized.  Changes
in the deferred tax valuation reserve are recognized  through charges or credits
to the deferred tax provision.

The effect of enacted  changes in tax law,  including  changes in tax rates,  on
deferred tax assets and  liabilities  is recognized in income in the period that
includes the enactment date.


Statement of Cash Flows

For  purposes  of  reporting  on the  statement  of cash  flows,  cash  and cash
equivalents include cash and due from banks and  interest-bearing  deposits with
an original maturity of three months or less.


Income per Share

Income per share  amounts  were  computed  based on the weighted  average  total
number of common shares  outstanding,  plus common shares  calculated  for stock
options  outstanding  using the treasury  stock  method.  There were  32,687,780
common  shares  outstanding  for the period from March 16, 1996 to February  28,
1997.

4. ACQUISITIONS


Acquisition of BancBoston Mortgage Corporation

On March 15, 1996,  HomeSide acquired from Bank of Boston all of the outstanding
stock of BBMC, which was subsequently  renamed  HomeSide  Lending,  Inc. Certain
assets and liabilities of BBMC were retained by Bank of Boston, including BBMC's
mortgage retail production operations in New England.

HomeSide made cash  payments of $139.5  million in cash and issued $86.8 million
of HomeSide common stock to Bank of Boston in consideration  for certain assets,
net of assumed  liabilities,  and the stock of BBMC. Also in connection with the
BBMC  acquisition,  the  Investors  purchased  approximately  55%  of  the  then
outstanding common stock of HomeSide for $107.2 


28

                                 HomeSide, Inc.

<PAGE>

Notes to Consolidated Financial Statements (Continued)


million in cash. Simultaneously,  Bank of Boston paid approximately $1.0 million
in cash for all the shares of HomeSide's  class C non-voting  common  stock.  In
consideration  of  services  rendered  to  HomeSide  with  respect  to the  BBMC
Acquisition,  class B  non-voting  stock valued at $1.0 million was issued to an
investment  bank.  Management  purchased  common stock for $4.1 million in cash,
$1.9  million of which was  financed by loans from  HomeSide.  On May 31,  1996,
HomeSide paid an additional $5 million to Bank of Boston in connection  with the
closing of the BMC  acquisition.  The  transaction  was  accounted for using the
purchase method of accounting.  The assets and liabilities of BBMC were recorded
at their estimated fair values at March 16, 1996, which totaled $1.5 billion and
$1.2 billion,  respectively.  The total purchase price paid for BBMC,  including
transaction costs and interest,  was $247.0 million. The excess of fair value of
net assets  acquired over the purchase price was $56.0 million and was allocated
as a reduction to mortgage servicing rights.


Acquisition of Barnett Mortgage Company

On May 31, 1996,  HomeSide acquired from Barnett certain assets,  net of assumed
liabilities,  and the outstanding  common stock of BMC (the "BMC  Acquisition").
Certain assets and liabilities of BMC were retained by Barnett,  including those
assets of BMC associated with the loan origination or production activities.

HomeSide made cash payments of $228.0  million to Barnett in  consideration  for
certain assets, net of assumed liabilities,  and the stock of BMC. In connection
with the BMC Acquisition,  an affiliate of Barnett  purchased shares of HomeSide
common  stock  for an  aggregate  purchase  price  of  $118.0  million.  Also in
connection  with the BMC  acquisition,  Bank of Boston  and the  Investors  paid
approximately  $42.3  million in cash for  additional  shares of  HomeSide.  The
transaction  was  accounted  for using the purchase  method of  accounting  and,
accordingly,  the results of operations of HomeSide include BMC from the date of
acquisition.  The assets and  liabilities  of BMC were  recorded  by HomeSide at
their  estimated  fair values at May 31, 1996,  which totaled $764.8 million and
$521.4 million,  respectively.  The total purchase price paid for BMC, including
transaction costs and interest,  was $235.0 million.  The excess of the purchase
price  over the fair  value of net  assets  acquired  was $8.4  million  and was
allocated to goodwill and is being  amortized on a  straight-line  basis over 15
years.

Unaudited pro forma  statements  of income for the year ended  December 31, 1995
(the fiscal year end of BBMC and BMC),  assuming  BBMC and BMC had been acquired
as of January 1, 1995,  and the period from March 16, 1996 to February 28, 1997,
assuming BMC had been acquired as of March 16, 1996 are as follows (in millions,
except per share data):

                                                                 Pro Forma for
                                               Pro Forma for    the Period From
                                              the Year Ended   March 16, 1996 to
                                            December 31, 1995  February 28, 1997
                                            ------------------------------------
Net servicing revenue ....................      $  235.1         $   167.3
Net interest revenue .....................          17.9              (4.5)
Net mortgage
  origination revenue ....................           0.7              67.1
Other income .............................           0.7               0.7
                                            ------------------------------------
    Total revenues .......................         254.4             230.6
Expenses .................................        (142.7)           (157.5)
                                            ------------------------------------

Income before income taxes
  and extraordinary loss .................         111.7              73.1
Income tax expense .......................         (45.7)            (29.5)
                                            ------------------------------------
Income before
  extraordinary loss .....................          66.0              43.6
Extraordinary loss .......................            --               6.4
                                            ------------------------------------
    Net income ...........................      $   66.0         $    37.2
                                            ====================================
Net income per share .....................            --         $     1.13


The purchase accounting  adjustments in the above pro forma statements of income
are based on the actual  purchase price and the amount of assets and liabilities
actually acquired. In addition,  gains on sales of mortgage servicing rights are
not  included in pro forma  results for the year ended  December  31,  1995.  No
adjustments have been made for restructuring costs that might have been incurred
or for cost  efficiencies  that might  have been  realized  during  the  periods
presented.  Accordingly,  these pro forma  results are not  indicative of future
results.


5. MORTGAGE SERVICING RIGHTS

The components of mortgage servicing rights are as follows (in thousands):

                                                                   February 28,
                                                                       1997
                                                                   -----------
Additions, including BBMC and BMC acquisitions ..............      $ 1,685,242
Sales of servicing ..........................................          (25,745)
Deferred hedge loss, net ....................................          110,637
Amortization ................................................         (155,827)
                                                                   -----------
Ending balance ..............................................      $ 1,614,307
                                                                   ===========

Net deferred  hedge loss of $110.6  million  consists of gains of $133.3 million
and losses of $254.9 million, less $11.0 million of amortization recognized as a
component of amortization of mortgage servicing rights.

                                                                              29
                                 HomeSide, Inc.

<PAGE>


6. PREMISES AND EQUIPMENT

Premises and equipment consist of the following (in thousands):


                                                              February 28,
                                                                 1997
                                                              ------------
Land .......................................................   $  3,451
Building ...................................................     10,986
Furniture and equipment ....................................     15,739
Leasehold improvements .....................................      3,808
                                                               --------
                                                                 33,984
Accumulated depreciation and amortization ..................     (4,469)
                                                               --------
Ending balance .............................................   $ 29,515
                                                               ========


7. RESERVE FOR ESTIMATED SERVICING LOSSES ON INVESTOR-OWNED LOANS

An  analysis of the reserve for  estimated  servicing  losses on  investor-owned
loans is as follows (in thousands):


                                                                 For the
                                                               Period From
                                                            March 16, 1996 to
                                                            February 28, 1997
                                                            -----------------
Beginning balance, assumed from BBMC .......................    $ 11,100
Provision for servicing losses on
  investor-owned loans .....................................      13,683
Charge-offs ................................................     (10,295)
Recoveries .................................................          60
Additions from acquisition of BMC ..........................       7,102
                                                                --------
Ending balance .............................................    $ 21,650
                                                                ========


8. NOTES PAYABLE

Notes payable consist of the following (dollars in thousands):

                                                     Weighted Average
                                                       Interest Rate
                                              ---------------------------------
                                 At                At
                             February 28,      February 28,          During
                                1997              1997            the Period
                             --------------------------------------------------
Bank line of credit .......     $1,778,496        5.65%              5.83%
Short-term
  credit facilities .......         40,007        8.25%              8.25%
                             -------------

                             $   1,818,503
                             =============


HomeSide borrows funds on a demand basis from an independent  syndicate of banks
under a $2.5 billion line of credit.  Under certain  circumstances  set forth in
the bank line of credit  agreement,  borrowings under such line of credit become
collateralized  by  substantially  all of  HomeSide's  assets.  The bank line of
credit  is used  to  provide  funds  for  HomeSide's  business  of  originating,
acquiring and servicing  mortgage loans. The bank line of credit includes both a
warehouse credit facility, which is limited to 98% of the fair value of eligible
mortgage loans held for sale, and a  servicing-related  facility which is capped
at $950.0 million.  At February 28, 1997,  $943.1 million  outstanding is due on
February 14, 2000 at which time the bank line of credit will terminate. The bank
line  of  credit  agreement  contains  covenants  that  impose  limitations  and
restrictions  on HomeSide,  including the  maintenance  of certain net worth and
ratio  requirements.  Amounts  outstanding  under the bank  line of  credit  are
comprised   of  a   warehouse   credit   facility   of  $835.4   million  and  a
servicing-related  credit facility of $943.1  million.  The amount of the unused
bank line of credit was $721.5 million as of February 28, 1997.

During the period  from March 16,  1996 to February  28,  1997,  the maximum and
average outstanding balances under the bank line of credit were $2.4 billion and
$2.1 billion, respectively.

On January 15, 1997,  HomeSide entered into a short-term  credit facility with a
bank in a maximum  aggregate  principal  amount of $85.0  million.  On March 14,
1997,  HomeSide entered into another  short-term credit facility in an aggregate
principal amount of $100.0 million.  These facilities each expire on the earlier
of May 1, 1997,  or the  consummation  of the initial sale of  medium-term  debt
securities.  On February 5, 1997,  HomeSide  Lending,  Inc. filed a registration
statement  for the  issuance  of $1.0  billion  of  debt  securities,  including
medium-term notes.

Drawings  under the bank line of credit bear interest at rates per annum,  based
on, at HomeSide's option (A) the highest of (i) the lead bank's prime rate, (ii)
the secondary  market rate of  certificates of deposit plus 100 basis points and
(iii) the  federal  funds  rate in  effect  from time to time plus 0.5% or (B) a
eurodollar rate.

Drawings under the short-term facilities bear interest at the greater of (i) the
lead bank's  prime rate,  (ii) the  secondary  market rate for  certificates  of
deposit (grossed up for maximum  statutory  requirements)  plus 1% and (iii) the
federal funds effective rate from time to time plus 0.5%.


9. LONG-TERM DEBT

On May 14,  1996,  HomeSide  issued  $200.0  million of 11.25%  notes  ("Notes")
maturing on and payable in full on May 15, 2003 and paying interest semiannually
in arrears on May 15 and November 15 of each year.  The Notes are  redeemable at
the  option of  HomeSide,  in whole or in part,  at any time on or after May 15,
2001, at certain pre-set  redemption  prices.  The indenture  contains covenants
that impose limitations and restrictions on HomeSide,  including the maintenance
of certain net worth and ratio requirements.  In addition, the Notes are secured
by a second  priority  pledge of the common  stock of  HomeSide.  HomeSide is in
compliance with all net worth and ratio requirements  contained in the indenture
relating to the notes.

On February 5, 1997,  HomeSide  issued  8,452,500  shares of common stock to the
public at $15.00 per share. A portion of the proceeds from the offering was used
to  pre-pay  $70.0  million  of the  Notes  at a  premium  of $7.9  million.  In
connection with the early  repayment of the Notes,  HomeSide wrote off a portion
of the  unamortized  debt  issuance  costs  related to the Notes and

30

                                 HomeSide, Inc.

<PAGE>

Notes to Consolidated Financial Statements (Continued)


incurred a prepayment penalty equal to one year's interest on the Notes retired.
The  loss  amounted  to  $6.4  million,  net of  tax,  and  was  recorded  as an
extraordinary   item.  The  remaining  proceeds  were  used  to  reduce  amounts
outstanding under the bank line of credit.

