SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
    ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

                         Commission file number 33-76930

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

                   DELAWARE                                      13-3759196
        (State or other jurisdiction of                       (I.R.S. Employer
        incorporation or organization)                       Identification No.)

    1111 NORTH HIGHLAND STREET, ARLINGTON, VIRGINIA                 22201
       (Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (703) 247-3700.

           Securities registered pursuant to Section 12(b) of the Act:
                                (Not applicable)

           Securities registered pursuant to Section 12(g) of the Act:
                                (Not applicable)

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

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of  Regulation  S-K (ss.  229.405 of this  chapte\\r)  is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]

         Based upon the closing  price of the  registrant's  common  stock as of
March  19,  1998,  the  aggregate  market  value  of the  voting  stock  held by
non-affiliates of the registrant is $45.1 million.*

         The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:


                 Class: Common Stock, par value $.01 per share.
                Outstanding at March 19, 1998: 2,242,494 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE:


PART III:
         Portions of the definitive  proxy statement for the 1998 Annual Meeting
of Shareholders, if filed before April 30, 1998.

----------------
*    Solely  for  purposes  of this  calculation,  all  executive  officers  and
     directors  of  the  registrant,  Employee  Stock  Ownership  Plan  and  all
     shareholders  reporting  beneficial  ownership  of  more  than  5%  of  the
     registrant's  common stock are considered to be affiliates.  This reference
     to affiliate status is not necessarily a conclusive determination for other
     purposes.


<PAGE>

                                     PART I

ITEM 1.       BUSINESS

GENERAL


         TeleBanc  Financial  Corporation  (the "Company" or  "TeleBanc"),  with
headquarters in Arlington, Virginia, had total assets of $1.1 billion at the end
of 1997.  TeleBanc  was  organized  by its  majority  stockholder,  MET Holdings
Corporation ("MET  Holdings"),  to become, in March 1994, the parent savings and
loan holding company for TeleBank ("the Bank"),  a federally  chartered  savings
bank.  In February  1997,  TeleBanc  acquired  TeleBanc  Capital  Markets,  Inc.
("TCM"),  a registered  investment  advisor,  funds manager,  and  broker-dealer
specializing  in mortgages and  mortgage-related  securities.  In June 1997, the
Company formed  TeleBanc  Capital Trust I ("TCT"),  which in turn sold shares of
trust preferred securities,  Series A, for a total of $10.0 million in a private
placement.  All references to the Company include the business of the Bank, TCM,
and TCT.  Financial and other data as of and for all periods prior to March 1994
represent the consolidated  data of the Bank only. Prior to March 1996, the Bank
was formerly known as Metropolitan Bank for Savings, F.S.B.

         The Company's revenues are derived  principally from interest income on
loans,  mortgage-backed  and related  securities,  and interest and dividends on
investment  securities and  interest-bearing  deposits.  The Company's principal
expenses are interest expense on deposits and borrowings and operating expenses,
such as compensation and employee benefits. The Company's net income also may be
offset by gains or losses on  hedging  transactions  and other  trading  account
gains or losses as part of the Company's asset/liability  management strategies.
Funds for these  activities  are  provided by  deposits,  borrowings,  principal
repayments on outstanding loans and mortgage-backed and related securities,  and
sales of investment securities held for trading.

         The Bank,  through  its  wholly  owned  subsidiary  TeleBanc  Servicing
Corporation ("TSC"),  funded 50% of the capital commitment for two new entities,
AGT Mortgage  Services,  LLC ("AGT") and AGT PRA, LLC ("AGT PRA").  AGT services
performing loans and administers  workouts for troubled or defaulted loans for a
fee.  Management  ceased operation of AGT on July 31, 1997. The primary business
of AGT PRA is its investment in Portfolio Recovery Associates,  LLC ("PRA"). PRA
acquires  and  collects   delinquent  consumer  debt  obligations  for  its  own
portfolio.

         Since 1994, TeleBanc has raised approximately $61.8 million through the
sale of capital  stock and warrants and the issuance of  subordinated  notes and
trust preferred  securities.  In the second quarter of 1994,  TeleBanc completed
its initial  public  offering,  raising $4.6 million  through the sale of common
stock and an additional $17.3 million through the issuance of subordinated notes
with warrants.  Upon the completion of this offering,  the Company  invested $15
million of the proceeds as capital of the Bank.  In February  1997,  the Company
consummated  the sale of $29.9  million  of  units  to  investment  partnerships
managed by  Conning &  Company,  CIBC WG Argosy  Merchant  Fund 2, LLC,  General
American  Life  Insurance  Company,   the  Progressive   Corporation,   and  The
Northwestern  Mutual Life  Insurance  Company and the  purchase of the assets of
Arbor Capital Partners, Inc., which was majority owned by MET Holdings,  through
the  issuance of 162,461  shares of TeleBanc  common  stock and a $500,000  cash
payment.   The  units  consist  of  convertible   preferred   stock  and  senior
subordinated notes with warrants. In June 1997, the Company formed TCT, which in
turn sold shares of trust preferred  securities,  Series A, for a total of $10.0
million in a private placement.

                                       1
<PAGE>
MARKET AREA AND COMPETITION

         From its office in Arlington, Virginia, the Company has a customer base
in all 50 states and the  District  of  Columbia.  As a result of the  Company's
direct marketing strategy for deposits and reliance upon the secondary market to
purchase mortgage loans and mortgage-backed and related securities,  the Company
competes on a  nationwide  basis for  deposits and  investments  in  residential
mortgage  products.  Generally,  the Company faces  substantial  competition for
deposits from thrifts,  commercial banks,  credit unions, and other institutions
providing retail investment opportunities. The ability of the Company to attract
and retain deposits depends on its ability to provide an investment  opportunity
meeting the requirements of investors as to rate of return, liquidity, risk, and
other factors,  as well as on the perception of depositors as to the convenience
and quality of its services. Competition in residential mortgage investing comes
primarily from commercial banks, thrift institutions, and purchasers of mortgage
products in the secondary market. The Company competes for residential  mortgage
investments  principally on the basis of bid price and for loans on the basis of
interest rate, fees it charges, and loan types offered.

LENDING ACTIVITIES

         GENERAL.  The Company's  lending  activities  consist  primarily of the
purchases of whole loans and  mortgage-backed and related securities rather than
the  production  and  origination  of  loans,  which  entails  greater  overhead
expenses, commonly found in a traditional thrift or community bank.

         LOAN PORTFOLIO COMPOSITION.  The Company's net loans receivable totaled
$540.7 million at December 31, 1997, or 49.1%,  of total assets at that date. At
December 31, 1997, $547.7 million,  or 98.8%, of the total gross loan portfolio,
consisted of one-to-four family  residential  mortgage loans. Prior to 1990, the
Company originated a limited number of loans for the purchase or construction of
multifamily  and  commercial  real  estate.  As  part of the  Company's  general
operating  strategy and in response to risks  associated  with  multifamily  and
commercial real estate lending and prevailing economic  conditions,  the Company
has  substantially  reduced its purchases  and  originations  of such loans.  At
December  31,  1997,  multifamily,  commercial,  and mixed use real estate loans
amounted to $5.3 million,  or 1.0%, of the Company's total loan  portfolio.  The
loan  portfolio  also  included home equity lines of credit and loans secured by
savings deposits in the amount of $869,000, or 0.2%, of the Company's total loan
portfolio at December 31, 1997.



                                       2
<PAGE>
         The following  table sets forth  information  concerning  the Company's
loan portfolio in dollar amounts and in percentages, by type of loan.


<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31,
                                                         ------------------------------------
                                                         1997       %        1996       %    
                                                         ----     ----       ----      ---   
                                                               (DOLLARS IN THOUSANDS)
<S>                                                   <C>        <C>      <C>        <C>     
Real estate loans:
   One- to four-family fixed-rate.................... $ 211,287  38.11%   $142,211   38.59%  
   One- to four-family adjustable-rate...............   336,470  60.69     217,352   58.97   
   Multifamily.......................................     1,447   0.26       1,516    0.41   
   Commercial real estate............................     3,033   0.55       4,017    1.09   
   Mixed use real estate.............................       856   0.15       1,180    0.32   
   Land..............................................       463   0.08         781    0.21   
                                                      --------- ------    --------  ------   
    Total real estate loans..........................   553,556  99.84     367,057   99.59   
                                                      --------- ------    --------  ------   
Consumer and other loans:
   Lease financing...................................       --      --          --      --   
   Home equity lines of credit and 
   second mortgage loans.............................       564   0.10       1,208    0.33   
   Other (1).........................................       305   0.06         305    0.03   
                                                      ----------------    --------  ------   
   Total consumer and other loans....................       869   0.16       1,513    0.41   
                                                      ----------------    --------  ------   
   Total loans....................................... $ 554,425 100.00%   $368,570  100.00%  
                                                      ========= =======   ========  ======   
Deduct:
   Non accrual/cost recovery.........................      (155)                       (182) 
   Deferred loan fees................................       (34)                        (42) 
   Deferred discounts on loans.......................    (9,938)                    (13,750) 
   Allowance for loan losses.........................    (3,594)                     (2,957) 
                                                      -------------               ---------- 
Total................................................   (13,721)                    (16,749) 
                                                      -------------               ---------- 
Loans receivable, net................................ $ 540,704                  $  351,821  
                                                      =============               ========== 
</TABLE>

<PAGE>


<TABLE>
<CAPTION>
                                                                                 AT DECEMBER 31,
                                                      -------------------------------------------------------
                                                           1995       %        1994      %        1993       %
                                                           ----      ---       ----     ---       ----      --
                                                                               (DOLLARS IN THOUSANDS)
<S>                                                   <C>         <C>     <C>        <C>      <C>        <C>   
Real estate loans:
   One- to four-family fixed-rate.................... $ 105,750   39.91%  $  67,449  42.54%   $  44,450  43.06%
   One- to four-family adjustable-rate...............   148,928   56.20      79,701  50.27       50,708  49.14
   Multifamily.......................................     1,286    0.49       1,114   0.70          932   0.90
   Commercial real estate............................     4,553    1.72       4,385   2.77        5,912   5.73
   Mixed use real estate.............................     1,792    0.68       1,953   1.23           --     --
   Land..............................................       384    0.14         387   0.24           16   0.02
                                                      --------- -------   --------- ------    --------- ------
    Total real estate loans..........................   262,693   99.14     154,989  97.75      102,018  98.85
                                                      --------- -------   --------- ------    --------- ------
Consumer and other loans:
   Lease financing...................................        --      --          --     --           17   0.02
   Home equity lines of credit and 
   second mortgage loans.............................     2,202    0.83       3,395   2.14        1,007   0.98
   Other (1).........................................        79    0.08         168   0.11          151   0.15
                                                      --------- -------   --------- ------    --------- ------
   Total consumer and other loans....................     2,281    0.86       3,563   2.25        1,175   1.15
                                                      --------- -------   --------- ------    --------- ------
   Total loans....................................... $ 264,974  100.00%  $ 158,552 100.00%   $ 103,193 100.00%
                                                      ========= =======   ========= ======    ========= ======
Deduct:
   Non accrual/cost recovery.........................                --                 --                  --
   Deferred loan fees................................               (42)               (50)                (68)
   Deferred discounts on loans.......................           (14,129)            (2,835)             (1,431)
   Allowance for loan losses.........................            (2,311)              (925)               (835)
                                                                -------             ------              ------
Total................................................           (16,482)            (3,810)             (2,334)
                                                                -------             ------              ------
Loans receivable, net................................          $248,492           $154,742            $100,859
                                                               =========           =========            ========
</TABLE>

------------
(1) Includes primarily  loans secured by deposit  accounts in the Bank, and to a
    lesser extent, unsecured consumer credit.
 
                                        3

<PAGE>
         MATURITY OF LOAN  PORTFOLIO.  The  following  table sets forth  certain
information  at December 31, 1997  regarding the dollar amount of loans maturing
in the Company's portfolio,  including scheduled repayments of principal,  based
on contractual terms to maturity.  Demand loans, loans having no stated schedule
of repayments and no stated maturity,  and overdrafts are reported as due within
one year.  The table below does not include any estimate of  prepayments,  which
may significantly shorten the average life of a loan and may cause the Company's
actual repayment experience to differ from that shown below.


<TABLE>
<CAPTION>
                                                DUE IN ONE        DUE IN ONE        DUE AFTER
                                               YEAR OR LESS      TO FIVE YEARS     FIVE YEARS           TOTAL
                                               ------------      -------------     ----------           -----
                                                                         (IN THOUSANDS)
<S>                                              <C>              <C>              <C>              <C>        
Real estate loans:
   One- to four-family fixed-rate...........     $   1,402        $   6,878        $  203,007       $   211,287
   One- to four-family adjustable-rate......            11           12,634           323,825           336,470
   Multifamily..............................            --            1,114               333             1,447
   Mixed use................................           110              300               446               856
   Commercial real estate...................           453              252             2,328             3,033
   Land.....................................            --              --                463               463
Consumer and other loans:
   Home equity lines of credit and
     second mortgage loans..................            --              544                20               564 
   Other....................................            --               --               305               305
                                                 ---------        ---------         ---------       ------------
     Total..................................     $   1,976        $  21,722          $530,727      $     554,425
                                                 =========        =========         ========        ============
</TABLE>


         The  following  table sets  forth as of  December  31,  1997 the dollar
amount of the loans maturing  subsequent to December 31, 1998 allocated  between
those with fixed interest rates and those with adjustable interest rates.

<TABLE>
<CAPTION>
                                                                FIXED RATES     ADJUSTABLE RATES        TOTAL
                                                                -----------     ----------------        -----
                                                                                 (IN THOUSANDS)
<S>                                                               <C>              <C>                  <C>        
Real estate loans:
   One- to four-family........................................    $209,885         $336,459 $           546,344
   Multifamily................................................       1,270                177             1,447
   Mixed use..................................................         746                 --               746
   Commercial real estate.....................................         537              2,043             2,580
   Land.......................................................         463                 --               463
Consumer and other loans:
   Home equity lines of credit and second
     mortgage loans...........................................          21                543               564
   Other......................................................          81                224               305
                                                                ----------         ----------       -----------
     Total.................................................... $   213,003        $   339,446       $   552,449
                                                               ===========        ===========       ===========
</TABLE>


         Scheduled contractual principal repayments of loans may not reflect the
actual life of such assets.  The average life of loans may be substantially less
than their  contractual terms because of prepayments.  In addition,  due-on-sale
clauses on loans  generally give the Company the right to declare a conventional
loan  immediately  due and payable in the event,  among other  things,  that the
borrower  sells the  property.  The  average  life of  mortgage  loans  tends to
increase,  however,  when current  mortgage loan market rates are  substantially
higher than rates on existing  mortgage  loans and,  conversely,  decreases when
rates on existing mortgage loans are substantially  higher than current mortgage
loan market rates.

         ORIGINATION, PURCHASE, AND SALE OF LOANS. Consistent with the Company's
strategy of minimizing  operating expenses,  the Company emphasizes the purchase
of loans rather than direct

                                       4

<PAGE>
originations.  The Company  purchased  $342.9 million,  $183.1  million,  $145.9
million,  $85.4  million,  and $33.4  million of loans  during  the years  ended
December 31, 1997,  1996,  1995,  1994,  and 1993,  respectively.  The Company's
mortgage loan originations totaled $0, $462,000, $2.7 million, $4.3 million, and
$1.8 million in the years ended December 31, 1997,  1996,  1995, 1994, and 1993,
respectively.

         Approximately  54.4%  of the  Company's  loan portfolio  is
serviced  by other  lenders  for which the  Company  pays a fee  ranging  from a
minimum of 25 basis points of the  principal  balance of the loan per annum to a
maximum  of $12 per month per loan.  The  institutions  servicing  loans for the
Company,  among other things,  collect and remit loan payments,  maintain escrow
accounts, inspect properties, and administer foreclosures when necessary.

         The  Company  sells  whole  loans  to   institutional   investors  and,
accordingly,  is a Fanie Mae  seller/servicer  and a Federal Home Loan  Mortgage
Corporation  ("FHLMC")  servicer.  The majority of loans sold have  consisted of
long-term, fixed-rate mortgage loans sold to Fannie Mae.

The Company generally sells such loans with servicing retained.