HomeSide  assumed a mortgage note payable that is due in 2017 and bears interest
at a contractual  rate of 9.50%.  HomeSide's  main office building is pledged as
collateral.  Principal  payments due on the mortgage note payable are as follows
(in thousands):


Fiscal Year
--------------------------------------------------------------------

1998 ...................................................  $     232
1999 ...................................................        256
2000 ...................................................        281
2001 ...................................................        309
2002 ...................................................        340
Thereafter .............................................     12,169
Unamortized purchase accounting premium ................      7,541
                                                           --------
                                                           $ 21,128
                                                           ========


10. INCOME TAXES

The  Company  files a  consolidated  federal  income tax return.  All  companies
included in the consolidated federal income tax return are jointly and severally
liable for any tax assessments based on such
consolidated return.

Components  of the  provision  for  income  taxes  before  the effect of the tax
benefit  associated  with the early  extinguishment  of debt were as follows (in
thousands):

                                                           For the
                                                          Period From
                                                       March 16, 1996 to
                                                       February 28, 1997
                                                       -----------------
Current:
  Federal .............................................     $   --
  State ...............................................         --
                                                           --------
Deferred:
  Federal .............................................      23,756
  State ...............................................       5,517
                                                           --------
                                                            $29,273
                                                           ========

The following is a  reconciliation  of the statutory  federal income tax rate to
the  effective  income tax rate as  reflected in the  consolidated  statement of
income:

                                                           For the
                                                          Period From
                                                       March 16, 1996 to
                                                       February 28, 1997
                                                       -----------------


Statutory federal income tax rate .....................        35.0%
State income and franchise taxes,
  net of federal tax effect ...........................         5.0
                                                           --------
    Effective income tax rate .........................        40.0%
                                                           ========


The extraordinary loss on the early  extinguishment of debt is stated net of the
related tax benefit of $4.3 million at an effective tax rate of 40%.


The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax  liabilities are presented below (in
thousands): 

                                                      February 28, 1997
                                                      -----------------
Deferred tax assets:
  Net operating and capital loss
    carryforwards .................................        $ 53,355
  Loss reserves ...................................          17,563
  Other assets ....................................          12,087
                                                           --------
    Total gross deferred tax assets ...............          83,005
                                                           --------
Deferred tax liabilities:
  Mortgage servicing fees .........................         207,278
  Other liabilities ...............................           5,678
                                                           --------
    Total gross deferred tax liabilities ..........         212,956
                                                           --------
    Net deferred tax liability ....................        $129,951
                                                           ========


In assessing  the  realizability  of deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which these temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax planning  strategies in making this assessment.  No valuation  allowance
was recorded as of February 28, 1997.

The  Company  had   consolidated   tax  net  operating  loss  and  capital  loss
carryforwards at February 28, 1997.  These  carryovers  expire in the years 2002
and 2012.

11. LEASE COMMITMENTS

HomeSide leases office facilities and equipment under noncancelable  leases that
include  renewal options and escalation  clauses which extend into 2001.  Rental
expense for office  facilities  and  equipment  leases was $3.9  million for the
period from March 16, 1996 to February 28, 1997. HomeSide's minimum future lease
commitments are as follows (in thousands):

Fiscal Year
--------------------------------------------------------------------

1998 ....................................................    $2,015
1999 ....................................................     1,508
2000 ....................................................       423
2001 ....................................................        74
2002 ....................................................        22
Thereafter ..............................................        --
                                                             ------
  Total .................................................    $4,042
                                                             ======

                                                                              31

                                 HomeSide, Inc.

<PAGE>


12. STOCKHOLDERS' EQUITY

On March 15, 1996, in connection with the BBMC acquisition  discussed in Note 4,
the Investors contributed cash of $107.3 million for 10,836,293 shares of common
stock. Also on March 15, 1996,  HomeSide issued 8,427,155 shares of common stock
and cash to Bank of Boston in exchange for BBMC. The common stock issued to Bank
of Boston was assigned a value of $86.8 million.

Simultaneously  with the closing of the BBMC  acquisition,  HomeSide also issued
97,138 shares of its Class B Non-Voting  common stock to Smith  Barney,  Inc. in
consideration  of services  rendered to  HomeSide  in  connection  with the BBMC
acquisition.  Bank of Boston also paid $1.0 million in cash for 97,138 shares of
HomeSide's Class C Non-Voting common stock. Bank of Boston then sold the Class C
shares to an unaffiliated third party.

On May 31, 1996, in  connection  with the BMC  Acquisition  discussed in Note 4,
Bank of Boston,  the Investors and certain  directors and executive  managers of
HomeSide  contributed  a total  of  approximately  $46.0  million  in  cash  for
4,100,944  shares of common  stock.  Approximately  $1.9  million  of the amount
contributed  by certain  directors and  management was financed by HomeSide and,
accordingly, is reported as a reduction of stockholders' equity. Also on May 31,
1996,  HomeSide issued  11,461,400 shares of common stock and cash to Barnett in
exchange  for BMC.  The common  stock  issued to Barnett was assigned a value of
$118.0 million.

On February 5, 1997,  HomeSide  issued  8,452,500  shares of common stock to the
public at $15.00 per share.  The stock is listed on the New York Stock  Exchange
under  the  symbol  HSL.  The  transaction,  net of  underwriting  discount  and
estimated expenses, resulted in net proceeds to the Company of $116.9 million. A
portion of the proceeds from the sale was used to pre-pay $70.0 million of Notes
at a premium of $7.9 million. Pro forma earnings per share giving effect for the
public  offering as of the date of the issuance of the Notes and the related use
of proceeds  to repay $70.0  million of the Notes and to reduce the bank line of
credit borrowings was $1.27. Upon completion of the issue, all shares of Class B
non-voting common stock converted automatically, on a 1-for-1 basis, into shares
of common stock.


13. SUPPLEMENTAL CASH FLOW INFORMATION

During the period from March 16, 1996 to February  28, 1997,  HomeSide  extended
loans totaling $1.9 million to certain  members of management in connection with
their purchase of shares of common stock.

In connection with the acquisitions of BBMC and BMC,  HomeSide recorded non-cash
assets  and  assumed   liabilities,   including  fair  value   adjustments,   of
approximately $2.3 billion and $1.7 billion, respectively.

HomeSide paid $81.8 million of interest during the period from March 16, 1996 to
February 28, 1997.


14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair  value  estimates  are made as of a  specific  point  in time  based on the
characteristics   of  the  financial   instruments   and  the  relevant   market
information.  Where  available,  quoted  market prices are used. In other cases,
fair values are based on estimates  using other  valuation  techniques,  such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are  significantly  affected  by the  assumptions  used and the  judgments  made
regarding risk  characteristics of various financial  instruments,  prepayments,
discount rates, estimates of future cash flows, future suspected loss experience
and other  factors.  Changes in  assumptions  could  significantly  affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent  markets  and, in many cases,  could not be realized in an immediate
sale of the  instrument.  Also,  because of  differences  in  methodologies  and
assumptions used to estimate fair value, the Company's fair values should not be
compared to those of other companies.

Fair  value  estimates  are  based on  existing  financial  instruments  without
attempting to estimate the value of anticipated future business and the value of
assets  and  liabilities   that  are  not  considered   financial   instruments.
Accordingly,  the aggregate  fair value  amounts  presented do not represent the
underlying  value of the  Company.  For  certain  assets  and  liabilities,  the
information required is supplemented with additional  information relevant to an
understanding of the fair value.

The methods and  assumptions  used to estimate  the fair values of each class of
financial instruments are as follows:


Cash and cash equivalents

The carrying amount reported in the balance sheet approximates fair value.


Mortgage  loans held for sale 

Fair values are based on the estimated value at which the loans could be sold in
the secondary  market.  These loans are priced to be sold with servicing  rights
retained, as is the Company's normal business practice.


Accounts receivable

Carrying amounts are considered to approximate fair value.


Risk management contracts

Fair values are estimated based on actual market quotes or option models.


Notes payable

The  carrying  amount  of  the  notes  payable  reported  in the  balance  sheet
approximates its fair value due to the short-term nature of the borrowings under
the credit agreements.

32

                                 HomeSide, Inc.
<PAGE>


Notes to Consolidated Financial Statements (Continued)


Long-term debt

Fair value of long-term debt is estimated by discounting
estimated future cash flows using a rate commensurate with the risks involved.


Commitments to or iginate mortgage loans

Fair value is estimated  using quoted  market  prices for  securities  backed by
similar loans adjusted for differences in loan characteristics.


Forward contracts to sell mortgages

Forward contracts to sell mortgages,  which represent legally binding agreements
to sell loans to permanent  investors at a specified price or yield,  are valued
using market prices for securities  backed by similar loans and are reflected in
the fair  values  of the  mortgages  held for sale,  to the  extent  that  these
commitments  relate to  mortgage  loans  already  originated,  or to the related
commitments to extend credit.


Options on mortgage-backed securities

The fair values of options are estimated based on actual market quotes.  In some
instances, quoted prices for the underlying loans or option models are used.


Fair Value

The fair values of the Company's  financial  instruments as of February 28, 1997
are as follows (in thousands):

                                                      Carrying         Fair
                                                       Amount          Value
                                                     --------------------------
Assets
Cash and cash equivalents ......................     $   52,691     $    52,691
Mortgage loans held for sale ...................        805,274         806,432
Accounts receivable ............................        157,518         157,518
Risk management contracts for
  mortgage servicing rights ....................         45,212          45,212

Liabilities
Notes payable ..................................      1,818,503       1,818,503
Long-term debt .................................        151,128         151,128
Accounts payable and accrued liabilities .......        140,304         140,304

Off-Balance Sheet(1)
Commitments to originate
  mortgage loans ...............................           --            (2,805)
Mandatory forward contracts to
  sell mortgages ...............................           --             3,588
Mandatory forward contracts
  to sell U.S. treasuries ......................                              7
Option contracts on
  mortgage-backed securities ...................           --             1,741
Option contracts on U.S. treasury
  bond futures .................................           --              (147)
------------
(1) Parenthesis denote a liability


Fair value estimates are made as of a specific point in time,  based on relevant
market data and information about the financial  instrument.  These estimates do
not reflect any premium or discount that could result from offering for sale the
Company's entire holding of a particular financial instrument. Because no active
market  exists for some portion of the  Company's  financial  instruments,  fair
value  estimates  are  based  on  judgments   regarding   future  expected  loss
experience,  current  economic  conditions,  current  interest rate and mortgage
prepayment trends,  risk  characteristics  of various financial  instruments and
other factors.

These estimates are subjective in nature and involve  uncertainties  and matters
of significant  judgment and,  therefore,  cannot be determined  with precision.
Changes in any of these  assumptions  used in calculating  fair value would also
significantly  affect the  estimates.  Further,  the fair value  estimates  were
calculated as of February 28, 1997.  Subsequent changes in market interest rates
and prepayment assumptions could significantly change the fair value.


15. RISK MANAGEMENT OF
MORTGAGE SERVICING RIGHTS

As discussed in Note 3, HomeSide  purchases  option  contracts on U.S.  Treasury
bond futures to manage the interest rate risk related to the value of HomeSide's
mortgage  servicing  rights.  A summary of HomeSide's  investments  in purchased
option instruments as of February 28, 1997 is as follows:


Notional amount of U.S. Treasury bond future options ..........  $ 3.6  billion
Fair value of outstanding options .............................  $45.2  million


Cash  requirements  for HomeSide's  option  contracts are limited to the initial
premium  paid.  The amount of contracts  purchased  depends on factors,  such as
interest rates,  interest rate  volatility and growth in the mortgage  servicing
portfolio.  HomeSide is subject to market risk to the extent that interest rates
fluctuate; however, the purpose of the option contracts is to hedge the value of
its mortgage  servicing  rights  portfolio,  which tends to react inversely with
changes in the value of HomeSide's option  contracts.  HomeSide's credit risk on
its option  contracts is limited,  because the option  contracts are traded on a
national exchange, which guarantees counterparty performance.


16. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

As discussed in Note 3, HomeSide purchases financial instruments and enters into
financial  agreements  with  off-balance  sheet  risk in the  normal  course  of
business and as part of its risk management programs. These instruments involve,
to varying  degrees,  elements of credit and interest rate risk.  Credit risk is
the possibility  that a loss may occur if a counterparty to a transaction  fails
to perform  according to the terms of the  contract.  Interest  rate risk is the
possibility  that a change in interest rates will cause the value of a financial
instrument to decrease or become more costly to settle.


Options and forward contracts

The notional amount of the options and forward contracts used in HomeSide's risk
management  programs is the amount upon which  interest and other payments under
the contract


                                                                              33

                              HomeSide, Inc.

<PAGE>


are based and is generally not exchanged. Therefore, the notional amounts should
not be taken as the  measure  of credit  risk or a  reflection  of  future  cash
requirements.  The risk  associated with options and forwards is the exposure to
current and expected  market  movements in the interest rates and the ability of
the  counterparties  to meet the terms of the contracts.  The cash  requirements
associated  with these  options  and forward  contracts,  aside from the initial
purchase  price,  are  minimal.   These  contracts   generally   require  future
performance  on the part of the  counterparty  upon  exercise  of the  option or
execution of the forward contract by HomeSide.

HomeSide  is  exposed  to  credit  loss in the  event of  nonperformance  by the
counterparties to the various  instruments.  HomeSide controls credit and market
risk  associated  with  interest rate products by  establishing  and  monitoring
limits  with  counterparties  as to the  types and  degree of risks  that may be
undertaken.  HomeSide's  exposure  to credit risk in the event of default by the
counterparties  for the options is $45.2  million  which was due at February 28,
1997.

HomeSide's  exposure to credit risk in the event of default by the  counterparty
for  mandatory  forward  commitments  to sell mortgage  loans is the  difference
between the contract price and the current market price, offset by any available
margins  retained by HomeSide or an independent  clearing  agent.  The amount of
credit risk as of February 28, 1997, if all counterparties failed completely and
if the margins,  if any,  retained by HomeSide or an independent  clearing agent
were to become unavailable, was approximately $3.6 million for mandatory forward
commitments of mortgage-backed securities.

The  following is a summary of  HomeSide's  notional  amounts and fair values of
interest rate products (in thousands):

                                                          February 28, 1997
                                                       ------------------------
                                                       Notional      Estimated
                                                        Amount     Fair Value(1)
                                                       ------------------------
Purchased commitments to sell mortgaged loans:
  Mandatory forward contracts .....................    $1,445,345     $  3,588
  Option contracts on mortgage-
    backed securities .............................       755,000        1,741
  Option contracts on US treasury
    bond futures ..................................       140,000         (147)
Risk management contracts on
  mortgage servicing rights:
  Purchased .......................................     3,572,300       45,212
------------
(1)  Fair  value  represents  the  amount at which a given  instrument  could be
     exchanged  in an  arm's  length  transaction  with a third  party as of the
     balance sheet date.
(2)  See  Note  14  for  additional  disclosures  on  fair  value  of  financial
     instruments.


Commitments to originate and purchase mortgage loans

HomeSide  regularly enters into  commitments to originate and purchase  mortgage
loans at a future date subject to compliance with stated conditions. Commitments
to originate  and purchase  mortgage  loans have  off-balance  sheet risk to the
extent HomeSide does not have matching  commitments to sell loans, which exposes
HomeSide to lower of cost or market  valuation  adjustments in a rising interest
rate environment.  Additionally, the extension of a commitment, which is subject
to HomeSide's credit review and approval policies, gives rise to credit exposure
when certain borrowing conditions are met and the loan is made. Until such time,
it represents only potential  exposure.  The obligation to lend may be voided if
the customer's financial condition deteriorates or if the customer fails to meet
certain conditions.  Commitments to originate and purchase mortgage loans do not
necessarily reflect future cash requirements because some of the commitments are
expected to expire  without  being  drawn upon.  Commitments  to  originate  and
purchase mortgage loans totaled $2.7 billion at February 28, 1997.


Mortgage loans sold with recourse

HomeSide sells mortgage loans with recourse to various investors and retains the
servicing rights and  responsibility for credit losses on these loans. The total
outstanding  balance of loans sold with recourse does not necessarily  represent
future cash outflows. The total outstanding principal balance of loans sold with
recourse was $14.2 million at February 28, 1997.

For five  years  following  the May 31,  1996  acquisition  of BMC,  Barnett  is
obligated to repurchase or reimburse  HomeSide for any credit losses  related to
$101.0 million of loans serviced with recourse.


Servicing commitment to investors

HomeSide is required to submit to certain investors,  primarily GNMA, guaranteed
principal and interest payments from the underlying mortgage loans regardless of
actual collections.


Purchase mortgage servicing rights commitments

HomeSide routinely enters into commitments to purchase mortgage servicing rights
associated  with mortgages  originated by third  parties,  subject to compliance
with stated conditions.  These commitments to purchase mortgage servicing rights
correspond  to mortgage  loans having an  aggregate  loan  principal  balance of
approximately $2.3 billion at February 28, 1997.


Geographical concentration of credit risk

HomeSide is engaged in business nationwide and has no material  concentration of
credit risk in any geographic region.


17. OTHER RELATED PARTY TRANSACTIONS

HomeSide  entered  into  agreements  with Bank of Boston and Barnett for certain
corporate support services.  For the period from March 16, 1996 through February
28, 1997,  HomeSide paid Bank of Boston and Barnett  approximately  $2.5 million
and $0.9 million, respectively, for these services.

HomeSide  purchases  mortgage  loans  eligible  for sale from Bank of Boston and
Barnett.  For the period from March 16, 1996 through February 28, 1997, HomeSide
paid  approximately  $4.7 million and $27.6  million,  respectively,  to Bank of
Boston and Barnett  for the  purchase of  mortgage  servicing  rights.  HomeSide
purchases the mortgage servicing rights to the mortgage loans Bank of Boston and
Barnett hold in their 


34

                                 HomeSide, Inc.
<PAGE>


Notes to Consolidated Financial Statements (Continued)


portfolios.  For the period from March 16, 1996 to February 28,  1997,  HomeSide
purchased  mortgage  servicing  rights from Bank of Boston and Barnett  totaling
approximately  $1.3 million and $8.2 million,  respectively.  The Bank of Boston
and Barnett purchases represent 2.8% and 16.0%,  respectively,  of the Company's
total production for the period from May 31, 1996 to February 28, 1997.

HomeSide services residential mortgage loans held in portfolio by Bank of Boston
and Barnett.  The servicing  fees paid by Bank of Boston and Barnett to HomeSide
are  market-based  fees  consistent  with the fees  charged by HomeSide to other
investors.  For the period  from March 16, 1996 to February  28,  1997,  Bank of
Boston and  Barnett  paid $5.3  million  and $23.6  million in  servicing  fees,
respectively.

As of February 28, 1997, certain members of management owed $1.9 million related
to loans granted to purchase  shares of the Company's  common stock.  Such loans
are  secured by a pledge of the shares  purchased,  have terms of  approximately
five years and bear interest at 8.25% per annum.


18. STOCK-BASED COMPENSATION

HomeSide has  established  the HomeSide  1996  Employee  Stock Option Plan under
which 582,845  shares of common stock are reserved for issuance.  Options issued
under the plan may be either  non-qualified  or incentive  stock options and the
options will be  exercisable  at such prices as are set by  HomeSide's  board of
directors. Under the plan, options will vest annually in five equal installments
in arrears.  During the period from March 16, 1996 to February 28, 1997, options
to  purchase  447,066  shares were  granted at an exercise  price of $10.294 per
share. To date,  there have been no exercises of options and options to purchase
6,494 shares were canceled under this plan.

HomeSide has also adopted a 1996 Time  Accelerated  Restricted Stock Option Plan
under which 1,165,724 shares of common stock are reserved for issuance.  Options
granted under this plan will be  non-qualified  and will be  exercisable at such
prices as are set by the board of directors. Options granted under the plan will
vest  nine  years  from the date of  grant.  Vesting  will  accelerate  upon the
achievement of certain  performance  criteria.  During the period from March 16,
1996 to February 28, 1997, options to purchase 894,132 shares were granted at an
exercise  price of $10.294 per share.  To date,  there have been no exercises of
options and options to purchase 12,988 shares were canceled under this plan.

There  was no  compensation  expense  associated  with the above  option  grants
because the exercise  price was equal to the estimated  fair value of the common
stock at the date of grant.

In 1995,  SFAS No. 123,  "Accounting for  Stock-Based  Compensation"  was issued
requiring  HomeSide  either to continue its current  accounting for  stock-based
compensation under Accounting  Principles Board ("APB") No. 25 or elect the fair
value-based method of accounting prescribed by SFAS No. 123. HomeSide elected to
continue to account for stock-based compensation under APB No. 25.

Under SFAS No. 123, the fair value of stock  options  granted in fiscal 1997 has
been  estimated  using a  Black-Scholes  option pricing model with the following
weighted average  assumptions for grants in fiscal 1997: risk free interest rate
ranging from 6.5% to 6.86%,  expected option life ranging from 7.5 to 8.5 years,
expected  volatility  of 35.0%  and no  expected  dividend  yield.  Using  these
assumptions,  the  estimated  fair value of options  granted for the period from
March 16, 1996 to  February  28, 1997 was  approximately  $0.5  million and such
amounts would be included in compensation expense over the vesting period of the
options. Pro forma net income and net income per share for the period from March
16, 1996 to February 28, 1997,  assuming the Company had  accounted for the plan
under SFAS No. 123, are as follows (in thousands, except per share data):

Net income:
  As reported ..........................................         $   36,969
  Pro forma ............................................             36,692
Net income per share:
  As reported ..........................................         $     1.33
  Pro forma ............................................               1.32


A summary of stock  options  activity  for fiscal year 1997 is  presented in the
table and narrative below:

                                                                Weighted Average
                                                     Shares     Exercise Price
                                                 -------------------------------
Options outstanding,
  beginning of year ..........................            --       $   10.294
Granted ......................................       1,341,198         10.294
Exercised ....................................            --           10.294
Forfeited ....................................         (19,482)        10.294
                                                 -------------------------------
Options outstanding, end of year .............       1,321,716     $   10.294
                                                 ===============================
Options exercisable, end of year .............            --             --
Weighted average per share
  fair value of options granted ..............      $     3.21           --


At February  28,  1997,  options for 440,572  shares are  outstanding  having an
exercise price $10.29 and a weighted average contractual life of 7.5 years, none
of which are exercisable. Options for 881,144 shares are also outstanding having
an  exercise  price of $10.29 and a  weighted  average  contractual  life of 8.5
years, none of which are exercisable.


19. EARNINGS PER SHARE

In February 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS
No.  128,  "Earnings  per  Share."  This  Statement  establishes  standards  for
computing and  presenting  earnings per share (EPS) and applies to entities with
publicly  held  common  stock  or  potential   common  stock.  It  replaces  the
presentation  of primary EPS with a presentation  of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income  statement and a
reconciliation  of the numer-


                                                                              35
                                 HomeSide, Inc.

<PAGE>

ator  and  denominator  of  the  basic  EPS  computation  to the  numerator  and
denominator of the diluted EPS computation.

Basic EPS  excludes  dilution  and is computed by dividing  income  available to
common stockholders by the weighted-average  number of common shares outstanding
for the period.  Diluted EPS reflects the potential dilution that could occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the  earnings of the  entity.  Diluted  EPS is  computed  similarly  to fully
diluted EPS pursuant to APB Opinion 15.

This Statement is effective for financial  statements  issued for periods ending
after December 15, 1997,  including interim periods;  earlier application is not
permitted.  Management  expects  that  the  impact  of  this  Statement  on  the
presentation of the financial statements of HomeSide will be immaterial.


20. DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE

In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This Statement  establishes  standards for the disclosure of
descriptive   information  about  securities,   the  liquidation  preference  of
preferred stock and redeemable stock. This Statement is effective for HomeSide's
fiscal year ending February 28, 1998. Management expects that the impact of this
Statement on the  presentation  of the financial  statements of HomeSide will be
immaterial.


21. CONTINGENCIES

HomeSide,  along  with its  subsidiaries,  is a  defendant  in a number of legal
proceedings arising in the normal course of business.  HomeSide, in management's
estimation,  has  adequate  reserves  in the  financial  statements  for pending
litigation.  Management,  after  reviewing all actions and  proceedings  pending
against or involving HomeSide, considers that the aggregate liabilities or loss,
if any,  resulting from the final outcome of these  proceedings  will not have a
material effect on the financial position, operations or liquidity of HomeSide.