         The  following  table  shows  loan  origination,  purchase,  sale,  and
repayment activity of the Company during the periods indicated.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                              1997          1996         1995
                                                              ----          ----         ----
                                                                       (IN THOUSANDS)

<S>                                                       <C>          <C>           <C>        
Total loans receivable at beginning of period...........  $   351,821  $   248,492   $   154,742
Loans purchased:
 Real estate loans:
   One- to four-family variable rate....................      256,545      128,171        98,065
   One- to four-family fixed rate.......................       86,331       53,915        47,845
   Multi-Family ........................................         --          1,000          --
   Mixed-used...........................................         --            --           --
   Commercial real estate...............................         --            --           --
   Consumer and other loans.............................         --            --           --
                                                          -----------  -----------   ---------
     Total loans purchased..............................      342,876      183,086       145,910
Loans originated:
 Real estate loans:
   One- to four-family variable rate....................         --            --           --
   One- to four-family fixed rate.......................         --             25            80
   Commercial real estate...............................         --            --           --  
   Land ................................................         --            400          --
Home equity lines of credit and second mortgage loans...         --             37         2,644
                                                          -----------  -----------   -----------
     Total loans originated.............................         --            462         2,724
                                                          -----------  -----------   -----------
     Total loans purchased and originated...............      342,876      183,548       148,634

Loans sold..............................................       39,656       18,829         6,192
Loans securitized.......................................       21,017        8,275         2,794
Loan repayments.........................................       95,127       50,221        32,755
                                                          -----------  -----------   -----------
   Total loans sold, securitized, and repaid............      155,800       77,325        41,741

Net change - TBFC ESOP Note Receivable .................          --           (65)         --
Net change in deferred discounts and loan fees..........        3,820         (379)      (11,286)
Net transfers to REO ...................................       (1,454)      (1,513)         (471)
Net provision for loan losses...........................         (637)        (646)       (1,386)
Cost Recovery/Contra Assets ............................           27          (41)           --
Other loan debits/HELOC advances .......................           51         (250)           --
                                                              -------     --------       -------
Increase (decrease) in total loans receivable...........      188,883      103,329        93,750
                                                              -------     --------       -------
Net loans receivable at end of period...................  $   540,704  $   351,821   $   248,492
                                                              =======     ========       =======
</TABLE>

         The Company's loan purchases  during 1997 increased $159.8 million from
fiscal  year 1996 as the  Company  continued  to expand the  Bank's  operations.
During fiscal 1997 and 1996, the Company's loan purchases  involved purchases of
whole loans in the secondary  market,  principally

                                       5
<PAGE>
from private  investors.  The Company's loan  purchases  during fiscal year 1997
included  purchases of 92 pools with  approximately  2,900 loans.  The Company's
loan  purchases  during  fiscal year 1996  included  purchases  of 35 pools with
approximately  1,253 loans and minimal  loan  originations  consistent  with the
Company's  operating  strategy.  The Company's loan purchases during fiscal year
1995 included purchases of 26 pools with  approximately  1,200 loans and minimal
loan originations consistent with the Company's operating strategy.

         ONE-TO-FOUR  FAMILY  RESIDENTIAL   LENDING.   No  mortgage  loans  were
originated during 1997. In 1996, the Company originated $25,000 of loans secured
by  one-to-four-family  residential  properties,  excluding home equity lines of
credit,  in accordance  with Fannie Mae and FHLMC  underwriting  guidelines  for
terms up to 30 years.  It is the  Company's  policy  to make  one-to-four-family
mortgage  loans  with  up to a 95%  loan-to-value  ratio,  if  private  mortgage
insurance is obtained on the portion of the principal amount in excess of 80% of
the appraised value.

         MULTIFAMILY AND COMMERCIAL REAL ESTATE LENDING. Since 1990, the Company
has not actively pursued multifamily and commercial real estate lending or loans
secured by undeveloped land and has substantially  reduced  originations of such
loans. As of December 31, 1997, multifamily,  mixed use, commercial real estate,
and land loans amounted to $5.8 million,  or 1.05%,  of the Company's total loan
portfolio.

         CONSUMER AND OTHER LENDING.  The Company does not emphasize consumer or
other loans, but from time to time, originates such loans as an accommodation to
its  customers or  purchases  such loans as part of larger loan  packages.  Such
lending  primarily  includes  home equity  lines of credit and loans  secured by
savings deposits.  However,  the Company did not originate any consumer or other
loans during 1997. During 1996, the Company originated $37,000 in consumer loans
and  $305,000 in other loans.  At December  31,  1997,  consumer and other loans
totaled $305,000,  or 0.06%, of the Company's total loan portfolio.  At December
31, 1997,  total  outstanding  home equity  lines of credit and second  mortgage
loans amounted to $564,000, or 0.10%, of the Company's total loan portfolio.

         CRA LENDING  ACTIVITIES.  The Bank  participates  in various  community
development  programs in an effort to meet its  responsibilities  under the CRA.
The Bank has now committed to invest up to $500,000 in an investment  tax credit
fund that qualifies for CRA purposes.

         In 1995, the federal financial  regulatory agencies promulgated a final
rule revising the  regulations  that implement the CRA. The revised  regulations
outline special evaluations for wholesale  institutions.  The Bank believes that
it meets the definition of a wholesale institution and that it serves the credit
needs of the entire nation.

                                       6
<PAGE>
MORTGAGE-BACKED AND RELATED SECURITIES, AND SECONDARY MARKET ACTIVITIES

         The  Company  maintains  a  significant   portion  of   mortgage-backed
securities,  primarily in the form of privately  insured  mortgage  pass-through
securities, as well as Government National Mortgage Association ("GNMA"), Fannie
Mae,  and  FHLMC  participation  certificates,  and  securities  issued by other
nonagency  organizations.  GNMA  certificates are guaranteed as to principal and
interest by the full faith and credit of the United States, while Fannie Mae and
FHLMC   certificates   are  each  guaranteed  by  their   respective   agencies.
Mortgage-backed  securities  generally entitle the Company to receive a pro rata
portion of the cash flows from an identified pool of mortgages.  The Company has
also  invested  in  collateralized   mortgage  obligations  ("CMOs")  which  are
securities issued by special purpose entities generally  collateralized by pools
of mortgage-backed  securities. The cash flows from such pools are segmented and
paid  in  accordance  with  a  predetermined  priority  to  various  classes  of
securities  issued  by the  entity.  The  Company's  CMOs  are  senior  tranches
collateralized  by  federal  agency  securities  or whole  loans.  In the fourth
quarter  of  1995,  the  Company  reclassified  the  existing   held-to-maturity
mortgage-backed  security portfolio to  available-for-sale.  The following table
sets  forth  the   activity   in  the   Company's   mortgage-backed   securities
held-to-maturity portfolio during the periods indicated.

         In 1997,  the Company  acquired  certain  trading  securities.  Trading
securities  are bought and held  principally  for the purpose of selling them in
the near term. Securities purchased for trading are carried at market value with
the  corresponding  unrealized  gains and losses being recognized by credits and
charges  to  income.  The  Company  had  $21.1  million  classified  as  trading
securities  at December 31,  1997.  No  securities  were  classified  as trading
securities at and prior to December 31, 1996. For the period ending December 31,
1997, the Company recognized  approximately  $564,000 in realized gains from the
sale of trading assets and approximately $640,000 in unrealized  appreciation of
trading assets.

                                       7
<PAGE>
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------------
                                                                        1997               1996              1995
                                                                        ----               ----              ----
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                                     <C>                <C>           <C>        
Mortgage-backed and related securities at beginning
   of period (not including available for sale and trading)...          $ --               $ --          $   221,005
   Purchases:
     Pass-through securities..................................            --                 --               55,110
     CMOs.....................................................            --                 --                5,235
     FNMA.....................................................            --                 --                   --
     GNMA.....................................................            --                 --                   --
     FHLMC....................................................            --                 --                   --
   Acquired in exchange for loans.............................            --                 --              (10,465)
   Sales (1)..................................................            --                 --              (18,813)
   Repayments.................................................            --                 --              (39,155)
   Transfer to held for sale..................................            --                 --             (212,917)
                                                                         --------------------------------------------
Mortgage-backed and related securities at
 end of period (not including available for sale and trading).          $ --               $ --          $        --
                                                                        =============================================
</TABLE>

       The   following   table  sets  forth  the   activity  in  the   Company's
mortgage-back   securities  available  for  sale  portfolio  during  the  period
indicated.

<TABLE>
<CAPTION>
                                                                    -------------------------------------------------
                                                                        1997               1996              1995
                                                                        ----               ----              ----
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                                     <C>                <C>           <C>        
Mortgage-backed and related securities at beginning
   of period .................................................      $ 184,743           $ 234,835         $15,459
   Purchases:
     Pass-through securities..................................         39,400             109,600          13,183
     CMOs.....................................................        218,836              30,053              --
     FNMA.....................................................          2,115              12,102           2,634
     GNMA.....................................................         32,200              30,687              --
     FHLMC....................................................          4,649              14,194          12,810
   Transfer from held to maturity.............................             --                  --         212,917
   Sales (1)..................................................      (117,047)            (185,703)       (15,755)
   Repayments.................................................       (45,304)             (61,805)        (6,024)
   Transfer to trading........................................             --                  --         (1,650)
Provision for losses on securities............................             --                 (22)            --
Mark to market ...............................................           (389)                826            811
FASB 122 servicing ...........................................             --                 (24)            --
                                                                    -------------------------------------------------
Mortgage-backed and related securities at
 end of period ...............................................      $ 319,203            $184,743      $ 234,835
                                                                    =================================================
</TABLE>
------------------------

(1)  Includes  mortgage-backed  securities  on  which  call  options  have  been
     exercised.

                                        8

<PAGE>


         The  following  table sets  forth the  scheduled  maturities,  carrying
values,  and  current  yields for the  Company's  portfolio  of  mortgage-backed
securities at December 31, 1997:

<TABLE>
<CAPTION>
                                                                           AFTER ONE BUT        AFTER FIVE BUT
                                                    WITHIN ONE YEAR      WITHIN FIVE YEARS     WITHIN TEN YEARS    
                                                    ---------------      -----------------     ----------------    
                                                  BALANCE   WEIGHTED    BALANCE   WEIGHTED    BALANCE   WEIGHTED   
                                                    DUE       YIELD       DUE       YIELD       DUE       YIELD    
                                                    ---       -----       ---       -----       ---       -----    
                                                                                            (DOLLARS IN THOUSANDS)
<S>                                              <C>         <C>       <C>          <C>      <C>          <C>      
Private issuer                                   $   --        --%     $ 2,621      6.44%    $ 6,021      8.84%    
Collateralized mortgage obligations                  --        --           --        --          --        --     
Agencies                                            939      6.26          623      6.75          --        --     
                                                 ------      ----      -------      ----     -------      ----     
                                                 $  939      6.26%     $ 3,244      6.50%    $ 6,021      8.84%    
                                                 ======      ====      =======      ====     =======      =====    


<CAPTION>
                                              AFTER TEN YEARS             TOTALS
                                              ---------------       ------------------
                                              BALANCE   WEIGHTED    BALANCE   WEIGHTED
                                                DUE       YIELD       DUE       YIELD
                                                ---       -----       ---       -----
                                             
<S>                                          <C>          <C>      <C>          <C>  
Private issuer                               $145,417     8.78%    $154,059     8.74%
Collateralized mortgage obligations           139,578     6.90      139,578     6.90
Agencies                                       24,004     6.90       25,566     6.87
                                             --------     ----     --------     ----
                                             $308,999     7.78%    $319,203     7.79%
                                             ========     ====     ========     ====
</TABLE>

                                       9

<PAGE>


         In May 1996,  the  Company  formed  AGT, a 50% owned  subsidiary  which
services loans for both the Bank and third parties.  The Company  entered into a
loan servicing  agreement with AGT on May 1, 1996,  whereby AGT is paid a fee of
$8 to $100 per loan per month  depending upon the type of loan and whether it is
performing or non-performing.  AGT also receives a fee in its capacity as Master
Servicer for the  Company's  subserviced  portfolio  and is  reimbursed  for any
direct  collection  expenses  including  attorney fees,  repair costs,  etc. The
Company ceased operation of AGT on July 31, 1997. For the period ending December
31,1997,   the  Company  incurred  a  loss  in  equity   investment  in  AGT  of
approximately $640,000.

         Most of the loans sold by the Company are sold on a servicing  retained
basis. Servicing includes collecting and remitting loan payments, holding escrow
funds for the payment of real estate taxes, contacting delinquent mortgagors, in
some cases  advancing to the investor  interest when the mortgage is delinquent,
supervising  foreclosures  in the event of  unremedied  defaults  and  generally
administering the loans.  Under loan servicing  contracts,  the Company receives
servicing  fees that are withheld  from the monthly  payments made to investors.
The Company's aggregate loan servicing fees amounted to $942,000,  $790,000, and
$126,000 in 1997, 1996, and 1995, respectively.

         The following table sets forth information regarding the Company's loan
servicing portfolio at the dates shown.

<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                                       ----------------------------------------------------------------------------
                                                 1997                      1996                       1995
                                       -----------------------   -----------------------    -----------------------
                                                       PERCENT                   PERCENT                   PERCENT
                                                         OF                        OF                        OF
                                         AMOUNT         TOTAL       AMOUNT        TOTAL       AMOUNT        TOTAL
                                         ------         -----       ------        -----       ------        -----
                                                                  (DOLLARS IN THOUSANDS)
<S>                                    <C>              <C>      <C>              <C>       <C>             <C>  
Loans owned and serviced by
   the Company.......................  $ 252,945        45.6 %   $   164,745      44.7%     $ 161,625       61.0%
Loans owned by the Company
   and serviced by others............    301,500        54.4         203,853      55.3        103,349       39.0
                                       ---------     -------     -----------    ------      ---------      -----
   Total loans owned by the
     Company.........................  $ 554,425       100.0 %   $   368,598     100.0%     $ 264,974      100.0%
                                       ===========   =======     ===========    ======      ===========    =====
Loans serviced for others............  $  57,682                 $    45,856                $  18,196

</TABLE>

NON-PERFORMING, DELINQUENT, AND OTHER PROBLEM ASSETS

         GENERAL. It is management's policy to monitor continually the Company's
loan  portfolio to anticipate  and address  potential and actual  delinquencies.
Valuations are periodically  performed by management and an allowance for losses
on REO is  established  by a  charge  to  operations  if the  fair  value of the
property has changed.

         NONPERFORMING  ASSETS.  Nonperforming  assets consist of loans on which
interest is no longer  accrued,  loans which have been  restructured in order to
allow the borrower to maintain  control of the collateral,  real estate acquired
by  foreclosure,  real estate upon which deeds in lieu of foreclosure  have been
accepted  and real  estate  owned  which  has been  classified  as  In-Substance
Foreclosure ("ISF").  Restructured loans and real estate owned have been written
down to estimated  fair value,  based upon  estimates of cash flow expected from
the underlying collateral and appropriately discounted.

                                       10

<PAGE>

         The  following  table  sets  forth  information  with  respect  to  the
Company's  non-accrual  loans,  REO and ISF,  and  troubled  debt  restructuring
("TDRs") at the dates  indicated.  Since  December  1993,  the Company no longer
classifies ISF loans as REO.

<TABLE>
<CAPTION>
                                                                          AT DECEMBER 31,
                                              ----------------------------------------------------------------------
                                              1997           1996           1995            1994           1993
                                              ----           ----           ----            ----           ----
                                                                   (DOLLARS IN THOUSANDS)
<S>                                       <C>             <C>            <C>            <C>             <C>        
Loans accounted for on a
non-accrual basis:
   Real estate loans:
     One- to four-family................  $    10,359     $     8,979    $     4,526    $     1,296     $     1,570
     Commercial real estate.............          568           1,217            261            702             902
     Land...............................           --              --             --             --              --
     Construction.......................           --              --             --             --              --
   Home equity lines of credit and
     second mortgage loans..............           --              54            136             41              47
   Other................................           --              --             --             27              35
                                          -----------     -----------    -----------    -----------     -----------
Total...................................  $    10,927     $    10,250    $     4,923    $     2,066     $     2,554
                                          ===========     ===========    ===========    ===========     ===========
Accruing loans which are contractu-
 ally past due 90 days or more:
   Real estate loans:
     One- to four-family................  $        --     $        --    $       230    $        --     $        --
                                          -----------     -----------    ------------   -----------     -----------
Total...................................  $        --     $        --    $       230    $        --     $        --
                                          ===========     ===========    ============   ===========     ===========
Total of non-accrual and 90 days
 past due loans.........................  $    10,927     $    10,250    $     5,153    $     2,066     $     2,554
                                          ===========     ===========    ===========    ===========     ===========
REO:
   One- to four-family..................  $       681     $     1,300    $       421    $        98     $       194
   Commercial real estate...............           --              --             --            206             665
   Land.................................           --              --            582            581             582
                                          -----------     -----------    -----------    -----------     -----------
                                                  681           1,300          1,003            885           1,441
   Loss allowance for REO...............           --             (65)          (213)           (92)           (221)
                                          -----------     -----------    -----------    ------------    -----------
     Total REO, net.....................          681           1,235            790            793           1,220
                                          -----------     -----------    -----------    -----------     -----------
Total non-performing assets, net........  $    11,608     $    11,485    $     5,943          2,859     $     3,774
                                          ===========     ===========    ===========    ===========     ===========
Total non-performing assets, net,
   as a percentage of total assets......         1.05%           1.83%          1.07%           0.7%            1.7%
                                          ===========     ===========    ===========    ============    ===========
Total loss allowance as a percentage
   of total non-performing assets,
   gross................................        30.96%          26.30%         39.53%         34.45%          26.43%
                                          ===========     ===========    ===========    ============    ===========
TDRs ..................................   $       425     $       435    $       365    $       688     $       413
                                          ===========     ===========    ===========    ============    ===========

</TABLE>

         During 1997,  non-performing assets increased by $123,000 or 1.1%. This
increase is attributed to the $188.9  million,  or 53.6%,  growth in the overall
loan portfolio.  In accordance with the Company's  policy,  management  actively
monitors the non-performing assets.