22. EMPLOYEE BENEFITS

HomeSide  offers a 401(k) defined  contribution  benefit plan in which employees
may contribute a portion of their compensation.  Substantially all employees are
eligible  for  participation  in the plan.  The Company  matched 100% of amounts
contributed  up to 4% of an employee's  compensation.  Further,  the Company may
contribute  additional  amounts at its discretion.  Total expense related to the
benefit plan was approximately $4.0 million for fiscal year 1997.


23. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                       For the Period From     For the Three    For the Three      For the Three
                                                          March 16, 1996       Months Ended     Months Ended       Months Ended
                                                          to May 31, 1996    August 31, 1996  November 30, 1996  February 28, 1997
                                                         ------------------------------------------------------------------------
                                                                      (dollars in thousands, except per share data)
<S>                                                       <C>                <C>               <C>                 <C>    
Revenues ...............................................     $33,717            $57,863            $62,325            $63,171
Expenses ...............................................      22,609             40,842             40,655             40,288
Income tax expense .....................................       4,554              6,954              9,015              8,750
                                                         ------------------------------------------------------------------------
Income before extraordinary loss on early
  extinguishment of  debt ..............................       6,554             10,067             12,655             14,133
Extraordinary loss from the early
  extinguishment of  debt, net of tax ..................        --                 --                 --                6,440
                                                         ------------------------------------------------------------------------
Net income .............................................      $6,554            $10,067            $12,655             $7,693
                                                         ========================================================================
Net income per share before extraordinary
  loss on early extinguishment of debt(a) ..............       $0.34              $0.29              $0.36              $0.37
Net income per share(a) ................................       $0.34              $0.29              $0.36              $0.20
Weighted average shares outstanding ....................  19,246,902         34,973,790         34,996,360         38,279,486
</TABLE>
------------
(a)  Net income per share is  computed  independently  for each of the  quarters
     presented.  Therefore,  the sum of the quarterly earnings per share amounts
     may not equal  the  annual  amount.  This is  caused  by  rounding  and the
     averaging effect of the number of share equivalents utilized throughout the
     year, which changes with the market price of the common stock.


36

                                 HomeSide, Inc.
<PAGE>

Notes to Consolidated Financial Statements (Continued)


24. PARENT COMPANY ONLY
    CONDENSED FINANCIAL INFORMATION


Balance Sheet

(Dollars in thousands)                                        February 28, 1997
                                                              -----------------
Assets
Investment in subsidiary ....................................       $629,513
Other assets ................................................         17,105
                                                                   ---------
Total assets ................................................       $646,618
                                                                   =========
Liabilities and stockholders' equity
Accounts payable and accrued expenses .......................         $4,322
Long-term debt ..............................................        130,000
                                                                   ---------
Total liabilities ...........................................        134,322
Common stock ................................................            531
Additional paid-in capital ..................................        476,646
Retained earnings ...........................................         36,969
                                                                   ---------
                                                                     514,146
Less: Notes received in payment
  for capital stock .........................................         (1,850)
                                                                   ---------
Total stockholders' equity ..................................        512,296

Total liabilities and stockholders' equity ..................       $646,618
                                                                   =========


Statement of Income
                                                                 For the
                                                                Period From
                                                             March 16, 1996 to
(Dollars in thousands)                                       February 28, 1997
                                                             ------------------
Revenues:
Dividends from subsidiary ...................................     $16,965
                                                                  -------
  Total revenues ............................................      16,965
                                                                  -------
Expenses:
Interest expense ............................................      19,445
Other expenses ..............................................         842
                                                                  -------
  Total expenses ............................................      20,287
                                                                  -------
Loss before income taxes, equity in undistributed
  income of subsidiary and extraordinary loss
  on early extinguishment of debt ...........................       3,322
Income tax benefit ..........................................       8,171
                                                                  -------
Income before equity in undistributed income
  of subsidiary and extraordinary loss on
  early extinguishment of debt ..............................       4,849
Equity in undistributed income of subsidiary ................      38,560
Extraordinary loss on early extinguishment
  of debt, net of tax .......................................       6,440
                                                                  -------
Net income ..................................................     $36,969
                                                                  =======


Statement of Cash Flows
                                                                 For the
                                                                Period From
                                                             March 16, 1996 to
(Dollars in thousands)                                       February 28, 1997
                                                             ------------------
Cash flows used in operating activities:
Net income                                                       $ 36,969
Adjustments to reconcile net income to net cash
  used in operating activities:
  Amortization                                                        842
  Equity in undistributed earnings of subsidiary                  (38,560)
  Deferred income tax benefit                                      (8,171)
  Change in other assets and accounts payable
    and accrued liabilities                                        (3,810)
                                                                  -------
Net cash used in operating activities                             (12,730)
                                                                  -------
Cash flows used in investing activities:
Capital contribution to subsidiary                               (376,453)
                                                                  -------
Net cash used in investing activities                            (376,453)
                                                                  -------
Cash flows provided by financing activities:
Issuance of bridge financing                                       90,000
Repayment of bridge financing                                     (90,000)
Issuance of Notes                                                 200,000
Payment of debt issue costs                                       (10,409)
Repayment of long-term debt                                       (70,000)
Proceeds from issuance of common stock                            269,592
                                                                  -------
Net cash provided by financing activities                         389,183
                                                                  -------
Net increase in cash
Cash and cash equivalents at beginning of period                       --
Cash and cash equivalents at end of period                             --
                                                                  -------
                                                                  $    --
                                                                  =======


                                                                         37

                                 HomeSide, Inc.

<PAGE>

Report of Independent Certified Public Accountants

To the Board of Directors of 
HomeSide, Inc.

We have audited the accompanying  consolidated balance sheet of HomeSide,  Inc.,
(a Delaware  corporation,  see Note 1) and subsidiaries as of February 28, 1997,
and the related  consolidated  statements  of income,  changes in  stockholders'
equity and cash flows for the period from March 16, 1996 to February  28,  1997.
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 audit.

We conducted our audit 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 that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of HomeSide, Inc. and
subsidiaries  as of  February  28,  1997 and the  consolidated  results of their
operations  and their cash flows for the period  from March 16, 1996 to February
28, 1997, in conformity with generally accepted accounting principles.


/s/ Arthur Andersen LLP
------------------------
Jacksonville, Florida
April 18, 1997


38

<PAGE>

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                               At December 31,       At March 15,
                                                                              1994         1995           1996
                                                                          ----------------------------------------
                                                                                         (In thousands)
                                    ASSETS
<S>                                                                        <C>           <C>           <C>    
Cash ..................................................................    $    5,653    $      830    $   23,216
Mortgage loans
  Held for sale, net ..................................................       271,215       388,436       628,504
  Held for investment .................................................        28,589        33,183        65,068
Purchased mortgage servicing rights, net ..............................       415,815       533,891       522,469
Excess mortgage servicing receivable, net .............................        15,333        17,447        20,393
Accounts receivable ...................................................        66,390        82,473        65,599
Accounts receivable from Bank of
  Boston and affiliates ...............................................           373           343          --
Pool loan purchases ...................................................        77,477        65,272        56,261
Mortgage claims receivable, net .......................................        48,835        45,422        17,563
Accrued income tax receivable .........................................          --            --          40,867
Deferred tax asset ....................................................        31,012        40,724        36,390
Real estate acquired ..................................................           924         2,627         2,797
Premises and equipment, net ...........................................        25,279        25,386        25,071
Other assets ..........................................................        19,992        18,269        16,159
                                                                         ----------------------------------------
    Total Assets ......................................................    $1,006,887    $1,254,303    $1,520,357
                                                                         ========================================
                   LIABILITIES & STOCKHOLDER'S EQUITY
Note payable to Bank of Boston ........................................    $  779,021    $  966,000    $1,256,000
Accounts payable and accrued liabilities ..............................        81,269        51,683       137,837
Accrued income taxes ..................................................         4,825        36,213          --
Long-term debt ........................................................        14,007        13,816        13,790
                                                                         ----------------------------------------
    Total liabilities .................................................       879,122     1,067,712     1,407,627
                                                                         ----------------------------------------
Commitments and Contingencies (Notes 9, 11, 12, 13, 15 and 16)
Stockholder's Equity:
  Common stock, $1 par value per share:
    10,000 shares authorized; 100 shares issued and outstanding ........          --            --            --
  Additional paid-in capital ..........................................       156,666       156,666       156,666
Retained earnings (accumulated deficit) ...............................       (28,901)       29,925       (43,936)
                                                                         ----------------------------------------
  Total stockholder's equity ..........................................       127,765       186,591       112,730
                                                                         ----------------------------------------
    Total Liabilities & Stockholder's Equity ..........................    $1,006,887    $1,254,303    $1,520,357
                                                                         ========================================
</TABLE>


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


                                                                              39

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.--Note 1)


<PAGE>

Consolidated Statements of Operations and
Retained Earnings

<TABLE>
<CAPTION>
                                                                                                                    For the
                                                                                                                  Period From
                                                                                                                January 1, 1996
                                                                                    Years Ended December 31,        through
                                                                                      1994            1995       March 15, 1996
                                                                                -----------------------------------------------
                                                                                                 (In thousands)
<S>                                                                             <C>               <C>              <C>      
Revenues:
  Mortgage servicing fees ..................................................... $     140,491     $    173,038     $     38,977
  Gain (loss) on risk management contracts ....................................        (6,702)         108,702         (128,795)
  Amortization of mortgage servicing rights ...................................       (66,801)        (108,013)          (7,245)
                                                                                -----------------------------------------------
    Net servicing revenue .....................................................        66,988          173,727          (97,063)
                                                                                -----------------------------------------------
  Interest income .............................................................        31,585           24,324            8,423
  Interest expense ............................................................       (33,952)         (27,128)         (10,089)
                                                                                -----------------------------------------------
    Net interest revenue (expense) ............................................        (2,367)          (2,804)          (1,666)
                                                                                -----------------------------------------------
  Net mortgage origination revenue ............................................         4,983            3,417            7,638
  Gain on sales of servicing rights ...........................................        10,862           10,230             --
  Other income ................................................................           147              511              253
                                                                                -----------------------------------------------
    Total Revenues ............................................................        80,613          185,081          (90,838)
                                                                                -----------------------------------------------
Expenses:
  Salaries and employee benefits ..............................................        40,370           45,381           10,287
  Occupancy and equipment .....................................................         9,012           10,009            2,041
  Servicing losses on investor-owned loans ....................................         7,177            9,981            5,560
  Real estate acquired ........................................................           253            1,054              291
  Other expenses ..............................................................        19,326           21,896            7,377
                                                                                -----------------------------------------------
    Total Expenses ............................................................        76,138           88,321           25,556
                                                                                -----------------------------------------------
Income (loss) before income taxes and cumulative effect of change
  in accounting principle .....................................................         4,475           96,760         (116,394)
Income tax expense (benefit) before cumulative effect of change
  in accounting principle:
    Current ...................................................................         4,773           47,646          (46,867)
    Deferred ..................................................................        (2,248)          (9,712)           4,334
                                                                                -----------------------------------------------
      Total Income Tax Expense (Benefit) ......................................         2,525           37,934          (42,533)
                                                                                -----------------------------------------------
Income (loss) before cumulative effect of change
  in accounting principle .....................................................         1,950           58,826          (73,861)
Cumulative effect on prior years of change in accounting for mortgage
  servicing fee income, net of tax ............................................         3,455             --               --
                                                                                -----------------------------------------------
    Net Income (Loss) .........................................................         5,405           58,826          (73,861)
Retained Earnings (Accumulated Deficit), January 1 ............................       (34,306)         (28,901)          29,925
                                                                                -----------------------------------------------
Retained Earnings (Accumulated Deficit), end of period ........................ $     (28,901)    $     29,925     $    (43,936)
                                                                                ===============================================
</TABLE>


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


40

                         BancBoston Mortgage Corporation
                (Acquired by HomeSide, Inc. on March 15, 1996 and
                  now known as HomeSide Lending, Inc.--Note 1)

<PAGE>

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                                   For the
                                                                                                                 Period From
                                                                                                                January 1, 1996
                                                                                    Years Ended December 31,        through
                                                                                      1994            1995       March 15, 1996
                                                                                -----------------------------------------------
                                                                                                 (In thousands)
<S>                                                                             <C>               <C>              <C>      
Cash flows provided by (used in) operating activities:
  Net income (loss) ..........................................................       $5,405          $58,826         $(73,861)
  Adjustments to reconcile net income (loss) to cash provided by
    (used in) operations:
      Cumulative effect of change in accounting for mortgage
        servicing fees, net of tax ...........................................       (3,455)            --               --
      Amortization ...........................................................       67,207          108,404            7,327
      Depreciation ...........................................................        2,621            3,133              719
      Servicing losses on investor-owned loans ...............................        7,177            9,981            5,560
      Deferred tax (benefit) expense .........................................       (2,248)          (9,712)           4,334
      Gain on sale of mortgage servicing rights ..............................      (10,862)         (10,230)            --
      (Gain) loss on risk management contracts ...............................        6,702         (108,702)         128,795
      Write down of real estate acquired .....................................        1,066            1,699            1,067
      Capitalized excess mortgage servicing receivable .......................       (3,653)          (7,513)          (3,967)
      Mortgage loans originated and purchased for sale .......................   (4,673,100)      (4,816,964)      (2,027,741)
      Proceeds and principal repayments of mortgage loans held for sale ......    5,005,969        4,694,909        1,787,673
      Change in accounts receivable ..........................................       (7,482)         (16,053)          17,217
      Change in pool loan purchases ..........................................        9,002           12,205            9,011
      Change in mortgage claims receivable ...................................        4,574           (5,383)          25,863
      Change in accrued income taxes .........................................       (1,231)          31,388          (77,080)
      Change in other assets and accounts payable and accrued liabilities ....      (13,051)         (11,899)          82,622
                                                                                -----------------------------------------------
        Net cash provided by (used in) operating activities ..................      394,641          (65,911)        (112,461)
                                                                                -----------------------------------------------
Cash flows provided by (used in) investing activities:
  Principal payments on (net origination) of mortgage loans
    held for investment ......................................................       11,216           12,966          (31,885)
  Purchase of premises and equipment .........................................       (5,355)          (3,141)            (404)
  Acquisition of Bell Mortgage ...............................................         --               (891)            --
  Purchase of mortgage servicing rights ......................................     (164,047)        (193,013)         (60,171)
  Proceeds from (amounts paid for) risk management contracts, net ............       (9,641)          27,120          (63,426)
  Proceeds from real estate acquired .........................................        2,773            2,610              759
  Proceeds from sales of mortgage servicing rights ...........................       10,862           28,649             --
                                                                                -----------------------------------------------
         Net cash used in investing activities ...............................     (154,192)        (125,700)        (155,127)
                                                                                -----------------------------------------------
Cash flows provided by (used in) financing activities:
  Borrowings from Bank of Boston .............................................    3,988,224        3,669,085        1,692,500
  Repayments to Bank of Boston ...............................................   (4,228,214)      (3,482,106)      (1,402,500)
  Repayment of long-term debt ................................................         (173)            (191)             (26)
                                                                                -----------------------------------------------
        Net cash provided by (used in) financing activities ..................     (240,163)         186,788          289,974
                                                                                -----------------------------------------------
Net increase (decrease) in cash ..............................................          286           (4,823)          22,386
  Cash at January 1 ..........................................................        5,367            5,653              830
                                                                                -----------------------------------------------
  Cash at end of period ......................................................       $5,653             $830          $23,216
                                                                                ===============================================
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest .................................................................      $32,819          $27,498           $9,211
                                                                                ===============================================
    Income taxes .............................................................       $7,864          $16,258          $30,213
                                                                                ===============================================
Supplemental schedule of non=cash investing activities:
  BBMC purchased bulk mortgage servicing rights during the years
    1994 and 1995. In conjunction with purchases, accounts payable
    were assumed .............................................................      $60,188          $23,022             --
                                                                                ===============================================
</TABLE>


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

                                                                              41

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


Notes to Consolidated Financial Statements


1. ORGANIZATION

BancBoston  Mortgage  Corporation  ("BBMC" or the  "Company") was a wholly=owned
subsidiary of The First National Bank of Boston ("Bank of Boston"),  which was a
wholly-owned subsidiary of Bank of Boston Corporation. In December 1995, Bank of
Boston  Corporation  signed an agreement  with Thomas H. Lee Company and Madison
Dearborn Partners  ("Investors") to sell BBMC, creating an independent  mortgage
company.  Under the terms of the agreement,  Bank of Boston received cash and an
equity  interest in the new  company,  HomeSide,  Inc.  The  Investors  acquired
majority interest in HomeSide,  Inc. The transaction closed March 15, 1996. Upon
completion of the transaction,  BBMC was renamed HomeSide Lending,  Inc. BBMC is
the Predecessor company to both HomeSide, Inc. and HomeSide Lending, Inc.

On March 4, 1996, Barnett Banks, Inc.  ("Barnett")  entered into an agreement to
sell  certain  of its  mortgage  banking  operations,  primarily  its  servicing
portfolio and proprietary  mortgage banking  software systems to HomeSide,  Inc.
Barnett  received  cash  and  an  ownership  interest  in  HomeSide,   Inc.  The
transaction closed May 31, 1996.


2. SUMMARY OF SIGNIFICANT
   ACCOUNTING POLICIES

Basis of presentation

The  consolidated   financial  statements  include  BBMC  and  its  wholly=owned
subsidiaries. All material intercompany transactions have been eliminated. These
financial statements have been prepared using the carrying values of BBMC and do
not reflect the purchase of BBMC as discussed in Note 1.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities,  the  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual  results  could  differ from those  estimates.  Specifically,  management
adjusts the amount of  amortization  recorded based on the effect of anticipated
changes in prepayment speeds.


Interest rate products

BBMC enters into  financial  agreements and purchases  financial  instruments as
part of its interest rate risk  management  strategy.  These  agreements are not
considered  trading  instruments and are primarily  entered into for purposes of
managing the  prepayment  risk  associated  with mortgage  servicing  rights and
interest rate risk relative to commitments  to originate  mortgage loans against
market value  declines  resulting from  fluctuations  in interest  rates.  These
instruments  and agreements  are designated as a part of BBMC's risk  management
strategy and are linked to the related assets being managed.

BBMC  acquires  financial  instruments,  including  derivative  contracts  (risk
management  contracts),  to  partially  protect the value of mortgage  servicing
rights from the effects of prepayment activity caused by interest rate declines.
These  financial  instruments  increase  or  decrease  in  value  in an  inverse
relationship to changes in market interest rates. Accordingly, as interest rates
decline,  these financial  instruments  will increase in value,  and as interest
rates increase,  these financial instruments will decline in value. The value of
these financial instruments will fluctuate daily with interest rate changes, and
these  fluctuations  may be  significant.  However,  the decline in the value of
these  financial  instruments  is limited to the value  recorded  in the balance
sheet.  These financial  instruments  primarily include options on U.S. treasury
futures, forward contracts, and interest rate floors.

As of March  15,  1996,  due to  rising  interest  rates,  the  risk  management
contracts had declined in value by the carrying  amount  recorded on the balance
sheet at December 31, 1995 (see Note 14).

The cost of option  contracts  to manage  BBMC's  fixed and  variable  rate loan
origination  commitments  are capitalized and amortized as an adjustment of gain
or loss over the life of the underlying  option contract.  Unamortized  premiums
are included in other assets on the balance sheet.  At March 15, 1996,  BBMC had
call options to purchase mortgage=backed  securities with a total face amount of
$653.0 million. The unamortized premiums associated with these options were $2.6
million at March 15,  1996.  There  were no put  options  outstanding  as of the
balance sheet date.

Short-term option contracts that are used to manage interest rate risk on BBMC's
mortgage servicing rights are  marked-to-market  with gains or losses recognized
in current  income.  The current  market  value of these  option  contracts  are
included in the balance of capitalized  mortgage  servicing rights. At March 15,
1996,  the current market value of these option  contracts  included in mortgage
servicing  rights was $20.2 million.  Unrealized  gains (losses) at December 31,
1994,  1995 and March 15,  1996,  included  in the  consolidated  statements  of
operations were ($2.9) million, $86.5 million and ($56.6) million, respectively.


Mortgage loans

Mortgage  loans held for sale are carried at the lower of aggregate cost or fair
value.  Fair value is based on the contract  prices at which the mortgage  loans
will be sold or, if the loans are not  committed  for sale,  the current  market
price.  Loan  origination  fees and certain  direct costs are deferred until the
related mortgage loans are sold.


Mortgage loans held for investment are stated at the lower of cost or fair value
at the time the permanent investment decisions are made. Discounts,  if any, are
amortized over the anticipated life of the investment.

42

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>

Notes to Consolidated Financial Statements (Continued)


Loans are placed on  nonaccrual  status  when any  portion of the  principal  or
interest  is  ninety  days past due or  earlier  when  concern  exists as to the
ultimate  collectibility  of  principal  or  interest.  When loans are placed on
nonaccrual status, the related interest  receivable is reversed against interest
income of the current period. Interest payments received on nonaccrual loans are
applied as a reduction of the  principal  balance when concern  exists as to the
ultimate  collection of principal;  otherwise,  such payments are  recognized as
interest  income.  Loans are removed from  nonaccrual  status when principal and
interest become current and they are estimated to be fully collectible.


Purchased and originated mortgage servicing rights

Purchased  mortgage servicing rights (PMSR) represent the cost of purchasing the
right to service  mortgage loans  originated by others.  PMSR are amortized as a
reduction  of  servicing  fee  income  over the  estimated  servicing  period in
proportion  to the  estimated  future net cash  flows  from the loans  serviced.
Remaining PMSR asset balances are evaluated for impairment by determining  their
estimated recoverable amount through applying the discount rate in effect at the
time the  servicing was  purchased to the  estimated  future  aggregate net cash
flows from the underlying mortgages.  The carrying value is written down for any
impairment;  such  write=downs  are  included  in the  amortization  of mortgage
servicing rights.

On January 1, 1996,  BBMC adopted  Statement of Financial  Accounting  Standards
(SFAS)  No.  122  which,  among  other  provisions,  requires  that the value of
mortgage servicing rights associated with mortgage loans originated by an entity
be  capitalized as assets.  The value of BBMC's  originated  mortgage  servicing
rights (OMSR) is determined by allocating  the total costs of the mortgage loans
between the loans and the mortgage servicing rights based on their relative fair
values.  Previously,  OMSRs were included with the cost of the related loans and
considered  in  determining  the gain or loss on sale when the loans  were sold.
Through March 15, 1996,  BBMC  capitalized  $3.1 million of OMSR,  which had the
effect of increasing  net mortgage  origination  revenue by $3.1 million for the
period  January 1, 1996 to March 15,  1996 since a portion of the basis of loans
originated  for sale  was  allocated  to OMSR.  Since  SFAS  No.  122  prohibits
retroactive  application,  historical  accounting results have not been restated
and,  accordingly,  the accounting  results for the previous years ended are not
directly comparable with the period January 1, 1996 through March 15, 1996.

SFAS No.  122 also  requires  that  capitalized  mortgage  servicing  rights  be
evaluated  for  impairment  based on the fair  value  of these  rights.  For the
purposes  of  determining  impairment,  BBMC's  mortgage  servicing  rights  are
stratified  based on interest  rate and type of loan  (conventional/government).
Impairment,  if any,  is  recognized  through  a  valuation  allowance  for each
impaired  stratum.  BBMC did not record any  impairment  charges  related to its
mortgage  servicing right portfolio for the period January 1, 1996 through March
15, 1996.


Excess mortgage servicing receivable

Excess  mortgage  servicing  receivable  (EMSR)  represents the present value of
servicing fee income in excess of a normal  servicing  fee. When loans are sold,
the estimated  excess  servicing is recognized as income and amortized  over the
estimated  servicing  period in proportion to the estimated future aggregate net
cash flows from the loans  serviced.  Remaining asset balances are evaluated for
impairment  based on current  estimates of future  discounted  cash flows.  Such
write-downs are included in amortization of mortgage servicing rights.