             During the years ended  December 31, 1997,  1996,  1995,  and 1994,
interest income of approximately  $739,000,  $789,000,  $365,000,  and $113,000,
respectively,  would  have been  recorded  on  non-accruing  loans had they been
performing in accordance with their terms. No interest on non-accruing loans was
included in income during the years ended  December 31, 1997,  1996,  1995,  and
1994. TDRs are loans to which the Company has granted certain concessions taking
into consideration among other things the borrower's financial  difficulty.  The
objective of the Company in granting these  concessions,  through a modification
of terms, is to maximize the recovery of its investment.  Such  modifications of
terms may include  reduction  in stated  rate,  extension  of maturity at a more
favorable rate,  and/or  reduction of accrued  interest.  TDRs with  concessions
totaled approximately $ 425,000,  $435,000,  $365,000,  and $688,000 at December
31,  1997,  1996,  1995,  and 1994,  respectively.  TDRs  continue to be closely
monitored by the Company due to their  inherent risk  characteristics.  Interest
income recorded on TDRs in 1997, 1996, 1995, and 1994 was approximately $28,000,
$28,000, $45,000, and $9,000, respectively.

                                       11

<PAGE>

         Loans which are not classified as non-accrual, past due 90 days or more
or TDRs, but where known information about possible credit problems of borrowers
caused  management to have serious  doubts as to the ability of the borrowers to
comply  with  present  loan  repayment  terms and may  result in  disclosure  as
non-accrual,  past due 90 days or more or TDRs are considered  potential problem
loans. At December 31, 1997,  loans still accruing  interest,  but identified by
management as potential  problem loans aggregated $2.5 million.  The majority of
these loans,  identified as "special mention" loans, include a $2.3 million pool
of single family, non-performing loans which are performing in accordance with a
bankruptcy plan.

         ALLOWANCE FOR LOAN LOSSES.  In originating  and purchasing  loans,  the
Company  recognizes  that credit losses will be experienced and that the risk of
loss will vary with, among other things, the type of loan, the  creditworthiness
of the borrower over the term of the loan, general economic  conditions,  and in
the case of a secured  loan,  the quality of the  security  for the loan.  It is
management's  policy to maintain an adequate allowance for loan losses based on,
among other  things,  the  Company's  and the  industry's  historical  loan loss
experience,   evaluation  of  economic   conditions,   and  regular  reviews  of
delinquencies  and loan portfolio  quality.  The Company increases its allowance
for loan losses by charging  provisions  for  possible  loan losses  against the
Company's income.

         The  Company's  methodology  for  establishing  the  allowance for loan
losses takes into  consideration  probable  losses that have been  identified in
connection with specific loans as well as losses in the loan portfolio that have
not been  identified  but can be  expected  to  occur.  General  allowances  are
established  by  management  and  approved  by the  Board  of  Directors.  These
allowances are reviewed  monthly based on an assessment of risk in the Company's
loan portfolio as a whole taking into  consideration the composition and quality
of the portfolio,  delinquency  trends,  current charge-off and loss experience,
the state of the real estate market and general economic conditions.  Additional
provisions  for  losses on loans may be made to bring the  allowance  to a level
deemed adequate.  Additionally,  the Company's  internal audit  consultants have
established  an  independent  internal loan review  program which is followed by
bank personnel.

         In general,  the Company  adds  provisions  to its  allowance  for loan
losses in amounts equal to 0.20% of one-to-four family mortgages, 0.50% for home
equity lines of credit and second trusts, 1.0% of multifamily and mixed use real
estate loans and 2.0% of  commercial  and land loans.  During 1997,  the Company
recorded a $637,000 net increase in the allowance for loan losses in relation to
the $188.9  million  increase  in the loan  portfolio.  Of this  increase in the
allowance for loan losses,  100% of the amount related to the general  valuation
allowance ("GVA").

         As of December 31, 1997, total loans  receivable  include four pools of
credit enhanced  one-to-four  family  mortgage loans totaling $41.7 million,  or
7.5%, of total loans outstanding. Two of these pools totaling $28.3 million have
a credit reserve from the seller equal to 2.5% of the unpaid  principal  balance
at the time of the  purchase  available  to offset  any  losses.  Another  pool,
totaling $7.3 million, has an indemnification whereby the seller must repurchase
any loan that  become  more than four  payments  past due at any time during the
life of the loan.  The final pool,  totaling $6.1 million,  has a credit reserve
equal to  approximately  10.0% of the  unpaid  principal  balance at the time of
acquisition. Management believes that the combination of the Company's loan loss
allowance, net credit discount, and credit enhancement on certain loan pools are
adequate to cover potential losses.

         Information regarding movements in the provision for loan losses during
the five  year  period  ending  December  31,  1997 is  incorporated  herein  by
reference  to the  section  titled  "Management's  Discussion  and  Analysis  of
Financial  Condition  and  Results of  Operations  --  Earnings  Performance  --
Provision for Loan and Security Losses" included in this Form 10-K.

                                       12

<PAGE>

         The  following  table sets forth at  December  31,  1997 the  aggregate
carrying  value of the Company's  assets  classified as  substandard,  doubtful,
loss, and special mention according to type.

<TABLE>
<CAPTION>
                                                                                            TOTAL         SPECIAL
                                           SUBSTANDARD     DOUBTFUL         LOSS         CLASSIFIED       MENTION
                                           -----------     --------         ----         ----------       -------
                                                                       (IN THOUSANDS)
Loans:
<S>                                       <C>              <C>            <C>           <C>              <C>       
   One- to four-family..................  $    10,359      $     --       $      443    $    10,802      $    2,257
   Commercial real estate...............          283           285               67            635             249
   Land.................................           --            --               --             --             --
   Home equity lines of credit and
     second mortgage....................           --            --               --             --             --
                                          -----------      --------       ----------    -----------      ---------

Total loans.............................  $    10,642      $    285       $      510    $    11,437      $   2,506
                                          ===========      =========      ==========    ===========      =========
REO:

   One- to four-family..................  $       681      $     --       $       --    $       681      $      --
                                          -----------      --------       ----------    -----------      ---------

Total REO...............................          681            --               --            681             --
                                          -----------      --------       ----------    -----------      ---------
Total...................................  $    11,323      $    285       $      510    $    12,118      $   2,506
                                          ===========      =========      ==========    ===========      =========
</TABLE>


         As a result of the declines in regional  real estate  market values and
the significant  losses  experienced by many financial  institutions,  there has
been a  greater  level  of  scrutiny  by  regulatory  authorities  of  the  loan
portfolios of financial  institutions  undertaken as part of the  examination of
the  institution  by the FDIC,  OTS,  and other  state and  federal  regulators.
Although the Company  believes it has  established  its existing  allowances for
losses in accordance with generally accepted accounting principles, there can be
no assurance that  regulators,  in reviewing the Company's loan portfolio,  will
not request the Company to increase its allowance for losses, thereby negatively
affecting the Company's financial condition and earnings.

                                       13

<PAGE>

         The  following  table  allocates  the allowance for loan losses by loan
category  at the  dates  indicated.  The  allocation  of the  allowance  to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any other category.

<TABLE>
<CAPTION>
                                                                                   AT DECEMBER 31,
                          -------------------------------------------------------------------------------
                                   1997                      1996                      1995              
                          ------------------------- ------------------------- -------------------------- 

                                       PERCENT OF                 PERCENT OF                PERCENT OF   
                                      LOANS IN EACH              LOANS IN EACH             LOANS IN EACH CH
                                       CATEGORY TO                CATEGORY TO               CATEGORY TO  O
                            AMOUNT     TOTAL LOANS     AMOUNT     TOTAL LOANS    AMOUNT     TOTAL LOANS  S
                            ------    -------------    ------    -------------   ------    ------------- -
                                                                               (DOLLARS IN THOUSANDS)
<S>                        <C>             <C>       <C>             <C>        <C>            <C>       
Real estate loans:
  One- to four-family..... $   3,271       98.80%    $   2,529       97.56%     $  1,939       96.11%    
  Multifamily.............        15        0.26            15        0.41            13        0.49     
  Commercial real estate..       286        0.55           373        1.09           281        1.72     
  Mixed use...............         9        0.15            12        0.32            18        0.68     
  Land....................         8        0.08             8        0.21             8        0.14     
Lease financing...........        --          --            --          --            --          --     
Home equity lines of
  credit and second
  mortgage loans..........         5        0.16            20        0.41            28        0.83     
Other consumer............        --          --            --          --            24        0.03     
                           ---------     ----------- ---------     -------      --------      ------     
Total allowance for
  loan losses............. $   3,594     100.00%     $   2,957      100.00%     $  2,311      100.00%    
                           =========     =======     =========    ========      ========     =======     


<CAPTION>
                          -----------------------------------------------------
                                    1994                      1993              
                          ------------------------- ---------------------------
                                        PERCENT OF                 PERCENT OF
                                       LOANS IN EACH              LOANS IN EACH
                                        CATEGORY TO                CATEGORY TO
                             AMOUNT     TOTAL LOANS     AMOUNT     TOTAL LOANS
                             ------    -------------    ------    ------------
<S>                         <C>            <C>        <C>             <C>   
Real estate loans:
  One- to four-family.....  $     667      92.81%     $     468       92.20%
  Multifamily.............         11       0.70              9        0.90
  Commercial real estate..        273       2.77            329        5.73
  Mixed use...............         --       1.23             --          --
  Land....................          8       0.24              1        0.02
Lease financing...........         --         --              3        0.02
Home equity lines of
  credit and second

  mortgage loans..........         16       2.14              5        0.98
Other consumer............         14       0.11             20        0.15
                            ---------      -----      ---------      ------

Total allowance for

  loan losses.............  $     989     100.00%     $     835      100.00%
                            =========    =======      =========    ========
</TABLE>

                                       14

<PAGE>

         Included in the above amounts are specific reserves totaling  $510,000,
$579,000,  $392,000,  $201,000,  and $240,000, at December 31, 1997, 1996, 1995,
1994, and 1993, respectively, related to loans classified as loss.

         REO.  REO is initially  recorded at  estimated  fair value less selling
costs. Fair value is defined as the estimated amount in cash or  cash-equivalent
value of other  consideration that a real estate parcel would yield in a current
sale between a willing buyer and a willing  seller.  Subsequent to  foreclosure,
REO is  periodically  evaluated  by  management  and an  allowance  for  loss is
established if the estimated fair value of the property, less estimated costs to
sell, declines.

         As of  December  31,  1997,  all  of the  Company's  REO  consisted  of
one-to-four family real estate.

INVESTMENT SECURITIES

         The  following  table  sets  forth the cost basis and fair value of the
Company's investment portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                                                 1997                     1996                        1995
                                         --------------------      -------------------        ------------
                                          COST           FAIR        COST         FAIR         COST         FAIR
                                          BASIS          VALUE       BASIS        VALUE        BASIS        VALUE
                                          -----          -----       -----        -----        -----        -----
                                                                                            (DOLLARS IN THOUSANDS)
<S>                                     <C>         <C>          <C>           <C>          <C>          <C>      
Investment Securities:
   Held to maturity:
     Corporate debt.................    $     --    $      --    $      --     $     --     $     --     $      --
     Margin account ................          --           --           18           18           --            --
     Other investments..............          --           --            1            1           --            --
   Available for sale:

     Municipal bonds................       7,327        7,681        7,325        7,507       12,360        12,712
     Corporate debt.................      18,536       19,575       22,525       23,569       22,850        23,987
     Obligations of U.S.

       government agencies..........      22,147       22,505       31,139       31,272        3,359         3,359
     Other Investments..............      25,536       25,553           --           --           --            --
     Certificate of Deposits .......         499          499          499          499           --            --
                                        --------    ---------    ---------      --------     -------       -------
Subtotal............................      74,045       75,813       61,505       62,866       38,569        40,058
   Securities purchased under
     agreements to resell...........          --           --        1,730        1,730           --            --
   Equity securities:
     Stock in FHLB Atlanta..........      10,000       10,000        7,300        7,300        5,275         5,275
     Stock in FHLMC ................       5,000        4,950        5,000        4,988           --            --
     Stock in FNMA ..................                   8,000        8,375        8,000        8,232            --               --
     Other corporate stock .........       2,038        2,099        1,011        1,011           --            --
                                        --------    ---------    ---------    ---------     --------     ---------
     Total..........................    $ 99,083    $101,237     $  84,546    $  86,127     $ 43,844     $  45,333
                                        ========    ========     =========    =========     ========     =========
</TABLE>

                                       15

<PAGE>

         The  following  table sets  forth the  scheduled  maturities,  carrying
values,  and  current  yields for the  Company's  investment  portfolio  of debt
securities at December 31, 1997 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           AFTER ONE BUT         AFTER FIVE BUT
                                                    WITHIN ONE YEAR      WITHIN FIVE YEARS       WITHIN TEN YEARS  
                                                 --------------------  ---------------------- -------------------- 
                                                  BALANCE   WEIGHTED    BALANCE   WEIGHTED    BALANCE   WEIGHTED   
                                                    DUE       YIELD       DUE       YIELD       DUE       YIELD    
                                                    ---       -----       ---       -----       ---       -----    
                                                                                            (DOLLARS IN THOUSANDS)
<S>                                              <C>            <C>    <C>          <C>     <C>           <C>      
Municipal bonds (a)                              $      --        --%  $    577     6.35%   $  3,692      6.50%    
Corporate debt                                          --        --         --       --       7,675      6.95     
Certificates of Deposit                                 --        --        499     6.92          --        --     
Obligations of U.S. Government Agencies                539      5.95         --       --          --        --     
Other Investments                                      324      5.84     25,054     5.69         175      7.50     
Equities                                                --        --         --       --          --        --     
                                                 ---------    ------   --------   ------    --------    ------     
                                                 $     863      5.91%  $ 26,130     5.73%   $ 11,542      6.81%    
                                                 =========    ======   ========   ======    ========    ======     


<CAPTION>
                                                 AFTER TEN YEARS           TOTALS
                                               ------------------    ------------------
                                               BALANCE   WEIGHTED    BALANCE   WEIGHTED
                                                 DUE       YIELD       DUE       YIELD
                                                 ---       -----       ---       -----
<S>                                           <C>           <C>     <C>           <C>  
Municipal bonds (a)                           $  3,412      9.67%   $  7,681      7.90%
Corporate debt                                  11,900      6.59      19,575      6.73
Certificates of Deposit                             --        --         499      6.92
Obligations of U.S. Government Agencies         21,966      6.18      22,505      6.17
Other Investments                                   --        --      25,553      5.70
Equities                                        25,424      6.42      25,424      6.42
                                              --------    ------   ---------    ------
                                              $ 62,702      6.55%  $ 101,237      6.36%
                                              ========    ======   =========    ======
</TABLE>


-----------------
(a) Yields on tax exempt obligations are computed on a tax equivalent basis.