Accounts receivable

Accounts  receivable  includes  advances made in connection  with loan servicing
activities.  These advances consist primarily of payments for property taxes and
insurance  premiums,  as well as,  principal and interest  remitted to investors
before they are collected from mortgagors.


Pool loan purchases

Pool  loan   purchases   are  carried  at  cost  and  consist  of   FHA=insured,
VA=guaranteed,  and conventional loans purchased from mortgage=backed securities
serviced by BBMC for others.  At the purchase date,  these loans were delinquent
or in the process of foreclosure or repayment.  Losses associated with pool loan
purchases are largely reimbursed by the insurer.


Mortgage claims receivable

Mortgage claims receivable  includes claims filed primarily with the FHA and the
VA.  These  receivables  are carried at cost,  less an allowance  for  estimated
amounts that are not collectible from the mortgage insuring agencies.


Real estate acquired

Real estate acquired includes  properties on which BBMC has foreclosed and taken
title.  It is initially  reported at the lower of the carrying value of the loan
or the fair value of the real estate obtained, less estimated selling costs. The
excess,  if any, of the loan  balance over the fair value of the property at the
time of transfer to real estate acquired is charged to the reserve for estimated
servicing losses on investor=owned  loans.  Subsequent  declines in the value of
the  property  and costs  related to holding the  property  are charged  against
income.


Premises and equipment

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation  is computed  using the  straight-line  method  over the  estimated
useful lives of the assets. Leasehold improvements are amortized over the lesser
of the estimated life of the improvement or the term of the lease.

                                                                              43

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


Other assets

Other assets  consist  primarily of a prepaid  pension asset of ($9.8 million at
March 15, 1996)  allocated from the Bank of Boston,  and the excess of cost over
fair  value of net  assets  acquired.  The excess of cost over fair value of net
assets acquired is amortized  using a  straight=line  basis over periods varying
from seven to twenty=five years.


Mortgage servicing fees

Mortgage servicing fees represent fees earned for servicing mortgage loans owned
by investors.  The fees are generally  calculated on the  outstanding  principal
balances of the loans serviced and are recognized as income on an accrual basis.


Servicing losses on investor=owned loans

BBMC records  losses  attributable  to servicing FHA and VA loans for investors.
These amounts  include  actual losses for final  disposition  of loans,  accrued
interest for which payment has been denied,  and estimates for potential  losses
based on BBMC's experience as a servicer of government loans.


A reserve for estimated  servicing losses on  investor-owned  loans is available
for potential losses related to the mortgage servicing portfolio and is included
in the balance of accounts payable and accrued liabilities.


Net mortgage origination revenue

Net  mortgage  origination  revenue  includes  gains and  losses  from  sales of
mortgage loans, deferred origination fees and expenses, and the present value of
gains from the EMSR.


Income taxes

BBMC  files  its  federal  tax  return  through  inclusion  in  Bank  of  Boston
Corporation's  consolidated  return.  Accordingly,  Bank of Boston's federal tax
provision  is  allocated  to all member  subsidiaries  as if each  member were a
separate taxpayer.  However,  the timing of utilization of certain of BBMC's tax
attributes  may differ from a stand-alone  tax-paying  basis.  BBMC accounts for
income taxes in accordance  with SFAS No. 109,  "Accounting  for Income  Taxes".
Note 10 includes  additional  information  with  respect to the adoption of this
statement.  Under SFAS No. 109, current tax liabilities or assets are recognized
through  charges or credits to the current tax provision for the estimated taxes
payable or refundable for the current year.

Deferred tax  liabilities  are  recognized for temporary  differences  that will
result in amounts  taxable in the future and deferred tax assets are  recognized
for  temporary  differences  and tax benefit  carryforwards  that will result in
amounts  deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized  through charges or credits to the deferred tax provision.
A deferred tax valuation  reserve is  established  if it is more likely than not
that all or a portion of the deferred  tax assets will not be realized.  Changes
in the deferred tax valuation reserve are recognized  through charges or credits
to the deferred tax provision.

The effect of enacted  changes in tax law,  including  changes in tax rates,  on
deferred tax assets and  liabilities  is recognized in income in the period that
includes the enactment date.


Accounting changes

Effective  January 1, 1994,  BBMC changed its method of accounting  for mortgage
servicing fees from the cash basis to the accrual basis.  The cumulative  effect
to January 1, 1994 of this  accounting  change was an  increase in net income of
approximately $3.5 million, which is net of income taxes of $1.9 million.


3. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS MORTGAGE
   SERVICING RECEIVABLE


PMSR consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31,             March 15,
                                                            ---------------------------------------------
                                                                  1994            1995           1996
                                                            ---------------------------------------------
                                                                             (In thousands)
<S>                                                              <C>            <C>             <C>     
PMSR ....................................................        $732,775       $954,931        $951,817
Accumulated amortization ................................        (316,960)      (421,040)       (429,348)
                                                            --------------------------------------------
Balance .................................................        $415,815       $533,891        $522,469
                                                            ============================================
<CAPTION>
EMSR consist of the following:
                                                                      December 31,           March 15,
                                                            -------------------------------------------
                                                                  1994            1995         1996
                                                            -------------------------------------------
                                                                             (In thousands)
<S>                                                               <C>            <C>             <C>     
EMSR ....................................................         $60,419        $66,465         $70,432
Accumulated amortization ................................         (45,086)       (49,018)        (50,039)
                                                            --------------------------------------------
Balance .................................................         $15,333        $17,447         $20,393
                                                            ============================================
</TABLE>


4. RESERVE FOR ESTIMATED SERVICING LOSSES ON INVESTOR=OWNED LOANS

An  analysis of the reserve for  estimated  servicing  losses on  investor-owned
loans is as follows:

<TABLE>
<CAPTION>
                                                                      December 31,             March 15,
                                                            ---------------------------------------------
                                                                  1994            1995           1996
                                                            ---------------------------------------------
                                                                             (In thousands)
<S>                                                              <C>            <C>             <C>     
Balance at January 1 ....................................         $(4,700)      $(6,650)         $(9,400)
Servicing losses on
  investor-owned loans ..................................          (7,177)       (9,981)          (5,560)
Charge-offs .............................................           5,304         7,473            2,725
Recoveries ..............................................             (77)         (242)            --
                                                            ---------------------------------------------
Ending Balance ..........................................         $(6,650)      $(9,400)        $(12,235)
                                                            =============================================
</TABLE>

5. MORTGAGE SERVICING PORTFOLIO

BBMC's  residential  mortgage servicing  portfolio totaled $37.9 billion,  $41.5
billion  and $44.2  billion  at  December  31,  1994,  1995 and March 15,  1996,
respectively,  and included  mortgage-backed  securities of $24.0 billion, $28.5
billion and $29.1 billion


44

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


Notes to Consolidated Financial Statements (Continued)

at December 31, 1994, 1995 and March 15, 1996, respectively. In addition, BBMC's
commercial loan servicing portfolio totaled $1.0 billion,  $0.9 billion and $0.2
billion at December 31, 1994,  1995 and March 15,  1996,  respectively.  Related
fiduciary  funds are segregated in trust  accounts,  principally  deposited with
Bank of Boston, and are not included in the accompanying  consolidated financial
statements.

BBMC has in force an errors and  omissions  policy in the amount of $25 million.
Fidelity  coverage  up to a  limit  of  $75  million,  subject  to a $1  million
deductible, is provided under a Bank of Boston master program.

6. PREMISES AND EQUIPMENT

Premises and equipment consist of the following:


                                              December 31,           March 15,
                                        ---------------------------------------
                                           1994           1995         1996
                                        ---------------------------------------
                                                    (In thousands)
Land ..............................        $4,086         $4,086        $4,086
Building ..........................        14,251         14,477        14,476
Furniture and equipment ...........        24,300         26,870        25,967
Leasehold improvements ............           752            824           877
                                        ---------------------------------------
                                           43,389         46,257        45,406
Accumulated depreciation
  and amortization ................       (18,110)       (20,871)      (20,335)
                                        ---------------------------------------
Balance ...........................       $25,279        $25,386       $25,071
                                        =======================================


7. NOTE PAYABLE TO BANK OF BOSTON

BBMC borrows  funds on a demand basis from Bank of Boston under a $1.25  billion
line of  credit,  collateralized  by  substantially  all of  BBMC's  assets.  At
December 31, 1994 and 1995 and March 15, 1996, the interest rate was 8.5%,  6.8%
and 7.7%, respectively,  less the benefit received from balances held at Bank of
Boston.  Interest expense, net of this benefit, was $24.6 million, $20.5 million
and $6.7  million for the years ended  December  31, 1994 and 1995,  and for the
period January 1, 1996 to March 15, 1996, respectively.


8. LONG-TERM DEBT

Long-term  debt  consists  of a 30-year  mortgage  note,  payable  monthly  with
interest at 91/2%,  maturing in 2017.  BBMC's main office building is pledged as
collateral.  Principal  payments due on long-term debt as of March 15, 1996, are
as follows:

                                                                  March 15, 1996
                                                                  (In thousands)
                                                                  --------------
1997 .........................................................         $  230
1998 .........................................................            234
1999 .........................................................            258
2000 .........................................................            283
2001 .........................................................            312
Thereafter ...................................................         12,473
                                                                   ----------
Total Due ....................................................        $13,790
                                                                   ==========
                                       
9. EMPLOYEE BENEFITS

BBMC participates  with Bank of Boston and its affiliates in a  non-contributory
defined  benefit  pension  plan  (Plan)  covering  substantially  all  full-time
employees.  Bank of Boston funds the Plan in compliance with the requirements of
the Employee Retirement Income Security Act.

The Plan is an account  balance  defined benefit plan in which each employee has
an account to which  amounts  are  allocated  based on level of pay and years of
service and which grows at a specific rate of interest.  Benefits  accrued prior
to 1989 are based on years of service, highest average compensation,  and social
security benefits. Expense (income) associated with this Plan was ($1.1) million
and $0.5 million for the years ended  December  31, 1994 and 1995,  respectively
and $0.3 million for the period January 1, 1996 to March 15, 1996.

BBMC also maintains non-qualified deferred compensation and retirement plans for
certain  officers.  All benefits provided under these plans are unfunded and any
payments to plan  participants  are made by BBMC. As of December 31, 1994,  1995
and March 15, 1996,  approximately $0.8 million,  $0.7 million and $0.7 million,
respectively,  were included in accrued expenses and other liabilities for these
plans. For the years ended December 31, 1994, 1995 and for the period January 1,
1996 to March 15, 1996,  expense  related to these plans was $0.2 million,  $0.2
million and $0.1 million, respectively.

BBMC  also  participates  with  Bank of Boston  and its  affiliates  in a thrift
incentive plan. Under this plan,  employer  contributions are generally based on
the amount of eligible employee contributions.  The amounts charged to operating
expense under this plan were $0.8 million, $0.2 million and $0.1 million for the
years ended December 31, 1994,  1995 and for the period January 1, 1996 to March
15, 1996, respectively. BBMC employees are eligible to participate in the thrift
plan until October 1, 1996 at which time BBMC  participant  accounts will become
part of a similar plan offered by the new company.

BBMC  participates  with Bank of Boston and its affiliates by providing  certain
health and life insurance  benefits for retired  employees.  Eligible  employees
currently  receive  credits up to $10 thousand based on years of service,  which
are used to  purchase  post-retirement  health  care  coverage.  Life  insurance
coverage is  dependent  on years of service at  retirement.  Amounts  charged to
employee benefits expense for these benefits were $0.6 million, $0.5 million and
$0.8  million for the years ended  December 31, 1994 and 1995 and for the period
January 1, 1996 to March 15,  1996,  respectively.  After March 15, 1996 retiree
benefits associated with current retirees will be assumed by Bank of Boston.