                                       16

<PAGE>

DEPOSITS AND OTHER SOURCES OF FUNDS

Deposits in the Bank as of December  31,  1997 were  represented  by the various
categories described below:

<TABLE>
<CAPTION>
                                                                                                PERCENT
                                                                                               OF TOTAL
             TERM                       CATEGORY                          BALANCE              DEPOSITS
             ----                       --------                          -------              --------
                                                                      (In thousands)
<S>                                                                     <C>                      <C>  
         None                  Checking Accounts                        $       761              0.15%
         None                  Money Market Accounts                        122,185             23.40%
         None                  Passbook Accounts                                665              0.13%

                               Certificates of Deposit
         3-month               Fixed-Term, Fixed-Rate                           949              0.18%
         6-month               Fixed-Term, Fixed-Rate                         4,414              0.84%
         12-month              Fixed-Term, Fixed-Rate                        54,604             11.41%
         18-month              Fixed-Term, Fixed-Rate                         8,312              1.59%
         2-year                Fixed-Term, Fixed-Rate                        60,490             11.63%
         30-month              Fixed-Term, Fixed-Rate                       136,599             26.12%
         3-year                Fixed-Term, Fixed-Rate                        23,404              4.48%
         4-year                Fixed-Term, Fixed-Rate                           603              0.12%
         5-year                Fixed-Term, Fixed-Rate                        94,804             18.15%
         7-year                Fixed-Term, Fixed-Rate                         4,303              0.82%
         10-year               Fixed-Term, Fixed-Rate                         5,128              0.98%
                                                                        -----------            -------
         Total                                                          $   522,221            100.00%
                                                                        ===========            =======
</TABLE>


                                       17

<PAGE>

         The following  table sets forth the change in dollar amount of deposits
in the  various  types of  accounts  offered by the  Company  between  the dates
indicated:

<TABLE>
<CAPTION>
                                         BALANCE                                       BALANCE                   
                                           AT          PERCENTAGE                        AT          PERCENTAGE  
                                      DECEMBER 31,         OF          INCREASE     DECEMBER 31,         OF      
              ACCOUNTS                   1997          DEPOSITS       (DECREASE)        1996          DEPOSITS   
              --------                ----------  ----------------    ----------    ---------------  ----------  
                                                                                       (DOLLARS IN THOUSANDS)
<S>                                    <C>                 <C>         <C>            <C>                <C>     
Passbook.............................. $      665          0.13%       $  (1,093)     $   1,758          0.45%   
Money market..........................    122,185         23.40           12,350        109,835         28.13    
Checking..............................        761          0.15              452            309          0.08    
Certificates of deposit...............    398,610         76.32          120,026        278,584         71.34    
                                       ----------        ------        ---------      ---------        ------    
     Total............................ $  522,221        100.00%       $ 131,735      $ 390,486        100.00%   
                                       ==========        ======        =========      =========        ======    

<CAPTION>

                                                         BALANCE
                                                           AT         PERCENTAGE
                                        INCREASE     DECEMBER 31,         OF
              ACCOUNTS                 (DECREASE)         1995         DEPOSITS
              --------                 ----------    ---------------  ---------
<S>                                     <C>            <C>                <C>  
Passbook..............................  $    (262)     $   2,020          0.66%
Money market..........................     34,103         75,732         24.71
Checking..............................     (1,439)         1,748          0.57
Certificates of deposit...............     51,584        227,000         74.06
                                        ---------      ---------       -------
     Total............................  $  83,986      $ 306,500        100.00%
                                        =========      =========       =======

</TABLE>


                                       18


<PAGE>


         The following table sets forth certificates of deposit and money market
accounts in the Company classified by rates at the dates indicated.

<TABLE>
<CAPTION>
                                                                                 AT DECEMBER 31,
                                                                     1997             1996              1995
                                                                     ----             ----              ----
                                                                                 (IN THOUSANDS)
<S>                                                              <C>               <C>              <C>        
0 - 1.99%.....................................................   $         5       $     5,235      $        --
2 - 3.99%.....................................................            --               148               --
4 - 5.99%.....................................................       231,048           210,481          141,750
6 - 7.99%.....................................................       289,046           170,056          158,375
8 - 9.99%.....................................................           696             1,709            1,817
10 - 11.99%...................................................            --               790              790
                                                                 -----------       -----------      -----------
                                                                 $   520,795       $   388,419      $   302,732
                                                                 ===========       ===========      ===========
</TABLE>

         The following table indicates the amount of the Company's  certificates
of deposit of $100,000 or more by time  remaining  until maturity as of December
31, 1997.

<TABLE>
<CAPTION>
                                                                                   CERTIFICATES
                                                                                    OF DEPOSIT
                                                                                    ----------
                                                                                  (IN THOUSANDS)
<S>                                                                                  <C>       
                      Three months or less........................................   $    3,379
                      Three through six months....................................        3,174
                      Six through twelve months...................................       11,779
                      Over twelve months..........................................       29,208
                                                                                     ----------
                      Total.......................................................   $   47,540
                                                                                     ==========
</TABLE>

BORROWINGS

         Although  deposits  are the  Company's  primary  source of  funds,  the
Company also utilizes  borrowings  from the FHLB of Atlanta and securities  sold
under agreements to repurchase as alternative  funding  sources.  As a member of
the FHLB  System,  which,  among other  things,  functions  in a reserve  credit
capacity for savings institutions,  the Company is required to own capital stock
in the FHLB of Atlanta and is  authorized  to apply for advances on the security
of such stock and certain of its home  mortgages  and other assets  (principally
securities  which are  obligations  of, or  guaranteed  by, the United States of
America)  provided  certain  creditworthiness   standards  have  been  met.  See
"Regulation."

         As of December 31, 1997 the Company had outstanding  advances of $200.0
million from the FHLB of Atlanta at interest  rates  ranging from 5.45% to 5.89%
and at a weighted average rate of 5.66%.

                                       19

<PAGE>

         The Company also  borrows  funds by entering  into sales of  securities
under  agreements to repurchase the same securities  with nationally  recognized
investment  banking firms.  The securities are held in custody by the investment
banking  firms with which the  Company  enters  into the  repurchase  agreement.
Repurchase  agreements  are treated as borrowings by the Company and are secured
by  designated  fixed  and  variable  rate  securities.  The  proceeds  of these
transactions are used to meet cash flow or asset/liability matching needs of the
Company. The following table sets forth certain information regarding repurchase
agreements for the dates indicated:

<TABLE>
<CAPTION>
                                                                     1997             1996              1995
                                                                     ----             ----              ----
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                             <C>               <C>              <C>        
Weighted average balance during the year......................  $   117,431       $    68,920      $    97,692
Weighted average interest rate during the year................        5.76%             5.77%             6.29%
Maximum month-end balance during the year.....................  $   279,909       $    97,416      $   119,507
Mortgage-backed securities underlying
   the agreements as of the end of the year:
   Carrying value, including accrued interest.................  $   104,736       $    22,856      $   103,590
Estimated market value........................................  $   104,696       $    22,804      $   103,891

Agencies:
   Carrying value, including accrued interest.................  $   190,820       $    38,562      $    10,499
   Estimated market value.....................................  $   190,804       $    38,621      $    10,594

</TABLE>


                                       20

<PAGE>


         The  following  table sets forth  information  regarding  the  weighted
average  interest  rates and the highest and average  month end  balances of the
Company's borrowings.

<TABLE>
<CAPTION>
                                                  AT OR                                            AT OR                            
                                           FOR THE YEAR ENDED                               FOR THE YEAR ENDED                      
                                            DECEMBER 31, 1997                                DECEMBER 31, 1996                      
                            ---------------------------------------------------  ---------------------------------------------------
                                      WEIGHTED  MAXIMUM   WEIGHTED   AVERAGE              WEIGHTED  MAXIMUM   WEIGHTED     AVERAGE  
                             ENDING   AVERAGE  AMOUNT AT  AVERAGE    WEIGHTED    ENDING   AVERAGE  AMOUNT AT  AVERAGE     WEIGHTED  
CATEGORY                    BALANCE    RATE    MONTH-END  BALANCE  AVERAGE RATE  BALANCE    RATE   MONTH-END  BALANCE   AVERAGE RATE
--------                    -------    ----   ----------  -------  ------------  -------  -------  ---------  -------   ------------
                                                                               (DOLLARS IN THOUSANDS)
<S>                        <C>        <C>      <C>       <C>          <C>       <C>        <C>     <C>         <C>         <C>      
Advances from the FHLB of
  Atlanta.............     $200,000   5.71%    $200,000  $160,749     5.66%     $144,800   5.94%   $  154,500  $120,633    5.91%    
Securities sold under
  agreement to repurchase  $279,909   5.91%    $279,909  $117,431     5.76% $     57,581   5.69%   $   97,416  $ 68,920    5.77%    

<CAPTION>

                                               AT OR
                                        FOR THE YEAR ENDED
                                         DECEMBER 31, 1995
                           ------------------------------------------------
                                   WEIGHTED  MAXIMUM  WEIGHTED   AVERAGE
                           ENDING   AVERAGE AMOUNT AT AVERAGE    WEIGHTED
CATEGORY                   BALANCE   RATE   MONTH-END BALANCE  AVERAGE RATE
--------                   ------- -------- --------- -------  ------------
                          
<S>                        <C>       <C>    <C>       <C>         <C>  
Advances from the FHLB of
  Atlanta.............     $105,500  5.87%  $ 106,800 $ 104,110   6.06%
Securities sold under
  agreement to repurchase  $ 93,905  6.06%  $ 119,507 $  97,692   6.29%
</TABLE>



                                       21
<PAGE>

PROPERTIES

         During 1997, the Bank operated from the Company's  headquarters located
at 1111  North  Highland  Street,  Arlington,  Virginia  22201  and the  Company
operated from an office that it subleases from  Danzinger and  Danzinger,  a law
firm, in New York for approximately $24,000 per year.

SUBSIDIARIES

         During the second  quarter of 1996,  the Bank  through its wholly owned
subsidiary  TeleBanc  Servicing  Corporation  ("TSC")  funded 50% of the capital
commitment to AGT Mortgage Services,  LLC ("AGT"). AGT services performing loans
and  workouts for  troubled or  defaulted  loans for a fee.  The Company  ceased
operation of AGT on July 31, 1997.  The Bank also provided in the second quarter
of 1996, 50% of the capital  commitment to AGT PRA, LLC ("AGT PRA"). The primary
business of AGT PRA is its  investment  in Portfolio  Recovery  Associates,  LLC
("PRA").  PRA acquires and collects delinquent consumer debt obligations for its
own portfolio.

         In February 1997,  TeleBanc  acquired  TeleBanc Capital  Markets,  Inc.
("TCM"),  a registered  investment  advisor,  funds manager,  and  broker-dealer
specializing  in mortgages and  mortgage-related  securities.  In June 1997, the
Company formed  TeleBanc  Capital Trust I ("TCT"),  which in turn sold shares of
trust preferred securities,  Series A, for a total of $10.0 million in a private
placement.

EMPLOYEES

         At  December  31,  1997,  the Company had  approximately  58  full-time
employees.   Management  considers  its  relations  with  its  employees  to  be
excellent. The Bank's employees are not represented by any collective bargaining
group.

                                   REGULATION

GENERAL

         The Company, as a savings and loan holding company,  and the Bank, as a
federally   chartered  savings  bank,  are  subject  to  extensive   regulation,
supervision and examination by the OTS as their primary federal  regulator.  The
Bank also is subject to regulation,  supervision  and examination by the Federal
Deposit  Insurance  Corporation  (the  "FDIC") and as to certain  matters by the
Board of Governors of the Federal Reserve System (the "Federal  Reserve Board").
See "Management's  Discussion and Analysis" and "Notes to Consolidated Financial
Statements"  as to the  impact of certain  laws,  rules and  regulations  on the
operations  of the Company and the Bank.  Set forth  below is a  description  of
certain recent regulatory developments.

         As discussed in  Management's  Discussion  and  Analysis,  in September
1996,   legislation  (the  "1996   legislation")  was  enacted  to  address  the
undercapitalization  of the SAIF, of which the Bank is a member.  As a result of
the 1996 legislation,  the FDIC imposed a one-time special  assessment of 0.657%
on  deposits  insured  by the SAIF as of March 31,  1995.  The Bank  incurred  a
one-time charge of $1.7 million (before taxes) to pay for the special assessment
based upon its level of SAIF  deposits as of March 31, 1995.  After the SAIF was
deemed to be recapitalized,  the Bank's deposit  insurance  premiums to the SAIF
were reduced as of September 30, 1996.  The Bank expects that its future deposit
insurance  premiums will continue to be lower than the premiums it paid prior to
the recapitalization.

         The 1996 legislation  also  contemplates the merger o the saif with the
Bank Insurance Fund (the "BIF"),  which generally  insures desposits in national
and  state-chartered  banks. The combined deposit insurance fund, which would be
formed no earlier  than  January  1, 1999,  would  insure  deposits  at all FDIC
Insured despository institutions. As a condition to the combined insurance fund,


                                       22

<PAGE>

however,   the  1996  legislation   contemplates  that  no  insured   depository
institution  would be chartered  as a savings  association  (such as  TeleBank).
Several  proposals for abolishing the federal thrift charter were  introduced in
Congress  during  1997 in bills  addressing  financial  services  modernization,
including  a  proposal  from  the  Treasury  Department  developed  pursuant  to
requirements of the 1996  legislation.  While no legislation was passed in 1997,
financial  modernization  legislation  continues to be discussed by Congress. In
the most recent  proposal  introduced in Congress,  the thrift  charter would be
preserved,  but the OTS would become a division of the Office of the Comptroller
of the Currency,  the agency that regulates  national  banks,  and thrifts would
become subject to national bank branching  rules.  In addition,  the legislation
would require  thrifts to hold 10% of their assets in home  mortgages,  and only
mortgage-backed  securities  backed by residential  mortgages  originated by the
thrift would count towards meeting this threshold.  The Company does not believe
that the  proposed  changes  to the  thrift  charter or the change in OTS status
would have a material effect on its operations,  however,  the Company is unable
to predict what form any final  legislation  will take. If final  legislation is
passed  abolishing  the federal  thrift  charter,  TeleBank could be required to
convert its federal  charter to either a national  bank  charter,  a new federal
type of bank charter or a state depository institution charter.

         The  legislation  currently  being  discussed  in  Congress  also would
subject the Company to regulation by the Federal  Reserve  Board.  Regulation by
the Federal Reserve Board could subject the Company to capital requirements that
are not currently applicable to holding companies under OTS regulation,  and may
result in  limitations  on the type of business  activities in which the Company
may engage at the holding company level, which business activities currently are
not restricted.

         Various  proposals  were  introduced  in Congress in 1997 to permit the
payment  of  interest  on  required  reserve  balances,  and to  permit  savings
institutions  and other  regulated  financial  institutions  to pay  interest on
business demand accounts.  While this legislation appears to have strong support
from  many  constituencies,  the  Company  is  unable to  predict  whether  such
legistation will be enacted.

         During  1997,  the  OTS  continued  its  comprehensive  review  of  its
regulations  to  eliminate  duplicative,   unduly  burdensome,  and  unnecessary
regulations.  The OTS revised or has proposed  revising  regulations  addressing
electronic banking operations,  capital distributions,  liquidity  requirements,
deposit accounts, and application processing. The proposal on electronic banking
operations would expand the services that TeleBank can provide electronically by
permitting  savings  institutions to engage in any activity  through  electronic
means  that they may  conduct  through  more  traditional  delivery  mechanisms,
including  opening new deposit accounts and the  establishment of loan accounts.
The proposal also would allow savings institutions to market and sell electronic
capacities and  by-products  to third parties if the capacities and  by-products
are acquired or developed in good faith as part of providing financial services.

         The  recently  proposed  revisions  to  the  OTS  capital  distribution
regulation  would  conform  the  definition  of  "capital  distribution"  to the
definition  used in the OTS  prompt  corrective  action  regulations,  and would
delete the three  classifications  of  institutions.  Under the proposal,  there
would  be  no  specific   limitation  on  the  amount  of  permissible   capital
distributions,  but the OTS  could  disapprove  a  capital  distribution  if the
institution  would not be at least adequately  capitalized  under the OTS prompt
correction action  regulations  following the distribution,  if the distribution
raised  safety  or  soundness  concerns,  or  if  the  distribution  violated  a
prohibition  contained in any  statute,  regulation,  or  agreement  between the
institution  and the OTS, or a condition  imposed on the institution by the OTS.
The OTS would consider the amount of the distribution  when determining  whether
it raised safety or soundness concerns.

         The  recently  adopted  revisions  to the  OTS  liquidity  requirements
lowered the minimum liquidity requirement for a federal savings institution from
5% to 4%, but made clear that an institution must maintain sufficient  liquidity
to  ensure  its safe and sound  operation.  The  revisions  also  added  certain
mortgage-related  securities  and mortgage loans to the types of assets that can
be used to meet liquidity requirements,  and provided alternatives for measuring
compliance with the requirements.



                                       23
<PAGE>
ITEM 2.  PROPERTIES

         Reference  is made to the  information  set  forth  under  the  caption
"Properties" under Item 1. Business of this Annual Report on Form 10-K.

ITEM 3.  LEGAL PROCEEDINGS

         There are no material  pending legal  proceedings,  other than ordinary
routine  litigation  incidental to its business,  to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.

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

         No matters were submitted to a vote of TeleBanc stockholders during the
fourth quarter of the fiscal year ended December 31, 1997.

                                     PART II

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

The Common Stock is currently traded "over-the-counter" under the symbol "TBFC".
The  following  table  sets  forth the  closing  high and low bid prices for the
Common Stock of the periods indicated.

Initial offering      $6.125

1996                               High                          Low
----                               ----                          ---
1st quarter                       $ 8.00                        $ 7.50
2nd quarter                       $ 9.75                        $ 8.00
3rd quarter                       $10.00                        $8.875
4th quarter                       $13.25                        $ 9.75

1997
----
1st quarter                       $17.00                        $12.00
2nd quarter                       $17.50                        $12.50
3rd quarter                       $19.00                        $15.75
4th quarter                       $18.75                        $17.50

No dividends  were paid in 1996 and 1997.  The closing per share bidprice of the
Common Stock on December 31, 1997 was $17.75.  The approximate number of holders
of record of the Company's common stock at December 31, 1997 was less than 300.


ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

SELECTED FINANCIAL DATA
                                                                                    Years ended December 31,

<S>                                                  <C>                 <C>              <C>              <C>            <C>       
(Dollars in thousands, except per share data)             1997              1996             1995              1994          1993
Interest income                                      $    59,301         $  45,800        $  40,511        $  22,208      $  16,667 
Interest expense                                          46,063            34,815           31,946           17,513         11,828 
   Net interest income                                    13,238            10,985            8,565            4,695          4,839 
Provision for loan losses                                    921               919            1,722              492            211 
Non-interest income                                        4,093             2,756            3,777              175          1,157 
General and administrative expenses                        9,042             8,375            5,561            3,503          2,997 
Other non-interest operating expenses                      1,100               700              679              153            739 
   Income before income taxes and cumulative
     effect of change in accounting principle              6,268             3,747            4,380              722          2,049
Income tax expense                                         1,657             1,195            1,660              182            842 
Cumulative effect of change in                                                                                                      
    accounting principle                                      --                --               --               --            170 
   Net income                                        $     3,671         $   2,552        $   2,720        $     540      $   1,377 
Earnings per share:                                                                                                                 
  Basic                                              $      1.68        $     1.25        $    1.33        $    0.31      $    1.06 
  Diluted                                            $      1.49        $     1.16        $    1.33        $    0.31      $    1.06 
At December 31,                                                                                                                     
Total assets                                         $ 1,100,352         $ 647,965        $ 553,943         $427,292      $ 220,301 
Loans receivable, net                                    540,704           351,821          248,492          154,742        100,859 
Mortgage-backed securities (a)                           340,313           184,743          234,385          236,464         80,782 
Investment securities (a)                                 91,237            78,826           40,058           12,444         18,110 
Deposits                                                 522,221           390,486          306,500          212,411        113,132 
Advances from the FHLB                                   200,000           144,800          105,500           96,000         61,000 
Securities sold under agreements to repurchase           279,909            57,581           93,905           79,613         29,642 
Total stockholders equity                                 45,824            24,658           21,565           17,028         12,378 
Financial ratios:                                                                                                                   
Return on average                                                                                                                   
   Total assets                                             0.45%             0.61%(c)        0.53%            0.17%           0.61%
   Stockholders' equity                                     9.17%            16.50%(c)       14.10%            3.17%          11.79%
Average stockholders'                                                                                                               
   equity to average total assets                           4.92%             3.70%           3.77%            5.27%           5.20%
Total general and administrative expenses                                                                                           
    to total assets                                         0.82%             1.03%(c)        1.00%            0.82%           1.36%
Number of (b):                                                                                                                      
     Deposit accounts                                     25,507            16,506          12,919            8,564           2,932 
     Full-time equivalent employees                           58                39              30               29              18 
Total assets per employee (b)                           $ 18,972         $  16,614        $ 18,465        $  14,734       $  12,239
</TABLE>
(a) Includes  available for sale, held to maturity,  held for sale, and trading.
(b) At end of period. (c) Excludes SAIF assessment.


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

The information contained in this section should be read in conjunction with the
Company's 1997 Consolidated Financial Statements and Notes thereto. In addition,
this  Annual  Report,  which  includes  Management's  Discussion  and  Analysis,
contains certain  forward-looking  information.  This  information  includes the
plans  and  objectives  of  management  for  future   operations  and  financial
objectives,   loan  portfolio   growth,   and   availability   of  funds.   This
forward-looking   information  is  subject  to  the  inherent  uncertainties  in
predicting  future  results and  conditions.  Certain  factors  that could cause
actual results and conditions to differ  materially  from those projected in the
forward-looking information are set forth below in the Interest Rate Sensitivity
Management  section.  Other  factors that could cause  actual  results to differ
materially  include  the  uncertainties  of  economic,  competitive  and  market
conditions,  and  future  business  decisions,  all of which  are  difficult  or
impossible to predict accurately and many of which are beyond the control of the
Company.  Although the Company  believes  that the  assumptions  underlying  the
forward-looking   information  included  herein  are  reasonable,   any  of  the
assumptions  could be inaccurate and  therefore,  there can be no assurance that
the  forward-looking  information  included  herein  will prove to be  accurate.
Therefore,  the  inclusion  of such  information  should  not be  regarded  as a
representation  by the Company or any other person that the objectives and plans
of the Company will be achieved.

INTRODUCTION

         TeleBanc  Financial  Corporation  ("TeleBanc"  or  the  "Company")  was
organized  by  its  majority   stockholder,   MET  Holdings   Corporation  ("MET
Holdings"),  to become,  in March  1994,  the parent  savings  and loan  holding
company for TeleBank  ("the  Bank"),  a federally  chartered  savings  bank.  In
February 1997,  TeleBanc  acquired  TeleBanc Capital Markets,  Inc.  ("TCM"),  a
registered investment advisor, funds manager, and broker-dealer  specializing in
mortgages and  mortgage-related  securities.  In June 1997,  the Company  formed
TeleBanc  Capital Trust I ("TCT"),  which in turn sold shares of trust preferred
securities,  Series A, for a total of $10.0 million in a private placement.  All
references  to the Company  include  the  business  of the Bank,  TCM,  and TCT.
Financial and other data as of and for all periods prior to March 1994 represent
the consolidated  data of the Bank only. Prior to March 1996, the Bank was known
as Metropolitan Bank for Savings, F.S.B.

         Since 1994, TeleBanc has raised approximately $61.8 million through the
sale of capital  stock and warrants and the issuance of  subordinated  notes and
trust preferred  securities.  In the second quarter of 1994,  TeleBanc completed
its initial  public  offering,  raising $4.6 million  through the sale of common
stock and an additional $17.3 million through the issuance of subordinated notes
with warrants.  Upon the completion of this offering,  the Company  invested $15
million of the proceeds as capital of the Bank.  In February  1997,  the Company
consummated  the sale of $29.9  million  of  units  to  investment  partnerships
managed  by  Conning  &  Company,  CIBC WG  Argosy  Merchant  Fund 2,  LLC,  the
Progressive Corporation,  and The Northwestern Mutual Life Insurance Company and
the purchase of the assets of Arbor Capital  Partners,  Inc., which was majority
owned by MET Holdings, through the issuance of 162,461 shares of TeleBanc common
stock and a $500,000 cash payment.  The units consist of  convertible  preferred
stock and senior



                                       24
<PAGE>

subordinated  notes with warrants.  For the period ending December 31, 1997, the
Company invested $15.3 million in the Bank and $3.0 million in TCM.

         Overall growth in assets and deposits reflects the Company's efforts to
invest and  leverage  the capital  proceeds.  At  December  31,  1997,  TeleBanc
reported  total assets of $1.1 billion,  total deposits of $522.2  million,  and
stockholders'  equity  of $45.8  million,  compared  to $220.3  million,  $113.1
million, and $12.4 million, respectively, at December 31, 1993.

         Since 1989,  the Bank has been  developing  an operating  strategy that
seeks to minimize  general and  administrative  expenses  through more efficient
deposit  gathering,  borrowing,  and asset generation.  From its headquarters in
Arlington,  Virginia, the Company attracts deposit accounts such as certificates
of deposit,  money market  accounts,  and interest  checking  accounts through a
targeted direct marketing program.  Unlike traditional  financial  institutions,
the Company  pursues a "branchless"  marketing  strategy and thus interacts with
its customers primarily through the telephone,  internet, mail, and fax. Company
representatives  utilize a sophisticated  computer software system to market and
process  deposits,  build a customer  database for future products,  and provide
quality service.  Other funding sources for the Company include  borrowings from
the Federal Home Loan Bank of Atlanta ("FHLB"), securities sold under agreements
to repurchase, and subordinated debt.

         The  Company's  asset  acquisition  strategy is focused on investing in
one-to-four  unit,   single-family  mortgages  and  mortgage  backed  securities
purchased in the secondary  market rather than to originate  loans.  The Company
seeks to manage  interest  rate risk  through  matching  the  maturities  of its
deposit  solicitations  and borrowings as compared with its asset  purchases and
the use of certain hedging  techniques in order to operate profitably in various
interest rate environments.

         In the first quarter of 1998,  TeleBanc  announced that it had signed a
definitive merger agreement to acquire (the "DFC Acquisition")  Direct Financial
Corporation  ("DFC").  DFC is the parent  holding  company of  Premium  Bank,  a
federal  savings bank  headquartered  in New Jersey.  At December 31, 1997,  DFC
reported  total  assets  of  $326.1  million,  loans  receivable,  net of $187.2
million,  total  deposits of $273.9  million and total  stockholders'  equity of
$12.3 million.  TeleBanc will pay $12 for each share of Direct  Financial common
stock or common stock  equivalent.  The  transaction is valued at  approximately
$26.4 million.  The DFC  Acquisition is expected to be consummated in the second
quarter of 1998, subject to DFC stockholder and regulatory approvals.

         Also  in  January  1998,  TeleBanc  signed  a  definitive   acquisition
agreement  whereby  MET  Holdings  will sell  substantially  all of its  assets,
including  approximately  1,433,081 shares of TeleBanc Common Stock owned by MET
Holdings,  and  assign  substantially  all  of  its  liabilities,  to  TeleBanc.
Immediately  following  consummation  of  the  acquisition,  MET  Holdings  will
dissolve  and   distribute   its  remaining   assets  and   liabilities  to  its
stockholders,  assuming such  dissolution is approved by the requisite number of
stockholders of MET Holdings and TeleBanc.

         Given the ever-increasing  competitive  financial services environment,
the Company has adopted a plan to establish  the Bank as a leading brand name in
direct  banking.  The  Company  intends  to focus on  higher  growth  rates  and
therefore  anticipates  increased  associated  expenses,   including  marketing,
compensation, and technology costs, for



                                       25
<PAGE>

the  next  two  years.  The  Bank's  core  competency  has  been to  incorporate
technology  to  operate  at  a  significantly  lower  cost  structure  than  its
competitors  and to use a portion of the expense  differential  to offer  higher
value  savings  products.  The Bank has also  evolved from using  national  rate
surveys as the primary means of attracting deposits to developing sophisticated,
multiple  channel  marketing  strategies.  These  strategies  are building brand
identity,  franchise  value,  and savings  patterns  that  mirror the  favorable
deposit  structure  of a  traditional  savings  bank  without the  corresponding
infrastructure  expense.   Management  believes  this  commitment  to  expansion
directly associated with brand building is necessary to establish the preeminent
direct banking franchise.

         The following  financial review presents  management's  analysis of the
consolidated  financial  condition  and results of  operations  of TeleBanc  and
should  be  read  together  with  the  consolidated   financial  statements  and
accompanying notes.

INTEREST RATE SENSITIVITY MANAGEMENT

         The  Company  actively  monitors  the  sensitivity  of its  assets  and
liabilities  to various  interest rate  environments  due to repricing in future
time periods.  Effective  interest rate  sensitivity  management seeks to ensure
that net  interest  income is  protected  from the impact of changes in interest
rates.  The  risk  management  function  is  responsible  for  the  measurement,
monitoring,  and  control of market  risk and the  communication  of risk limits
throughout  the  Company  in  connection  with  its  asset-liability  management
activities and trading.

     The Company's  strategies are intended to stabilize the Company's  exposure
to market  risk and net  interest  rate  spread  under a variety  of  changes in
interest  rates.  In  an  effort  to  manage  growth  effectively,  the  Company
undertakes  a slow and  steady  path to  leverage  its  capital  and  invest  in
interest-earning assets. This growth is funded by raising deposits and incurring
debt including FHLB advances and securities sold under  agreements to repurchase
("repos").  The Company's  deposit  gathering  strategy  tends to rely on higher
yielding interest checking accounts,  money market accounts, and certificates of
deposit  accumulated  through the Bank's  branchless  banking telephone and mail
operations,  rather than  relying on extensive  branch  networks  which  require
higher  overhead.  Similarly,  the  Company  tends to invest its funds in assets
purchased in the secondary  market rather than incurring  overhead for extensive
loan origination operations.  As a result, the Company's interest rate spread is
lower than that of traditional financial institutions.  By actively managing the
maturities of its interest-sensitive  assets and liabilities,  the Company seeks
to maintain relatively consistent interest rate spreads and mitigate much of the
interest rate risk associated with such assets and liabilities.

         Management  utilizes a risk management  process that allows risk-taking
within well defined  limits which can be used to create and enhance  shareholder
value through the effective employment of risk capital. To this end, the Company
has  established  an  Asset-Liability   Committee  ("ALCO")  and  implemented  a
measurement of risk using "market value of equity"and  "gap"  methodologies  and
other measures.

         ALCO  establishes the policies and guidelines for the management of the
Company's assets and  liabilities.  The ALCO meets a minimum of eight times each
year and its  membership  is  composed of  individuals  from the Company and two
members of the Board of Directors.  The ALCO policy is directed  toward reducing
the variability of the market value of its equity under a wide range of interest
rate environments. Fair value of equity (FVE) represents the



                                       26
<PAGE>

net fair value of the  company's  financial  assets and  liabilities,  including
off-balance sheet hedges. The Company monitors the sensitivity of changes in its
fair value of equity with  respect to various  interest  rate  environments  and
reports  regularly  to ALCO.  Effective  fair  value  management  maximizes  net
interest income while  constraining the changes in the fair value of equity with
respect to changes in interest rates to acceptable  levels. The model calculates
a benchmark FVE for current market conditions.

         The Company  utilizes  sensitivity  analysis  to evaluate  the rate and
extent of changes to its FVE under  various  market  environments.  In preparing
simulation analysis,  the Company breaks down the aggregate investment portfolio
into discrete  product types that share  similar  properties,  such as fixed- or
adjustable  rate,  similar coupon,  and similar age. In the model,  each product
type exhibits different projected cashflows (i.e. prepayment assumptions). Under
this  analysis,  the net  present  value  of  expected  cashflows  for  interest
sensitive  assets and  liabilities  are calculated  under various  interest rate
scenarios.  In conducting  this  sensitivity  analysis,  the model considers all
asset, liability,  and off-balance sheet hedges, including whole loan mortgages,
mortgage-backed securities, mortgage derivatives, corporate bonds, interest rate
swaps, caps, floors, and options. The range of interest rate scenarios evaluated
encompasses  significant changes to current market conditions.  By this process,
the Company  subjects its interest  rate  sensitive  assets and  liabilities  to
substantial  market stress and evaluates the FVE resulting  from various  market
scenarios.  ALCO  reviews  the  results of these  stress  tests and  establishes
appropriate   strategies  to  promote  continued   compliance  with  established
guidelines.

         Management  measures the efficiency of its  asset/liability  management
strategies by analyzing,  on a quarterly basis,  the Bank's  theoretical FVE and
the  expected  effect of  changes  in  interest  rates.  The Board of  Directors
establishes  limits within which such changes in FVE are to be maintained in the
event of changes in interest rates.

         The Company  calculates a theoretical FVE in response to a hypothetical
change in market  interest risk. The model addresses the exposure to the Bank of
its market sensitive (i.e.  interest rates) non-trading  financial  instruments.
The model excludes the Bank's  trading  portfolio,  which based on  management's
analysis,   has  an  immaterial   impact  on  the  Bank's  FVE.  A  hypothetical
instantaneous  move  upward of 100 basis  points  would cause FVE to decrease by
7.7%.

         Every method of market value  sensitivity  analysis  contains  inherent
limitations  and express and implied  assumptions  that can affect the resulting
calculations.   For  example,   each  interest  rate  scenario  reflects  unique
prepayment and repricing assumptions. In addition, this analysis offers a static
view of assets,  liabilities,  and hedges held as of December 31, 1997 and makes
no  assumptions  regarding  transactions  the Company  might take in response to
changing market conditions.

         The Company  employs  various  hedging  techniques  to  implement  ALCO
strategies  directed  toward  managing the variability of the FVE by controlling
the  relative  sensitivity  of  market  value  of  interest-earning  assets  and
interest-bearing  liabilities.  The  sensitivity  of changes in market  value of
assets and  liabilities  is  affected  by such  factors as the level of interest
rates,  market expectations  regarding future interest rates,  projected related
loan  prepayments,   and  the  repricing  characteristics  of  interest  bearing
liabilities.



                                       27
<PAGE>

         The Company  utilizes  hedging  techniques to reduce the variability of
FVE and its overall interest rate risk exposure over a one-to-seven year period.
A policy adopted by the Company's Board of Directors  prohibits  management from
speculative  purchases or sales of futures,  options,  stripped  mortgage-backed
securities, or other mortgage derivative products.