                                                                              45

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


The components of post-retirement benefits expense for the two years ended 
December 31 were as follows:

                                                            1994          1995
                                                         ----------------------
                                                              (In thousands)
Service cost (benefits earned
  during the period) .............................           $63           $53
Interest cost on projected
  benefit obligation .............................           282           264
Amortization:
  Unrecognized net asset .........................           250           250
  Unamortized gain ...............................           (11)          (53)
                                                         ----------------------
Net post-retirement benefit cost .................          $584          $514
                                                         ======================


BBMC's unfunded accumulated post-retirement benefit obligation for the two years
ended December 31 was as follows:

                                                            1994          1995
                                                         ----------------------
                                                              (In thousands)
Accumulated post-retirement benefit
  obligation for retirees ........................        $3,711         $3,515
Unrecognized net gain ............................         1,385          1,541
Unrecognized net obligation ......................        (4,500)        (4,250)
                                                         ----------------------

Post-retirement benefit liability ................          $596           $806
                                                         ======================


Assumptions used in actuarial computations were:


                                                      1994             1995
                                                 ------------------------------
                                                          (In thousands)
Rate of increase in future
  compensation levels                                    4.50%            4.50%
Weighted average discount rate                           8.25%            7.25%
Medical inflation rate                           11% declining     8% declining
                                                 to 5% in 2001    to 5% in 1999

An increase of 1% in the assumed  health care cost trend rate would result in an
increase of 5.9%, and 5.8% in the accumulated post-retirement benefit obligation
and 4.9%, and 4.9% in annual post-retirement benefit expense for the years ended
December 31, 1994, and 1995, respectively.

These retirement plans are assessed annually.  There was no actuarial  valuation
at March 15, 1996.  Post-retirement  benefit  expense for the period  January 1,
1996 to March 15, 1996 was $0.1 million.


10. INCOME TAXES

The components of the net deferred tax asset are as follows:

                                              December 31,           March 15,
                                         --------------------------------------
                                           1994           1995          1996
                                         --------------------------------------
                                                      (In thousands)
PMSR ..............................       $27,223        $34,008        $28,167
EMSR ..............................         9,303          8,957          8,881
Reserve for estimated
  servicing losses on
  investor-owned loans ............         2,529          3,657          4,759
Other .............................        (2,385)        (1,301)        (1,303)
Valuation reserve .................        (5,658)        (4,597)        (4,114)
                                         --------------------------------------
Net deferred tax assets,
  net of reserve ..................       $31,012        $40,724        $36,390
                                         ======================================


The deferred tax assets, net of the valuation reserve,  can be realized from the
reversal of existing deferred tax liabilities and by carryback to previous years
with  taxable  income.  The  valuation  reserve has been  primarily  established
against state deferred tax assets where carryback is not permitted.


The components of the provision for (benefit from) income taxes are as follows:

                                               December 31,           March 15,
                                         --------------------------------------
                                              1994        1995           1996
                                         --------------------------------------
                                                      (In thousands)
 Current tax provision
  (benefit) ...........................      $4,773       $47,646      $(46,867)
Deferred tax (benefit)
  expense on income ...................      (2,587)       (8,651)        4,817
  Change in valuation
    reserve ...........................         339        (1,061)         (483)
                                         --------------------------------------
Net deferred tax
  (benefit) expense ...................      (2,248)       (9,712)        4,334
Income tax provision (benefit)
  before cumulative effect of
  changes in accounting
  principles ..........................       2,525        37,934       (42,533)
Change in accounting for
  mortgage servicing fee ..............       1,860          --            --
Total income tax
  provision (benefit) .................      $4,385       $37,934      $(42,533)
                                         ======================================


The following table reconciles the expected  federal tax provision  (benefit) on
income (loss) before cumulative effect of change in accounting principle,  based
on the federal statutory tax rate of

46

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


Notes to Consolidated Financial Statements (Continued)

35%, to the actual tax provision  (benefit) before  cumulative effect of changes
in accounting principles:

                                               December 31,           March 15,
                                         --------------------------------------
                                              1994        1995           1996
                                         --------------------------------------
                                                      (In thousands)
Expected tax provision (benefit)
  applicable to income (loss)
  before cumulative effect of
  change in accounting
  principle ............................      $1,567      $33,866      $(40,738)
Effect of:
  State income taxes, net of
    federal tax benefits ...............         381        3,774           743
  Other ................................         577          294        (2,538)
                                         --------------------------------------
Actual tax provision (benefit)
  before cumulative effect of
  change in accounting
  principle ............................      $2,525      $37,934      $(42,533)
                                         ======================================

11. LEASE COMMITMENTS

BBMC leases office  facilities  and equipment  under  noncancelable  leases that
include  renewal options and escalation  clauses which extend into 1999.  Rental
expense for leases of office facilities and equipment was $3.6 million, and $3.9
million for the years ended  December 31, 1994 and 1995 and $1.8 million for the
period  January  1,  1996  to  March  15,  1996.  BBMC's  minimum  future  lease
commitments are as follows:

                              December 31, 1995             March 15, 1996
                              ---------------------------------------------
                                             (In thousands)
1996 ........................      $1,996                       $1,837
1997 ........................         622                        1,910
1998 ........................         280                        1,764
1999 ........................          52                        1,079
2000 ........................          --                          107
Thereafter ..................          --                           21
                              =============================================
Total .......................      $2,950                       $6,718
                              ---------------------------------------------


12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

BBMC purchases financial  instruments and enters into financial  agreements with
off-balance  sheet risk in the normal course of business through the origination
and selling of mortgage loans and the management of the risk of  fluctuations in
interest rates.  These  instruments  involve,  to varying  degrees,  elements of
credit and interest rate risk.  Credit risk is the  possibility  that a loss may
occur if a counterparty to a transaction fails to perform according to the terms
of the contract. Interest rate risk is the possibility that a change in interest
rates will cause the value of a financial  instrument to decrease or become more
costly  to  settle.   Financial  instruments  primarily  used  by  BBMC  include
commitments  to extend  credit,  mandatory  and  optional  forward  commitments,
commitments to purchase  mortgage  servicing  rights,  and other  instruments to
minimize the  interest  rate risk of  capitalized  servicing  assets,  primarily
options on treasury bond futures.


Options and forward contracts

BBMC  purchases  options and forward  contracts to protect the value of mortgage
servicing assets from exposure to increases in prepayment activity and to reduce
the  impact of  interest  rate  fluctuations  on its  lending  commitments.  The
notional  amount of the options and forward  contracts  is the amount upon which
interest and other  payments  under the contract are based and is generally  not
exchanged. Therefore, the notional amounts should not be taken as the measure of
credit risk or a reflection  of future cash  requirements.  The risk  associated
with  options and  forwards  is the  exposure  to current  and  expected  market
movements in the interest  rates and the ability of the  counterparties  to meet
the terms of the contracts.  The cash requirements associated with these options
and forward contracts, aside from the initial purchase price, are minimal. These
contracts  generally require future  performance on the part of the counterparty
upon exercise of the option or execution of the forward contract by BBMC.

BBMC  is  exposed  to  credit  loss  in  the  event  of  nonperformance  by  the
counterparties to the various instruments.  BBMC controls credit and market risk
associated with interest rate products by establishing and monitoring  limits as
to the types and  degree of risks that may be  undertaken.  BBMC's  exposure  to
credit  risk in the event of default by the  counterparties  for the  options is
$20.2 million which was due at March 15, 1996.

BBMC's exposure to credit risk in the event of default by the  counterparty  for
mandatory forward  commitments to sell mortgage loans is the difference  between
the contract price and the current market price, offset by any available margins
retained by BBMC or an independent  clearing agent. The amount of credit risk as
of March 15, 1996, if all  counterparties  failed completely and if the margins,
if any,  retained  by BBMC  or an  independent  clearing  agent  were to  become
unavailable,  was approximately  $16.1 million for mandatory forward commitments
of mortgage-backed securities.


                                                                              47

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


The  following  is a  summary  of BBMC's  notional  amounts  and fair  values of
interest rate products as of December 31, 1994 and 1995, and March 15, 1996.

<TABLE>
<CAPTION>
                                                         December 31, 1994        December 31, 1995          March 15, 1996
                                                       Notional    Estimated    Notional     Estimated    Notional   Estimated
                                                        Amount   Fair Value(1)   Amount    Fair Value(1)   Amount  Fair Value(1)
                                                       -------------------------------------------------------------------------
                                                                                      (In thousands)
<S>                                                       <C>         <C>       <C>             <C>         <C>         <C>    
Purchased commitments to sell mortgage loans:
  Mandatory forward contracts ........................    $286,430    $4,413    $1,169,559      $(9,798)    $941,087    $16,099
  Options on mortgage-backed securities ..............      87,000       172       315,000         --        653,000      7,607
Risk management contracts:
  Purchased ..........................................     371,000     2,157     3,107,500      118,753      781,000     17,990
  Sold ...............................................        --        --         295,000      (33,833)        --         --
</TABLE>
------------
(1)  Fair  value  represents  the  amount at which a given  instrument  could be
     exchanged  in an  arms  length  transaction  with a third  party  as of the
     balance sheet date.
(2)  See  Note  14  for  additional  disclosures  on  fair  value  of  financial
     instruments.


Commitments to originate mortgage loans

BBMC regularly enters into  commitments to originate  mortgage loans at a future
date subject to  compliance  with stated  conditions.  Commitments  to originate
mortgage  loans have  off-balance  sheet  risk to the extent  BBMC does not have
matching  commitments  to sell  loans,  which  exposes  BBMC to lower of cost or
market   valuation   adjustments   in  a  rising   interest  rate   environment.
Additionally,  the extension of a commitment,  which is subject to BBMC's credit
review  and  approval  policies,  gives  rise to credit  exposure  when  certain
borrowing  conditions  are  met and  the  loan is  made.  Until  such  time,  it
represents only potential exposure.  The obligation to lend may be voided if the
customer's  financial  condition  deteriorates  or if the customer fails to meet
certain  conditions.  Commitments to originate mortgage loans do not necessarily
reflect future cash  requirements  since some of the commitments are expected to
expire without being drawn upon. Commitments to originate mortgage loans totaled
$194.5  million at December  31, 1994,  $885.6  million at December 31, 1995 and
$956.4 million at March 15, 1996.


Mortgage loans sold with recourse

BBMC sells  mortgage  loans with  recourse to various  investors and retains the
servicing  rights on these loans.  The total  outstanding  balance of loans sold
with recourse does not  necessarily  represent  future cash outflows.  The total
outstanding  principal  balance of loans sold with  recourse was $9.0 million at
December 31,  1994,  $6.8 million at December 31, 1995 and $7.0 million at March
15, 1996.


Servicing commitments to investors

BBMC is  required to submit to certain  investors,  primarily  GNMA,  guaranteed
principal and interest payments from the underlying mortgage loans regardless of
actual collections.


Purchase mortgage servicing rights commitments

BBMC routinely  enters into  commitments to purchase  mortgage  servicing rights
associated  with mortgages  originated by third  parties,  subject to compliance
with stated conditions. These commitments to purchase mortgage servicing rights,
correspond  to mortgage  loans having an  aggregate  loan  principal  balance of
approximately  $2.7  billion at December  31, 1995 and $0.9 billion at March 15,
1996.


Geographical concentration of credit risk

BBMC is engaged in  business  nationwide  and has no material  concentration  of
credit risk in any geographic region.


13. OTHER RELATED PARTY TRANSACTIONS

BBMC services mortgage loans for Bank of Boston and its affiliates. The balances
of those  portfolios  totaled  $3.3  billion,  $2.0  billion and $2.0 billion at
December 31, 1994 and 1995 and March 15, 1996,  respectively.  Related servicing
fees are included in mortgage servicing fees and were $8.4 million, $7.6 million
and $1.2 million for the year ended  December 31, 1994,  1995 and for the period
January 1, 1996 to March 15, 1996, respectively.

BBMC  reimburses  Bank of Boston and its  affiliates  for certain  occupancy and
supplies  costs.  Total costs  reimbursed  were $0.7  million for the year ended
December 31, 1994, 1995 and $0.2 million for the period January 1, 1996 to March
15, 1996.

BBMC  services  real estate  acquired by the Bank of Boston and its  affiliates.
Related  expenses are  reimbursed and were $2.1 million and $1.7 million for the
years ended  December 31, 1994,  1995 and $1.7 million for the period January 1,
1996 to March 15, 1996.