         Interest  rate  swaps,  caps,  swaptions,  floors,  collars,  financial
options, and other mortgage derivative products are used to manage

interest rate exposure by hedging  certain  assets and  liabilities  and are not
used for  speculative  purposes.  The Company's  interest rate spread was 1.49%,
1.84%, and 1.72% for 1997, 1996, and 1995, respectively.  The Company's yield on
interest-earning   assets  for  such  periods  was  1.73%,   1.94%,  and  1.88%,
respectively.  Since the initial  public  offering in May 1994,  the Company has
steadily grown in both assets and  liabilities,  with average  interest  earning
assets  growing  from $206.9  million  for the  quarter  ended March 31, 1994 to
$772.2  million for the year ended  December  31,  1997,  and  average  interest
bearing  liabilities growing from $206.1 million to $738.3 million over the same
period.  The  Company's  ongoing  strategy  is to maintain a  relatively  stable
interest rate margin and interest rate spread.

         The Company also monitors its assets and  liabilities  by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring  interest rate sensitivity "gap." An asset or liability is said to be
interest rate  sensitive  within a specific  period if it will mature or reprice
within  that  period.  The  interest  rate  sensitivity  gap is  defined  as the
difference between the amount of  interest-earning  assets maturing or repricing
within a specific  time  period and the amount of  interest-bearing  liabilities
maturing or repricing within the same time period. A gap is considered  positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate  sensitive  liabilities  and is  considered  negative  when the  amount  of
interest  rate  sensitive  liabilities  exceeds  the  amount  of  interest  rate
sensitive  assets.  Generally,  during a period  of  rising  interest  rates,  a
negative gap would  adversely  affect net  interest  income while a positive gap
would result in an increase in net interest income; conversely,  during a period
of falling  interest  rates,  a negative  gap would result in an increase in net
interest income and a positive gap would adversely  affect net interest  income.
The  Company's  current  asset-liability  management  strategy is to maintain an
evenly matched  one-to-five year gap giving effect to hedging,  but depending on
market conditions and related circumstances,  a positive or negative one-to-five
year gap of up to 20% may be  acceptable.  Inclusive  of the  Company's  hedging
activities,  the  Company's  one-year  gap at December  31,  1997 is 5.35%.  The
Company's hedge-effected one-to-five year gap at such date is (6.36)%.

         The following  assumptions  were used by management in order to prepare
the  Company's gap table set forth on the next page.  Non-amortizing  investment
securities  are  shown  in  the  period  in  which  they  contractually  mature.
Investment  securities  which contain embedded options such as puts or calls are
shown in the period in which that  security is  currently  expected to be put or
called or to mature.  The table  assumes  that  fully-indexed,  adjustable-rate,
residential  mortgage loans and  mortgage-backed  securities prepay at an annual
rate  between  10% and 15%,  based on  estimated  future  prepayment  rates  for
comparable market benchmark securities and the Company's prepayment history. The
table also assumes that fixed rate,  current-coupon  residential loans prepay at
an annual rate of between 10% and 15%. The above assumptions were adjusted up or
down on a pool by pool basis to model the effects of product type,  coupon rate,
rate adjustment  frequency,  lifetime cap, net coupon reset margin, and periodic
rate caps upon prevailing



                                       28
<PAGE>

annual  prepayment  rates.  Time  deposits are shown in the period in which they
contractually mature, and savings deposits are shown to reprice immediately. The
interest rate  sensitivity of the Company's  assets and  liabilities  could vary
substantially if different assumptions were used or if actual experience differs
from the assumptions  used.  Certain  shortcomings are inherent in the method of
analysis presented in the gap table. Although certain assets and liabilities may
have similar  maturities  or periods of  repricing,  they may react in different
degrees to changes in market interest rates. The interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest rates on other types of assets and  liabilities  may lag
behind changes in market interest rates. Certain assets, such as adjustable-rate
mortgages,  have  features  which  restrict  changes  in  interest  rates  on  a
short-term  basis and over the life of the  assets.  In the event of a change in
interest rates,  prepayment rates would likely deviate  significantly from those
assumed in calculating the table. The ability of many borrowers to service their
debt may decease in the event of an interest rate increase.

<TABLE>
<CAPTION>
                                                                      Repricing       Repricing     Repricing
                                                                         Within          Within        Within    Repricing
                                      Balance       Percent                 0-3            4-12           1-5         Over
<S>                                <C>               <C>              <C>             <C>            <C>          <C>     
(Dollars in Thousands)      December 31, 1997      of Total              Months          Months         Years      5 Years
Interst-earning assets:
  Loans receivable, net            $  540,704        50.43%           $  62,981       $ 174,892      $204,997     $ 97,834
  Investment securities
    available for sale, interest
    bearing accounts & FHLB stock      91,237         8.51               15,158             638        61,934       13,507
  Mortgage backed securities
    available for sale and trading    340,313        31.74              127,191         104,601        61,715       46,805
  Federal funds sold & interest
    bearing deposits                   99,991         9.32               99,991              --            --           --
Total interest-earning assets      $1,072,245       100.00%           $ 305,321       $ 280,131      $328,647     $158,146
Non-interest earning assets:           28,107
Total assets                       $1,100,352
Interest-bearing liabilities:
  Savings deposits                 $  123,611        11.98%           $ 123,611       $   --         $     --     $     --
  Time deposits                       398,610        38.63               23,414         102,348       266,838        6,010
  FHLB advances                       200,000        19.39              200,000              --            --           --
  Other borrowings                    279,909        27.13              279,909              --            --           --
  Subordinated debt                    29,614         2.87                   --              --        12,937       16,677
Total interest-bearing liabilities $1,031,744       100.00%           $ 626,934       $ 102,348      $279,775     $ 22,687
Non-interest bearing liabilities       13,212
  Total liabilities                $1,044,956
  Total trust preferred                 9,572
  Stockholders' equity                 45,824
Total liabilities and
  stockholders equity              $1,100,352
Periodic repricing difference
  (periodic gap)                                                      $(321,613)      $  177,783     $  48,872    $135,459
Cumulative repricing difference
  (cumulative gap)                                                    $(321,613)      $ (143,830)    $ (94,958)   $ 40,501
Cumulative gap to total assets                                           (29.23)%         (13.07)%       (8.63)%      3.68%
Cumulative gap to total assets
  hedge affected (a)                                                     (10.81)%           5.35%        (6.36)%      3.68%
</TABLE>
 (a) The hedge effected  cumulative  gap to total assets  reflects the effect of
hedging  instruments  on the Company's gap at December 31, 1997. For purposes of
determining  the  effect  of  such  hedging  instruments,   interest  rate  swap
agreements are treated as part of the hedged  liability;  hence,  the cash flows
from the swap and the hedged  asset or  liability  are netted and the  resulting
cash flows are used in the gap  calculation.  Interest rate cap agreements  also
are



                                       29
<PAGE>

treated as part of the hedged  asset or  liability  and  weighted  the  market's
estimate of the likelihood the cap strike will be met or exceeded.  The net cash
flows are used in the gap calculations.

FINANCIAL CONDITION

         The Company's  total assets  increased by $452.0  million or 69.8% from
$648.0 million at December 31, 1996 to $1.1 billion at December 31, 1997. Growth
in assets is attributable to increases in  mortgage-backed  securities and loans
receivable. The primary sources of funds for this growth in assets were deposits
and borrowings.

         Loans  receivable,  net and loans  receivable  held for sale  increased
$188.9  million or 53.7%,  from $351.8  million at  December  31, 1996 to $540.7
million at December 31,  1997.  The increase  reflects  whole loan  purchases of
$343.2 million offset by $95.1 million of principal repayments and $60.7 million
of loans sold in 1997.  In the past year,  the  Company  focused  its efforts on
expanding  its direct loan  acquisition  program.  As a result,  the Company has
significantly  improved  its ability to source,  price,  and close whole  loans.
During 1996, the Company  recorded whole loan purchases of $103.1 million offset
by $50.2 million of principal repayments and $27.1 million of loans sold. In the
second quarter of 1996, the Company  reevaluated its loan  investment  strategy.
The  Company  determined  that  the  probable  sale of  loans,  subsequent  to a
restructuring or credit enhancement,  would add value to the portfolio. Pursuant
to this  strategy,  the Company  created a loans held for sale  category  with a
one-time   transfer   of  loans  from  the   investment   portfolio   that  have
characteristics that make them susceptible to sale after  restructuring,  credit
enhancement,  or other  improvements.  Loans held for sale are  recorded  at the
lower of cost or market.  The  Company  maintains  loans held for sale and loans
held for investment categories.

         Mortgage-backed   securities,   available-for-sale,   increased  $134.5
million, or 72.8%, from $184.7 million at December 31, 1996 to $319.2 million at
December 31, 1997.  Investment  securities,  available for sale, increased $12.4
million,  or 15.7%,  from $78.8 million at December 31, 1996 to $91.2 million at
December  31,  1997.  These  securities  are held  for  liquidity  purposes  and
increased along with the growth of assets of the Bank in 1997.

         Deposits  increased  $131.7 million,  or 33.7%,  from $390.5 million at
December 31, 1996 to $522.2 million at December 31, 1997, largely as a result of
the  Company's   continued   marketing  efforts  to  attract  money  market  and
certificate of deposit accounts.  During fiscal year 1997,  approximately  $25.9
million of  interest  was  credited  to the  accounts  while  deposits  exceeded
withdrawals  by $105.8  million,  resulting  in a net change of $131.7  million.
During  1997,  the  Company  completed  a systems  conversion  to an  integrated
platform for marketing,  deposit  operations,  and  accounting/finance.  The new
system will support  future growth and improve the  Company's  ability to launch
new products.  To prepare for the systems upgrade,  management controlled growth
of deposits in an effort to focus on the  conversion  process and  minimize  the
impact  to new  customers.  The  Company  relied  on  FHLB  advances  and  other
borrowings to support asset growth. .

         FHLB advances increased $55.2 million, or 38.1%, from $144.8 million at
December  31, 1996 to $200.0  million at December 31,  1997.  Other  borrowings,
composed of securities  sold under  agreements to repurchase,  increased  $222.3
million, or 385.9%, from $57.6 million at December 31, 1996 to $279.9 million at
December 31, 1997. For the year ended 1997,  subordinated  debt, net of original
issue discount, was $29.6 million, which includes the 9.5% senior



                                       30
<PAGE>

subordinated debt raised in February 1997 and the 11.5% subordinated debt raised
in the second  quarter of 1994. In June 1997,  the Company  formed TCT, which in
turn sold shares of trust preferred  securities,  Series A, for a total of $10.0
million in a private  placement.  The trust preferred  securities have an annual
dividend rate of 11.0% payable semi-annually,  beginning in December 1997. These
transactions  reflect  the  Company's  ability to utilize  alternate  sources of
funding in order to support asset growth.

         Stockholders'  equity  increased  $21.1  million  to $45.8  million  at
December 31, 1997 from $24.7 million at December 31, 1996. The increase reflects
the issuance of $15.3 million of 4% convertible  preferred  stock,  $1.5 million
stock issuance in exchange for Arbor's assets,  $4.6 million in net income,  and
an unrealized  gain for the year on  securities  available for sale of $642,000,
net of taxes, which increases the Company's  stockholders'  equity, but does not
impact the statement of  operations.  The  consolidated  average  balance sheets
along with income and expense and related  interest yields and rates at December
31, 1997 and for each of the preceding  three fiscal years are shown below.  The
table also presents  information  for the periods  indicated with respect to the
difference between the weighted average yield earned on interest-earning  assets
and weighted  average rate paid on  interest-bearing  liabilities,  or "interest
rate spread," which savings  institutions  traditionally  use as an indicator of
profitability.  Another indicator of an institution's  profitability is its "net
yield on  interest-earning  assets," which is its net interest income divided by
the average balance of interest-earning  assets. Net interest income is affected
by the  interest  rate spread and by the  relative  amounts of interest  earning
assets and  interest-bearing  liabilities.  As discussed  above,  the  Company's
operating  strategy  results in lower spreads and margins than other  comparable
financial  institutions,  but the Company  believes lower net interest income is
mitigated by savings in general and administrative expenses.

<TABLE>
<CAPTION>
                                                1997                            1996                      1995
                                  Balance      Average   Interest    Average Average Interest  Average   Average  Interest Average
(Dollars in thousands)     December 31, 1997   Balance  Inc./Exp. Yield/Cost Balance Inc./Exp.Yield/Cost Balance Inc./Exp.Yield/Cost
<S>                          <C>              <C>         <C>          <C>   <C>       <C>         <C>    <C>       <C>        <C>  
Interest-earning assets:
Loans receivable, net(a)     $  540,704       $441,819    $34,729      7.86% $279,038  $23,089     8.28%  $201,737  $17,726    8.80%
Mortgage-backed &
  related securities                 --             --         --        --        --       --       --    233,728   18,614    7.96
Investment securities (b)        54,241         16,203      1,064      6.48    12,841      871     6.79     13,627      990   7.274
Mortgage-backed &
  related securities, AFS       319,203        226,064     17,646      7.81   221,656   17,955     8.10     19,138    1,597    8.35
Investment securities, AFS (c)   91,237         73,649      4,776      6.49    61,169    3,959     6.47     25,516    2,071    8.12
Federal funds sold               45,750          1,844        100      5.37       842       44     5.22        810       49    6.05
Trading account                  21,110         12,581      1,124      8.81        --       --       --      1,932      166    8.59
   Total interest-earning
     assets                  $1,072,245       $772,160    $59,439      7.70% $575,546  $45,918    7.98%   $496,488  $41,213    8.31%
Non-interest earning assets      28,107         41,465                         26,929                       15,388
    Total assets             $1,100,352       $813,625                       $602,475                     $511,876
Interest-bearing liabilities:                          
Savings deposits             $  123,611       $120,901    $ 6,380      5.28% $ 99,346$   4,815     4.85%  $ 41,387$   2,111    5.10%
Time deposits                   398,610        311,740     19,578      6.28   258,870   16,542     6.39    223,745   14,922    6.67
FHLB advances                   200,000        160,681      9,885      6.07   120,678    6,689     5.54     94,718    5,985    6.32
Other borrowings                279,909        117,515      6,941      5.83    68,154    4,569     6.70    107,330    6,839    6.37
Subordinated debt, net           29,614         27,434      3,279     11.95    17,250    2,200    12.75     17,250    2,089   12.11
   Total interest-bearing                              
    liabilities              $1,031,744       $738,271    $46,063      6.21% $564,298  $34,815     6.14%  $484,430 $31,9466.59%
Non-interest-bearing                                   
   liabilities                   13,212         25,719                         15,900                        8,150
   Total liabilities         $1,044,956       $763,990                       $580,198                     $492,580
   Total Trust Preferred          9,572          9,597                             --                           --
   Stockholders' equity          45,824         40,038                         22,277                       19,296
Total liabilities and                                  
   stockholders' equity      $1,100,352       $813,625                       $602,475                     $511,876
Excess of  interest-earning                  
  assets over interest-
  bearing liabilities/
  net interest income/

</TABLE>


                                       31
<PAGE>

<TABLE>
<CAPTION>
<S>                          <C>             <C>          <C>          <C>  <C>        <C>        <C>  <C>                     <C>  
  interest rate spread       $   40,501      $ 33,889     $13,376      1.49% $ 11,248  $11,103    1.84%$    12,058$  9,267     1.72%
Net yield on interest
  earning assets                                                       1.73%                      1.94%                        1.87%
Ratio of  interest-earning
  assets to interest-bearing
  liabilities                                                        104.59%                    101.99%                      102.49%

</TABLE>

(a)   Includes   mortgages   held  for  sale  and   investment.   (b)   Includes
interest-bearing deposits, repurchase agreements,  investment securities held to
maturity,  and FHLB stock.  (c) Interest  income and average yields on municipal
bonds are presented on a tax equivalent basis.

LIQUIDITY MANAGEMENT AND FUNDING

         Liquidity is a company's  ability to maintain  sufficient cash flows to
fund  operations and meet existing and future  obligations,  including  maturing
liabilities, loan commitments, and depositors' withdrawals. The asset portion of
the  balance  sheet  provides  liquidity  through  short-term   investments  and
maturities and repayments of loans and investment  securities.  Other sources of
asset liquidity include sales of loans or securities.

         Liquidity  is  provided  through the  Company's  ability to attract and
maintain  sufficient  deposits and to access available funding markets.  Federal
regulations  require that the Bank maintain an average of 5.00%  liquidity ratio
in relation to certain  borrowings  and the deposit base.  The Bank exceeded the
requirement throughout 1997 and 1996.

         The Company  continues  to enhance the core  deposit  base  through its
branchless  marketing  strategy  that targets  individual  savers who deposit an
average of $21,000.  Management is developing new deposit  products,  such as an
interest checking account, responsive to our customers needs and cross marketing
these  services,  which should provide stable funding sources in future periods.
In an effort to decrease the costs  associated  with new  accounts,  the Company
attracted  several new affinity groups  including the National Council of Senior
Citizens.  Members of the affinity groups receive increased  benefits  including
higher rates and lower minimum balances.

         The following table shows the changes in deposits for each of the prior
periods:

<TABLE>
<CAPTION>
                                                                 Years ended December 31,
(Dollars in thousands)                               1997                   1996                  1995
<S>                                              <C>                    <C>                   <C>     
Balance at beginning of period                   $390,486               $306,500              $212,411
Deposits in excess of (less than)
   withdrawals                                    105,777                 62,629                76,866
Interest credited on deposits                      25,958                 21,357                17,223
Balance at end of period                         $522,221               $390,486              $306,500
</TABLE>

         Management  believes that liquidity of bank deposits  coupled with FDIC
insurance will continue to encourage depositors to maintain significant portions
of their funds in insured depository  accounts.  Management also believes that a
high level of service  and  convenience  coupled  with a growing  acceptance  of
electronic and branchless banking will allow the Company to compete  efficiently
and  effectively  against other FDIC insured banks and other non-bank  financial
institutions.   Savings  deposits   increased  $11.7  million,   or  10.5%,  and
certificate of deposit accounts increased $120.0 million, or 43.1% during 1997.

         The  Company  also relies  upon  borrowed  funds to provide a source of
liquidity at  attractive  interest  rates.  Total  borrowings  increased  $277.5
million, or 137.1%, during 1997. Advances from the FHLB increased $55.2 million,
or 38.1%, during the period largely as a result of attractive interest rates and
due to the various products offered by the



                                       32
<PAGE>

FHLB to member  institutions.  Advances are  collateralized by specific liens on
mortgage loans in accordance with an "Advances,  Specific  Collateral Pledge and
Security Agreement", which requires the Company to maintain qualified collateral
equal to 120 to 160 percent of the Company's advances.  Accordingly, the Company
increased  single-family  residential  mortgage  loan  collateral to the FHLB to
$255.8  million  during  the  year.  Additional  borrowings  from  the  FHLB are
contingent  upon the Company  providing the appropriate  collateral.  Repurchase
agreements  increased  $222.3  million,  or 386.1%,  during  1997.  Principally,
mortgage-backed   securities  are  pledged  as  collateral  for  the  repurchase
agreements.  As of December 31, 1997, the Bank had approximately  $154.0 million
in additional borrowing capacity.

         As of December 31 1997, the Company had approximately  $31.0 million of
face  amount  of  subordinated  notes  with  warrants.   The  subordinated  debt
represents a very stable,  although  relatively  expensive,  source of funds. At
December 31, 1997,  subordinated debt, net was $29.6 million. In addition to the
subordinated debt, the Company also had outstanding $10.0 million face amount of
11.0%  trust  preferred  securities  and  $16.2  million  face  amount  of  4.0%
cumulative  preferred stock at December 31, 1997. The annual cost to service the
subordinated debt and trust preferred  securities is $4.4 million and the annual
dividend requirement on the cumulative  preferred stock is $648,000.  Subject to
regulatory  approval,  the Bank will  dividend  this  balance to the  Company to
service the debt.  There are  various  regulatory  limitations  on the extent to
which federally chartered savings institutions may pay dividends.  Also, savings
institution  subsidiaries of holding companies generally are required to provide
their OTS Regional  Director  with no less than 30 days'  advance  notice of any
proposed  declaration on the institution's  stock.  Under terms of the indenture
pursuant to which the subordinated  notes were issued,  the Company presently is
required to maintain,  on an  unconsolidated  basis,  liquid assets in an amount
equal to or greater than $3.3 million,  which  represents  100% of the aggregate
interest  expense for one year on the  subordinated  debt. The Company had $48.6
million in liquid assets at December 31, 1997.

CAPITAL ADEQUACY

         The  Company's  stockholders'  equity at December 31,  1997,  was $45.8
million.  This  represents a $21.2  million,  or 85.8%,  increase from the prior
year.  The increase  reflects the  issuance of $15.3  million of 4%  convertible
preferred  stock,  $1.6 million stock  issuance in exchange for Arbor's  assets,
$4.2  million in net income and an  unrealized  gain for the year on  securities
available  for sale of $642,000,  net of taxes,  which  increases  the Company's
stockholders' equity, but does not impact the statement of operations.  See Note
2 of the Consolidated Financial Statements.

         The Bank meets all current and fully phased-in capital  requirements as
adjusted for the changes  which are effective to the  computation  of risk-based
capital and core capital at December 31, 1997.

         The required and actual amounts and ratios of capital pertaining to the
Bank as of December 31, 1997 are set forth as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                                   To Be Well
                                                                      For Capital                             Capitalized Under
                                                                        Adequacy                               Prompt Corrective
                                           Actual                      Purposes:                              Action Provisions:
                              Amount               Ratio        Amount             Ratio            Amount            Ratio
As of December 31, 1997:
Total Capital (to risk
<S>                          <C>                  <C>          <C>                  <C>            <C>                <C>  

</TABLE>

                                       33
<PAGE>

<TABLE>
<CAPTION>
<S>                          <C>                  <C>          <C>                  <C>            <C>                <C>  
   weighted assets)          $55,701              11.91%      _$37,409             _8.0%          _$46,761           _10.0%
Core Capital (to adjusted
   tangible assets)          $52,617               5.06%      _$41,606             _4.0%          _$52,008            _5.0%
Tangible Capital (to
   tangible assets)          $52,608               5.06%      _$15,602             _1.5%               N/A             N/A
Tier I Capital (to
   risk weighted assets)     $52,617              11.25%           N/A              N/A           _$28,057             _6.0%
As of December 31, 1996:
Total Capital (to risk
   weighted assets)          $34,104              10.41%      _$26,205             _8.0%          _$32,756           _10.0%
Core Capital (to adjusted
   tangible assets)          $31,726               5.08%      _$24,999             _4.0%          _$31,248            _5.0%
Tangible Capital (to
   tangible assets)          $31,711               5.07%       _$9,374             _1.5%               N/A             N/A
Tier I Capital (to
   risk weighted assets)     $31,726               9.69%           N/A              N/A           _$19,654            _6.0%

</TABLE>


EARNINGS PERFORMANCE
Comparison  of Operating  Results for the Years Ended  December 31, 1997 , 1996,
and 1995

NET INCOME.  Net income for fiscal year 1997 was $3.7  million  compared to $2.6
million for fiscal year 1996.  Net income for the year ended  December  31, 1997
consisted primarily of $12.3 million in net interest income, $3.3 million in net
gains  on the  sale of  loans  held for  sale,  mortgage-backed  and  investment
securities, and trading assets offset by $10.1 million in non-interest expenses,
$921,000 in provision for loan losses,  and $1.7 million in income tax expenses.
For  fiscal  year 1997,  the  Company's  return on average  assets and return on
average  equity  was 0.45% and  9.17%,  respectively.  The  Company's  return on
average assets and return on average equity has  historically  declined in years
of capital raising.  Based on 2,833,036  weighted average shares of common stock
issued and  outstanding  as well as  potentially  dilutive  securities,  diluted
earnings per share was $1.49.

         Net income decreased by $168,000,  or 6.2%, from $2.7 million in fiscal
year 1995, to $2.6 million in fiscal year 1996. Net income for 1996 includes the
effect of a one-time $1.7 million,  before tax,  assessment to recapitalize  the
Savings Association Insurance Fund ("SAIF"). Without such assessment, net income
would have been $3.6  million.  Net income for the year ended  December 31, 1996
consisted primarily of $11.0 million in net interest income, $1.8 million in net
gains on the sale of loans  held  for sale and  mortgage-backed  and  investment
securities  offset  by  $9.1  million  in  non-interest  expenses,  $919,000  in
provision for loan losses,  and $1.2 million in income tax expenses.  For fiscal
year 1996,  the Company's  return on average assets and return on average equity
was 0.42% and 11.46%,  respectively.  Based on 2,203,075 weighted average shares
of  common  stock  issued  and  outstanding  as  well  as  potentially  dilutive
securities, diluted earnings per share was $1.16.

NET INTEREST INCOME.  Net interest income is the principal source of a financial
institution's  income stream and represents the spread between  interest and fee
income  generated from earning assets and the interest  expense paid on deposits
and  borrowed  funds.  Fluctuations  in  interest  rates as well as  volume  and
composition changes in interest-earning assets and interest-bearing  liabilities
materially affect net interest income.

         Net interest  income  increased by $2.2 million,  or 20.0%,  from $11.0
million  to $13.2  million  for the  years  ended  December  31,  1996 and 1997,
respectively.  Interest rate spreads decreased from 1.84% to 1.49% for the years



                                       34
<PAGE>

ended December 31, 1996 and 1997, respectively. The decrease in spreads reflects
a 28 basis point decline in the yield of interest  earning  assets and a 7 basis
point  increase  in the costs of  interest-bearing  liabilities.  The decline in
yield  reflects  a  decrease  in loan  yield due to a larger  loan held for sale
portfolio and an increase in costs  associated with hedging  instruments used to
reduce  interest rate risk matched  against the deposit  portfolio  resulting in
higher  costs.  Average  interest-earning  assets and  liabilities  were  $772.2
million and $738.3  million,  respectively,  for 1997 compared to $575.5 million
and $564.3 million, respectively, for 1996.

         Net interest income increased $2.4 million, or 27.9%, from $8.6 million
to $11.0 million for the years ended  December 31, 1995 and 1996,  respectively.
Interest rate spreads increased to 1.84% from 1.72% for the years ended December
31, 1996 and 1995,  respectively.  For 1995, average interest-earning assets and
liabilities were $ $496.5 million and $484.4 million, respectively.

         The  following  table  allocates  the  period-to-period  changes in the
Company's various  categories of interest income and expense between changes due
to changes in volume  (calculated by multiplying the change in average volume of
the related interest-earning asset or interest-bearing liability category by the
prior year's  rate) and due to changes in rate  (changes in rate  multiplied  by
prior  year's  volume).  Changes due to changes in  rate-volume  (change in rate
multiplied  by changes in volume) have been  allocated  proportionately  between
changes in volume and changes in rate.

<TABLE>
<CAPTION>
                                                           1997 vs. 1996                                  1996 vs. 1995
                                                 Increase (Decrease) Due to             Increase (Decrease) Due to
(Dollars in thousands)                    Volume          Rate          Total          Volume         Rate        Total
<S>                                     <C>       <C>              <C>              <C>            <C>         <C>     
Interest-earning assets:
    Loans receivable, net (a)           $  12,732 $    (1,092)     $   11,640       $   6,333   $    (968)     $  5,365
    Mortgage-backed and

      related securities                       --          --              --          (9,307)     (9,307)      (18,614)
    Investment securities (b)                 220         (27)            193              16        (134)         (118)
    Mortgage-backed and related securities
      available for sale                      373        (682)           (309)         16,404         (45)       16,359
    Investment securities
      available for sale (c)                  809           8             817           2,194        (305)        1,889
    Federal funds sold                         54           2              56               2          (8)           (6))
    Trading account                           562         562           1,124              17        (185)         (168)
     Total interest-earning assets        $14,750     $(1,229)     $   13,521         $15,659   $ (10,952)     $  4,707
Interest-bearing liabilities:
    Savings deposits                     $  1,111     $   454      $    1,565         $ 2,803   $    (100)     $  2,703
    Time deposits                           3,315        (279)          3,036           2,208        (596)        1,612
    FHLB advances                           2,400         796           3,196             972        (292)          680
    Other borrowings                        2,838        (466)          2,372          (1,778)       (446)      (2,224)
    Subordinated debt                       1,207        (128)          1,079              --          112          112
Total interest-bearing liabilities         10,871         377          11,248           4,205       (1,322)       2,883
Change in net interest income              $3,879   $  (1,606)      $   2,273        $ 11,454   $   (9,630)    $  1,824

</TABLE>

(a) Includes mortgage and other loans. (b) Includes  interest-bearing  deposits,
repurchase  agreements,  investment securities held to maturity, and FHLB stock.
(c)  Interest  income  and  average  yields  on  municipal  bonds,  included  in
investment securities, are presented on a tax equivalent basis.

INTEREST INCOME.  Total interest income increased $13.5 million,  or 29.5%, from
$45.8 million for the year ended December 31, 1996 to $59.3 million for the year
ended December 31, 1997.  Interest  income on mortgage and other loans increased
$11.6 million or 50.4%. The increase is largely attributed to the $162.8 million
increase in average loan



                                       35
<PAGE>

balance.  Interest income on  mortgage-backed  securities  held-to-maturity  and
available-for-sale  decreased  by  $309,000,  or 1.7%,  from  $18.0  million  at
December 31, 1996 to $17.6 million at December 31, 1997 largely as a result of a
29 basis point decline in the yield.

         Total  interest  income  increased $5.3 million,  or 13.1%,  from $40.5
million for the year ended December 31, 1995 to $45.8 million for the year ended
December 31, 1996.  Interest  income on mortgage and other loans  increased $5.4
million or 30.5%.  The  increase  is  largely  attributed  to the $77.3  million
increase in average loan balance. Interest income on mortgage-backed  securities
held-to-maturity  and  available-for-sale  decreased by $2.2 million,  or 10.9%,
from $20.2  million at December  31, 1995 to $18.0  million at December 31, 1996
largely  as a result of a $31.2  million  decline  in  average  mortgage  backed
securities held-to-maturity and available-for-sale.

INTEREST EXPENSE.  Total interest expense increased by $11.2 million,  or 32.3%,
from $34.8 million for the year ended December 31, 1996 to $46.1 million for the
year ended December 31, 1997. The increase is  attributable  to a $174.0 million
increase in interest bearing  liabilities  coupled with a 7 basis point increase
in interest costs.  Total interest expense  increased by $2.9 million,  or 9.1%,
from $31.9 million for the year ended December 31, 1995 to $34.8 million for the
year ended  December 31, 1996. The increase is  attributable  to a $79.9 million
increase in interest bearing  liabilities  offset by a 45 basis point decline in
interest costs.

PROVISION  FOR LOAN LOSSES.  The provision for loan losses is the annual cost of
providing an allowance for estimated losses in the loan portfolio. The allowance
reflects management's judgment as to the level considered  appropriate to absorb
such losses  based upon a review of factors  including  delinquent  loan trends,
historical  loss  experience,  economic  conditions,  loan portfolio mix and the
Company's internal credit review process.

         Total  provisions  for loan losses  increased  by $2,000,  or 0.2% from
$919,000  for the year ended  December  31, 1996 to $921,000  for the year ended
December  31,  1997.  The stable  level of  provision  expenses  during  1997 is
attributed to the low level of net charge-offs. The total loan loss allowance as
of December 31, 1997 and 1996 was $3.6  million and $3.0  million  respectively,
which was 0.67% and 0.80% of total loans outstanding,  respectively.  Total loan
loss  allowance as a percentage  of total  non-performing  loans was 31.4% as of
December 31, 1997 as compared to 26.3% as of December 31, 1996.

         The Company's  strategy of purchasing loans in the secondary market has
provided management with the ability to acquire certain assets at discounts.  As
of  December  31,  1997,  the  Company  reported a total net  discount  of $10.2
million.  These discounts are only taken into income as the balance of the loans
receivable are repaid.

         Total loans  receivable  as of December  31, 1997 include four pools of
credit enhanced one-to-four family mortgage loans totaling $41.7 million or 7.5%
of total loans  outstanding.  Two of these pools  totaling  $28.3 million have a
credit reserve from the seller equal to 2.5% of the unpaid principal  balance at
the time of the purchase available to offset any losses.  Another pool, totaling
$7.3 million, has an indemnification whereby the seller must repurchase any loan
that become more than four  payments past due at any time during the life of the
loan.  The final pool,  totaling  $6.1  million,  has a credit  reserve equal to
approximately 10.0% of the unpaid balance at the time of the acquisition.



                                       36
<PAGE>

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                          1997              1996              1995             1994              1993
<S>                                      <C>               <C>               <C>               <C>               <C> 
Balance at beginning of period           $2,957            $2,311            $   989           $ 835             $659
Loans charged off, net of recoveries:
    Real estate loans:
       One-to-four family                  (283)             (273)                --            (338)             (19)
       Land                                  --                --                 --              --               (1)
    Other:
       Other                                 --                --               (400)             --              (15)
Total charge-offs                          (283)             (273)              (400)           (338)             (35)
Provision for loan losses                   921               919              1,722             492              211
Balance at end of period                 $3,595            $2,957             $2,311           $ 989             $835
Ratio of net charge-offs to net average
  loans outstanding during the period      0.06%             0.10%              0.14%           0.24%            0.03%

</TABLE>

NON-INTEREST  INCOME.  Total non-interest  income increased by $1.3 million,  or
46.4%,  from $2.8  million for fiscal year 1996 to $4.1  million for fiscal year
1997. With the addition of trading assets, the Company  recognized  non-interest
income of $1.2 million.  Gains on loans held for sale increased $274,000.  Gains
on sales of  mortgage-backed  securities and investment  totaled $982,000.  Loan
fees, service charges and other decreased $188,000, which includes loan fees and
other income of $829,000, TCM commission income of $572,000 and a equity loss of
$642,000 for the  write-off of the Bank's  investment  in AGT Mortgage  Services
("AGT"). AGT serviced performing and non-performing loans for a fee. Given lower
than  anticipated  non-performing  loan  levels,  AGT did not  achieve  adequate
economies  of scale to  generate  sufficient  revenue.  Accordingly,  management
decided to cease operations of AGT on July 31, 1997.