An affiliate of Bank of Boston purchases a 99.25%  participation in mortgages in
the process of being sold to permanent  investors.  The principal  balances sold
under this agreement aggregated  approximately $3.6 billion and $6.5 billion for
the year ended  December 31, 1994 and 1995,  respectively,  and $0.7 billion for
the period January 1, 1996 to March 15, 1996.

BBMC  purchased  mortgage  servicing  rights from Bank of Boston during 1995 and
capitalized  $4.8  million in mortgage  servicing  rights  associated  with this
transaction.

48

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


Notes to Consolidated Financial Statements (Continued)


BBMC sold  mortgage  loans to Bank of Boston  and its  affiliates  in its normal
course of  business.  These sales  totaled $0.4 billion and $0.5 billion for the
years ended  December 31, 1994 and 1995,  respectively  and $0.6 billion for the
period  January 1, 1996 to March 15, 1996.  Included in mortgage  loans held for
sale are loans which will be sold to Bank of Boston and its affiliates  totaling
$94.5 million and $18.1 million at December 31, 1994 and 1995, respectively, and
$64.1 million at March 15, 1996.

Miscellaneous  administrative services are provided by related companies.  These
services  did  not  have  a  material  impact  on  the  consolidated   financial
statements.

14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
disclosure of fair value information about financial  instruments whether or not
recognized in the balance  sheet,  for which it is  practicable to estimate fair
value.

Financial  instruments  include  such  items as  mortgage  loans  held for sale,
mortgage loans held for investment,  interest rate contracts, notes payable, and
other instruments.

Fair  value  estimates  are made as of a  specific  point  in time  based on the
characteristics   of  the  financial   instruments   and  the  relevant   market
information.  Where  available,  quoted  market prices are used. In other cases,
fair values are based on estimates  using other  valuation  techniques,  such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are  significantly  affected  by the  assumptions  used and the  judgments  made
regarding risk  characteristics of various financial  instruments,  prepayments,
discount rates, estimates of future cash flows, future expected loss experience,
and other  factors.  Changes in  assumptions  could  significantly  affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent  markets  and, in many cases,  could not be realized in an immediate
sale of the  instrument.  Also,  because of  differences  in  methodologies  and
assumptions  used to  estimate  fair value,  BBMC's  fair  values  should not be
compared to those of other companies.

Under the  Statement,  fair  value  estimates  are based on  existing  financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial instruments.  Accordingly,  the aggregate fair value amounts presented
do  not  represent  the  underlying  value  of  BBMC.  For  certain  assets  and
liabilities,  the information  required under the Statement is supplemented with
additional information relevant to an understanding of the fair value.

The methods and  assumptions  used to estimate  the fair values of each class of
financial instruments are as follows:


Cash

The carrying amount reported in the balance sheet approximates fair value.


Mortgages held for sale

Fair values are based on the estimated value at which the loans could be sold in
the secondary  market.  These loans are priced to be sold with servicing  rights
retained, as is BBMC's normal business practice.


Mortgages held for investment

Fair value is estimated  using market  quotes for  securities  backed by similar
loans or by  discounting  contractual  cash flows,  adjusted for credit risk and
prepayment  estimates.  These loans are priced with servicing  rights  retained.
Discount rates are obtained from secondary market sources.


Accounts receivable, pool loan purchases, and mortgage claims
receivable, net

Carrying  amounts are considered to approximate fair value. All amounts that are
assumed to be uncollectible within a reasonable time are written off.


Excess mortgage servicing receivable

Fair value is based on the present  value of expected  future net cash flows and
the current estimated servicing life.


Risk management contracts

Fair values are estimated based on actual market quotes or option models.


Note payable to Bank of Boston

The  carrying  amount  of the note  payable  to Bank of Boston  reported  in the
balance sheet approximates its fair value.


Long-term debt

Fair value of long-term debt is estimated by discounting  estimated  future cash
flows using a rate commensurate with the risks involved.


Commitments to originate mortgage loans

Fair value is estimated  using quoted  market  prices for  securities  backed by
similar loans adjusted for differences in loan characteristics.


Forward contracts to sell mortgages

Forward contracts to sell mortgages,  which represent legally binding agreements
to sell loans to permanent  investors at a specified price or yield,  are valued
using market prices for securities  backed by similar loans and are reflected in
the fair  values  of the  mortgages  held for sale,  to the  extent  that  these
commitments  relate to  mortgage  loans  already  originated,  or of the related
commitments to extend credit.


Options on mortgage-backed securities

The fair values of options are estimated based on actual market quotes.  In some
instances, quoted prices for the underlying loans or option models are used.

                                                                              49

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.-- Note 1)

<PAGE>


The estimated fair values of BBMC's financial instruments are as follows:

<TABLE>
<CAPTION>
                                                             December 31, 1994          December 31, 1995        March 15, 1996
                                                         Carrying                   Carrying                  Carrying
                                                          Amount      Fair Value     Amount    Fair Value      Amount     Fair Value
                                                       -----------------------------------------------------------------------------
                                                                                      (In thousands)
ASSETS
<S>                                                     <C>           <C>           <C>         <C>         <C>           <C>       
Cash ...............................................    $   5,653     $   5,653     $    830    $    830    $   23,216    $   23,216
Mortgages held for sale ............................      271,215       272,535      388,436     395,984       628,504       633,993
Mortgages held for investment ......................       28,589        26,988       33,183      35,003        65,068        65,068
Accounts receivable ................................       66,763        66,763       82,816      82,816        65,599        65,599
Pool loan purchases ................................       77,477        77,477       65,272      65,272        56,261        56,261
Mortgage claims receivable .........................       48,835        48,835       45,422      45,422        17,563        17,563
Excess mortgage servicing receivable ...............       15,333        20,700       17,447      19,117        20,393        23,100
Risk management contracts, classified as
  PMSR, and other assets(2) ........................        3,727         2,157       84,520      84,920        20,169        20,169
LIABILITIES
Note payable to Bank of Boston .....................      779,021       779,021      966,000     966,000     1,256,000     1,256,000
Long-term debt .....................................       14,007        13,853       13,816      16,211        13,790        21,695
OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans ............                     (1,455)                   1,094           --        27,250
Mandatory forward contracts
  to sell mortgages(2) .............................                      4,413                   (9,798)          --        16,099
Options on mortgage-backed securities(2) ...........                        172                       --           --         7,607
Risk management contracts ..........................                     (6,998)                      --           --          --
</TABLE>
------------
(1)  Parentheses denote a liability
(2)  See Note 12 for additional disclosures on notional amounts

Fair value estimates are made as of a specific point in time,  based on relevant
market data and information about the financial  instrument.  These estimates do
not reflect any premium or discount  that could  result from  offering  for sale
BBMC's entire holding of a particular  financial  instrument.  Because no active
market  exists for some  portion  of BBMC's  financial  instruments,  fair value
estimates are based on judgments  regarding  future  expected  loss  experience,
current economic  conditions,  current interest rates and repayment trends, risk
characteristics of various financial instruments, and other factors.

These estimates are subjective in nature and involve  uncertainties  and matters
of significant  judgment and,  therefore,  cannot be determined  with precision.
Changes in any of these  assumptions  used in calculating  fair value would also
significantly  affect the  estimates.  Further,  the fair value  estimates  were
calculated  as of  December  31,  1994 and 1995 and March 15,  1996.  Changes in
market interest rates and prepayment  assumption could significantly  change the
fair value.


15. CONTINGENCIES

BBMC is a  defendant  in a number of legal  proceedings  arising  in the  normal
course of business.  BBMC, in  management's  estimation,  has recorded  adequate
reserves in the financial statements for pending litigation.  Management,  after
reviewing  all  actions  and  proceedings  pending  against or  involving  BBMC,
considers that the aggregate liability or loss, if any, resulting from the final
outcome of these  proceedings  will not have a material  effect on the financial
position or results of operations of BBMC.

During 1994, BBMC settled a class action lawsuit pertaining to escrow practices.
BBMC agreed to change its escrow  calculations to the aggregate method and, as a
result,  refunded  approximately  $45.0  million  in excess  escrow  balance  to
mortgagors.  In addition, BBMC paid interest on these excess funds in the amount
of approximately $1.3 million.  The change in escrow calculations did not have a
material impact on the consolidated financial statements.

50

                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and now
                    known as HomeSide Lending, Inc.--Note 1)

<PAGE>

Notes to Consolidated Financial Statements (continued)


16. ACQUISITION OF BELL MORTGAGE

On June 1, 1995,  BBMC  purchased  the assets and  liabilities  of Bell Mortgage
Company (Bell Mortgage),  a privately-held  mortgage origination company located
in  Minneapolis,  Minnesota,  for $0.9 million in cash. The  acquisition of Bell
Mortgage was accounted for as a purchase.  Accordingly,  the purchase  price was
allocated to net assets  acquired based upon their  estimated fair market value.
As of a result of the acquisition,  goodwill of $0.4 million was recorded and is
being amortized over a 7-year period using the straight-line method.

Also,  under the terms of the agreement,  the shareholders of Bell Mortgage will
receive  additional  contingent  cash payments  based on Bell Mortgage  reaching
specific performance goals over the next 3 years. These additional cash payments
will be  recorded  as  additions  to  goodwill  and will be  amortized  over the
remainder of the original 7-year period using the straight-line method.

Results  of  operations   after  the  acquisition   date  are  included  in  the
consolidated  financial  statements.  Pro forma financial results would not have
been materially different as a result of this acquisition.


                         BancBoston Mortgage Corporation
              (Acquired by HomeSide, Inc. on March 15, 1996 and no
                    known as HomeSide Lending, Inc.--Note 1)



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


Reports of Independent Certified Public Accountants


To the Board of Directors of
BancBoston Mortgage Corporation:

We have  audited  the  accompanying  consolidated  balance  sheet of  BancBoston
Mortgage Corporation and subsidiaries (see Note 1) as of March 15, 1996, and the
related  consolidated  statements of operations  and retained  earnings and cash
flows for the period from  January 1, 1996 to March 15,  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 audit.

We conducted our audit 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 that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  BancBoston
Mortgage  Corporation and subsidiaries as of March 15, 1996 and the consolidated
results of their  operations and their cash flows for the period from January 1,
1996 to March  15,  1996,  in  conformity  with  generally  accepted  accounting
principles.



/s/ Arthur Andersen LLP
-----------------------
Jacksonville, Florida
March 14, 1997

                                                                              51
<PAGE>


Reports of Independent Certified Public Accountants

The Board of Directors
BancBoston Mortgage Corporation

We have  audited the  accompanying  consolidated  balance  sheets of  BancBoston
Mortgage  Corporation  as of  December  31,  1994  and  1995,  and  the  related
consolidated  statements of operations and retained  earnings and cash flows for
the years then ended.  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 that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  BancBoston
Mortgage  Corporation  as of December  31, 1994 and 1995,  and the  consolidated
results of their  operations  and their cash flows for the years then ended,  in
conformity with generally accepted accounting principles.

As discussed in Notes 2, BancBoston Mortgage Corporation also changed its method
of accounting for mortgage servicing fee income, effective January 1, 1994.



/s/Coopers & Lybrand L.L.P.
----------------------------
Jacksonville, Florida

January  18,  1996,  except  
for the  second  paragraph  
of Note 1 and the fifth
paragraph of Note 2, as to
which the date is March 4, 1996



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


HomeSide, Inc.
Market for the Registrant's Common Equity and
Related Stockholder Matters


HomeSide's  common stock is listed on the New York Stock Exchange ("NYSE") under
the symbol HSL. As of February 28, 1997, there were 86 shareholders of record of
the Company's commonstock.  Class C common stock has no voting rights and is not
publicly traded. There was 1 shareholder of record of Class C common stock as of
February 28, 1997.

Common stock of HomeSide,  Inc. was initially  sold to the public on January 30,
1997,  and the  transaction  closed on February 5, 1997.  The high and low sales
prices as reported by the NYSE for the Company's  stock from January 31, 1997 to
February 28, 1997 was $19 and $161/8, respectively.

During the fiscal year ended  February 28, 1997,  no dividends  were declared or
paid on HomeSide's common stock.


52

                                 HomeSide, Inc.