         Total non-interest income declined by $1.0 million, or 26.3%, from $3.8
million for fiscal year 1995 to $2.8 million for fiscal year 1996. Loan fees and
service  charges  increased  $756,000  due to fees  collected on $2.8 million in
purchased  mortgage  servicing  rights.  Gains on loans held for sale  increased
$642,000.  Gains on sales of mortgage-backed  securities and investments totaled
$935,000.

NON-INTEREST  EXPENSES.  Total non-interest  expenses increased $1.0 million, or
11.0%,  from $9.1 million for fiscal year 1996 to $10.1  million for fiscal year
1997.  Non-interest expenses are composed of general and administrative expenses
and other non-interest expenses.  General and administrative  expenses increased
$600,000,  or 7.1%,  from $8.4  million for the year ended  December 31, 1996 to
$9.0  million  for the year ended  December  31,  1997.  The slight  increase is
primarily  attributed  to the $1.2 million  increase in  compensation  which was
offset by the effect of a one-time $1.7 million  assessment to recapitalize  the
SAIF which was recognized in fiscal year 1996.  Compensation expenses reflect an
increase of 19 employees from the prior year including the compensation expenses
for  TCM  employees.  Other  administrative  costs  increased  $1.1  million  to
accommodate the growing deposit base and increased marketing expenses associated
with building a brand  identity and enhancing  franchise  value.  As in previous
years,  it is the Company's  compensation  policy to pay a combination of salary
and  incentive  based  compensation  consisting  of bonuses  tied to the overall
Company's performance and individual  performances  consistent with the improved
performance of the Company. Bonuses increased from $1.1 million for 1996 to $1.5
million for 1997.  General and  administrative  expenses  net of bonuses and the
SAIF  assessment  as a  percentage  of total  assets was 0.69% and 0.86% for the
years ended



                                       37
<PAGE>

December 31, 1997 and 1996,  respectively.  General and administrative  expenses
net of the SAIF  assessment as a percentage of total assets were 0.69% and 1.03%
for the years ended December 31, 1997 and 1996, respectively. Other non-interest
expense increased $1.1 million, or 36.7%, from $3.0 million at December 31, 1996
to $4.1  million at  December  31,  1997.  This  increase is  attributable  to a
$375,000 increase in advertising expense in conjunction with the marketing plan,
$150,000  increase in  amortization  of  purchased  mortgage  servicing  rights,
$228,000 increase in office occupancy,  and $350,000 increase in other operating
expenses.

         Total non-interest expenses increased $2.9 million, or 46.8%, from $6.2
million for fiscal year 1995 to $9.1 million for fiscal year 1996.  Non-interest
expenses  are  composed  of  general  and  administrative   expenses  and  other
non-interest  expenses.  General  and  administrative  expenses  increased  $2.8
million,  or 50.0%,  from $5.6  million for the year ended  December 31, 1995 to
$8.4 million for the year ended  December  31,  1996.  The increase is primarily
attributed to the effect of a one-time $1.7 million  assessment to  recapitalize
the SAIF, a $660,000 increase in compensation,  employee benefits,  and $483,000
in federal  insurance  premium  and  overall  administrative  costs for a higher
deposit base. As in previous years, it is the Company's  compensation  policy to
pay a  combination  of salary and  incentive  based  compensation  consisting of
bonuses tied to the overall Company's  performance and individual  performances.
Consistent with the improved  performance of the Company net of SAIF assessment,
bonuses increased to $1.1 million for 1996 from $775,000 for 1995.  Bonuses were
$1.1  million  and  $745,000  for the year  ended  December  31,  1996 and 1995,
respectively.  General and  administrative  expenses net of bonuses and the SAIF
assessment  as a  percentage  of total  assets was 0.86% and 0.87% for the years
ended  December  31, 1996 and 1995,  respectively.  General  and  administrative
expenses net of the SAIF  assessment  as a percentage  of total assets was 1.03%
and 1.00% for the years ended  December 31, 1996 and 1995,  respectively.  Other
non-interest  expense increased $21,000,  or 3.1%, from $679,000 at December 31,
1995 to $700,000 at December 31, 1996. The slight  increase is attributable to a
$213,000 increase in amortization of purchased  mortgage servicing rights offset
by a $192,000 decline in real estate owned expenses.

INCOME TAX EXPENSE.  Income tax expense is computed upon,  and generally  varies
proportionally with, earnings before income tax expense adjusted for non-taxable
income and non-deductible expenses.

         The effective  tax rate for the year ended  December 31, 1997 was 26.4%
compared to 31.9% for 1996.  The income tax expense for the year ended  December
31,  1997 was $1.7  million as  compared  with $1.2  million  for the year ended
December 31, 1996.  The effective tax rate  decreased  largely as a result of an
increase in municipal bond interest.

         The effective  tax rate for the year ended  December 31, 1996 was 31.9%
compared to 37.9% for 1995.  The income tax expense for the year ended  December
31,  1996 was $1.2  million as  compared  with $1.7  million  for the year ended
December 31, 1995.  The  effective tax rate  decreased  largely as a result of a
decrease in municipal bond interest.

IMPACT OF INFLATION AND CHANGING PRICES

         Since interest rates and inflation rates do not always move in concert,
the effect of inflation on financial  institutions  may not  necessarily  be the
same as on other  businesses.  A bank's asset and  liability  structure  differs



                                       38
<PAGE>

significantly from that of industrial companies in that virtually all assets and
liabilities  are of a monetary  nature.  Management  believes that the impact of
inflation on financial  results  depends  upon the  Company's  ability to manage
interest  rate  sensitivity  and, by such  management,  reduce the  inflationary
impact upon  performance.  Interest  rates do not  necessarily  move in the same
direction,  or in the same magnitude, as the prices of other goods and services.
As discussed above, management seeks to manage the relationship between interest
sensitive  assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.

YEAR 2000

         The Company utilizes and is dependent upon data processing  systems and
software to conduct its business.  The data  processing  systems include various
software packages licensed to the Company by outside vendors and a client server
core processing system which are run on in-house computer networks. In 1997, the
Company  initiated  a review and  assessment  of all  hardware  and  software to
confirm that it will  function  properly in the year 2000.  The  Company's  core
processing  software  vendor and the  majority  of the  vendors  which have been
contacted  have  indicated  that their  hardware  and/or  software are Year 2000
compliant.  Testing will be performed  for  compliance.  While there may be some
additional  expenses incurred during the next two years, Year 2000 compliance is
not expected to have a material effect on the Company's  consolidated  financial
statements.

NEW GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

         Statement  of  Financial   Accounting   Standards  Nos.  130  and  131,
"Reporting   Comprehensive   Income"  and  "Disclosures  about  Segments  of  an
Enterprise  and Related  Information,"  respectively,  were issued in June 1997.
SFAS 130  requires  that  certain  financial  activity  typically  disclosed  in
shareholders' equity be reported in the financial statements as an adjustment to
net income in determining  comprehensive income. SFAS 131 requires the reporting
of selected segmented  information in quarterly and annual reports.  The Company
does not anticipate any material  financial  impact from the  implementation  of
SFAS Nos. 130 and 131.




                                       39
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA











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

         Item 9 is not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Pursuant to General  Instruction G of the Form 10-K,  such  information
shall be filed as an amendment no later than 120 days from December 31, 1997.

ITEM 11. EXECUTIVE COMPENSATION

         Pursuant to General  Instruction G of the Form 10-K,  such  information
shall be filed as an amendment no later than 120 days from December 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Pursuant to General  Instruction G of the Form 10-K,  such  information
shall be filed as an amendment no later than 120 days from December 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Pursuant to General  Instruction G of the Form 10-K,  such  information
shall be filed as an amendment no later than 120 days from December 31, 1997.

                                     PART IV

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

         (a)(1) The following  consolidated  financial  statements of registrant
and its  subsidiary  and report of  independent  auditors are included in Item 8
hereof.

         Report of Independent Auditors.

         Consolidated  Statements of Financial Condition - December 31, 1997 and
1996.

         Consolidated  Statements of Operations - Years Ended December 31, 1997,
1996, and 1995.

         Consolidated  Statements  of  Changes in  Stockholders'  Equity - Years
Ended December 31, 1997, 1996, and 1995.



                                       40
<PAGE>

         Consolidated  Statements of Cash Flows - Years Ended December 31, 1997,
1996, and 1995.

         Notes to Consolidated Financial Statements.

         (a)(2) All  schedules  for which  provision  is made in the  applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related  instructions or are  inapplicable and therefore have
been omitted.

         (a)(3) The following  exhibits are either filed with this Report or are
incorporated herein by reference:

     3.1(a) Amended and Restated Certificate of Incorporation of the Company.*

     3.1(b) Certificate of Designation****

     3.2    Bylaws of the Company.****

     4.1    Specimen certificate of shares of Common Stock.***

     4.2    Indenture,  dated as of June 9, 1997,  between  the  Coporation  and
            Wilmington Trust Company, as debenture trustee.*

     4.3    Form of Certificate of Exchange Junior Subordinated Debentures.*

     4.4    Amended and Restated  Declaration of Trust of TeleBanc Capital Trust
            I dated as of June 9, 1997.*

     4.5    Form of Exchange Capital Security Certificate.*

     4.6    Exchange  Guarantee  Agreement by the Corporation for the benefit of
            the holders of Exchange Capital Securities.*

     4.7    Registration  Rights  Agreement,  dated  June  5,  1997,  among  the
            Corporation, TeleBanc Capital Trust I, and the Initial Purchaser.*

     4.8    Liquidated  Damages  Agreement,   dated  June  9,  1997,  among  the
            Corporation, TeleBanc Capital Trust I, and the Initial Purchaser.*

     10.1   1994 Stock Option Plan.***

     10.2   Tax Allocation Agreement,  dated April 7, 1994, between the Bank and
            the Company.**

     10.3   Unit Purchase  Agreement,  dated as of February 19, 1997,  among the
            Company and the Purchasers identified therein. ****

     10.4   Amended and Restated Acquisition Agreement, dated as of February 19,
            1997, among the Company, Arbor Capital Partners, Inc., MET Holdings,
            Inc., and William M. Daugherty. ****

     10.5   1997 Stock Option Plan*****

     11     Statement regarding computation of per share earnings.

     13     1997  Annual  Report to  Stockholders,  portions  of which have been
            incorporated by reference into this Form 10-K.

     21     Subsidiaries of the Registrant.

     99.1   Independent auditor's report of Arthur Andersen LLP .

------------------
*     Incorporated by reference to the Company's  registration statement on Form
      S-4/A (File 33-340399) filled with the SEC on December 8, 1997.

**    Incorporated by reference herein to  pre-effective  Amendment No. 1 to the
      Company's  registration  statement on Form S-1 (File No.  33-76930)  filed
      with the SEC on May 3, 1994.

***   Incorporated by reference herein to the Company's  registration  statement
      on Form S-1 (File No. 33-76930) filed with the SEC on March 25, 1994.

****  Incorporated by reference herein from the Company's Current Report on Form
      8-K, as filed with the SEC on March 17, 1997.

***** Incorporated  by  reference  herein  from  Exhibit D to the  Corporation's
      definitive  proxy  materials  which  were  filed  as  Exhibit  99.3 to the
      Corporation's  Annual Report on Form 10-K for the year ended  December 31,
      1996, attached to the prospectus as Appendix I.

                                       41

<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly authorized as of the 30th day of
March, 1996.

                                                 TELEBANC FINANCIAL CORPORATION
                                                 ------------------------------
                                                             Registrant

                                                 By:    /s/ Mitchell H. Caplan
                                                        ----------------------
                                                            Mitchell H. Caplan
                                                                 President

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated as of March 30, 1996.

         Signature                                      Title
         ---------                                      -----

/s/ David A. Smilow                          Chairman of the Board & CEO
-------------------------                   (principal executive officer)
David A. Smilow   


/s/ Mitchell H. Caplan                        President, Vice Chairman
-------------------------                           and Director
Mitchell H. Caplan    


/s/ Aileen Lopez Pugh                       Executive Vice President and
-------------------------                 Chief Financial Officer/Treasurer     
Aileen Lopez Pugh                   (principal financial and accounting officer)


/s/ David DeCamp                                      Director
------------------------
David DeCamp


/s/ Arlen W. Gelbard                                  Director
------------------------
Arlen W. Gelbard


/s/ Dean C. Kehler                                    Director
------------------------
Dean C. Kehler


/s/ Steven F. Piaker                                  Director
------------------------
Steven F. Piaker


/s/ Mark Rollinson                                    Director
------------------------
Mark Rollinson


<PAGE>

/s/ Michael A. Smilow                                 Director
------------------------
Michael A. Smilow



<PAGE>


                               INDEX TO FINANCIALS

         Report of Independent Auditors.

         Consolidated  Statements of Financial Condition - December 31, 1997 and
1996.

         Consolidated  Statements of Operations - Years Ended December 31, 1997,
1996, and 1995.

         Consolidated  Statements  of  Changes in  Stockholders'  Equity - Years
Ended December 31, 1997, 1996, and 1995.

         Consolidated  Statements of Cash Flows - Years Ended December 31, 1997,
1996, and 1995.

         Notes to Consolidated Financial Statements.


<PAGE>


                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
                                                                                                   Sequentially
                                                                                                     Numbered
  Exhibit No.                                       Exhibit                                            Page
  -----------                                       -------                                            ----
<S>   <C>                                                                       
      3.1(a)      Amended  and  Restated  Certificate  of  Incorporation  of the
                  Company.*

      3.1(b)      Certificate of Designation****

      3.2         Bylaws of the Company.****

      4.1         Specimen certificate of shares of Common Stock.***

      4.2         Indenture,  dated as of June 9, 1997,  between the  Coporation
                  and Wilmington Trust Company, as debenture trustee.*

      4.3         Form of Certificate of Exchange Junior Subordnates Debentures.

      4.4         Amended and Restated  Declaration of Trust of TeleBanc Capital
                  Trust I dated as of June 9, 1997.

      4.5         Form of Exchange Capital Security Certificate.*

      4.6         Exchange  Guarantee  Agreement  by  the  Corporation  for  the
                  benefit of the holders of Exchange Capital Securities.

      4.7         Registration  Rights Agreement,  dated June 5, 1997, among the
                  Corporation,   TeleBanc  Capital  Trust  I,  and  the  Initial
                  Purchaser.

      4.8         Liquidated  Damages  Agreement,  dated June 9, 1997, among the
                  Corporation,   TeleBanc  Capital  Trust  I,  and  the  Initial
                  Purchaser.

      10.1        1994 Stock Option Plan.***

      10.2        Tax  Allocation  Agreement,  dated April 7, 1994,  between the
                  Bank and the Company.**

      10.3        Unit Purchase Agreement,  dated as of February 19, 1997, among
                  the Company and the Purchasers identified therein. ****

      10.4        Amended  and  Restated  Acquisition  Agreement,  dated  as  of
                  February 19, 1997, among the Company,  Arbor Capital Partners,
                  Inc., MET Holdings, Inc., and William M. Daugherty. ****

      10.5        1997 Stock Option Plan.****

      11          Statement regarding computation of per share earnings.

      13          1997  Annual  Report to  Stockholders,  portions of which have
                  been incorporated by reference into this Form 10-K.

      21          Subsidiaries of the Registrant.

      99.1        Independent auditor's report of Arthur Andersen LLP
</TABLE>

*     Incorporated by reference to the Company's  registration statement on Form
      S-4 (File 33-340399) filded with the SEC on December 8, 1997.

**    Incorporated  by  reference  to  pre-effective  Amendment  No.  1  to  the
      Company's  registration  statement on Form S-1 (File No.  33-76930)  filed
      with the SEC on May 3, 1994.

***   Incorporated by reference to the Company's  registration statement on Form
      S-1 (File No. 33-76930) filed with the SEC on March 25, 1994.

****  Incorporated  by reference from the Company's  Current Report on Form 8-K,
      as filed with the SEC on March 17, 1997.

***** Incorporated  by  reference  herein  from  Exhibit D to the  Corporation's
      definitive  proxy  materials  which  were  filed  as  Exhibit  99.3 to the
      Corporation's  Annual Report on Form 10-K for the year ended  December 31,
      1996, attached to the prospectus as Appendix I.