UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark one)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
                                   ACT OF 1934

    For the fiscal year ended September 30, 1998

                                                      OR

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

                           Commission File No. 1-12979

                             HomeSide Lending, Inc.
             (Exact name of registrant as specified in its charter)

                Florida                               59-2725415
(State or other jurisdiction of 
incorporation or organization)             (I.R.S. Employer Identification No.)

                   7301 Baymeadows Way, Jacksonville, FL 32256

               (Address of principal executive offices) (Zip Code)

                                 (904) 281-3000
              (Registrant's telephone number, including area code)

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 the number of shares  outstanding  of each of the Company's  classes of
common stock, as of the latest practicable date.

        Title of each class          Outstanding at December 28, 1998
        -------------------          --------------------------------

Common stock $1.00 par value                              100 shares


Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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.


<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE

                                                    PART I

ITEM 1.  BUSINESS

General

        HomeSide  Lending,  Inc.  (the  "Company" or  "HomeSide")  is one of the
largest  full  service  residential  mortgage  banking  companies  in the United
States.  On February 10, 1998,  National  Australia Bank, Ltd. (the  "National")
acquired all outstanding  shares of the common stock of HomeSide  International,
Inc. (the "Parent") and the Company adopted a fiscal year end of September 30 to
conform  to the  fiscal  year of the  National  (see Note 2 of the  Consolidated
Financial  Statements).  HomeSide's  predecessor  ("HomeSide  Predecessor")  was
formed through the acquisition of the mortgage banking operations of BankBoston,
N.A.  ("BBMC  Predecessor"  to  HomeSide  Predecessor)  on  March  16,  1996 and
subsequently  purchased the mortgage banking  operations of Barnett Banks,  Inc.
Unless otherwise  designated,  the term "HomeSide" refers to the Company for the
periods subsequent to February 10, 1998, to HomeSide Predecessor for the periods
from March 16, 1996 to February  10,  1998 and to BBMC  Predecessor  for periods
prior to March 16, 1998.

        HomeSide's strategy emphasizes variable cost mortgage loan originations,
low cost mortgage  servicing and effective  risk  management.  Headquartered  in
Jacksonville,   Florida,  HomeSide  ranks  as  the  9th  largest  mortgage  loan
originator  and the 6th largest  servicer in the United  States at September 30,
1998 based on data published by Inside Mortgage Finance.

        The  residential  mortgage  market,  which totaled over $4.2 trillion at
September 30, 1998 is the second largest debt market in the world, exceeded only
by the United States Treasury market. The residential  mortgage market has grown
at a compound annual rate of approximately 8% since 1985. HomeSide competes in a
mortgage  banking  market  which is highly  fragmented  with no  single  company
controlling  or  dominating  the market.  At  September  30,  1998,  the largest
originator  represented 7.4% of the market and the largest servicer  represented
5.7%,  while the top 30  originators  and servicers  represented  56% and 52% of
their markets, respectively, based on data published by Inside Mortgage Finance.
Residential  mortgage lenders compete primarily on the basis of loan pricing and
service,   making  effective  cost  management   essential.   The  industry  has
experienced rapid  consolidation  which has been accelerated by the introduction
of  significant  technology  improvements  and the economies of scale present in
mortgage  servicing.  The top 10 mortgage loan servicers  have  increased  their
aggregate market share from 16.6% in 1990 to 34.3% as of September 30, 1998.

        HomeSide's  business  strategy  is to  increase  the  volume of its loan
originations and the size of its servicing portfolio while continuing to improve
operating efficiencies.  In originating mortgages,  HomeSide focuses on variable
cost channels of production,  including correspondent,  broker, consumer direct,
affinity,  and co-issue sources.  HomeSide also pursues strategic  relationships
with other production sources to acquire and service residential mortgage loans.
Management  believes that these  variable  cost  channels of production  deliver
consistent  origination  opportunities  for  HomeSide  without  the  fixed  cost
investment associated with traditional retail mortgage branch networks. HomeSide
believes  that its ongoing  investment in  technology  will further  enhance and
expand existing  processing  capabilities  and improve its efficiency.  Based on
independent  surveys of direct cost per loan and loans  serviced  per  employee,
management  believes that HomeSide has been one of the industry's most efficient
mortgage  servicers.  The Company's  average cost per employee  approximates the
average cost per employee of its major competitors.

        HomeSide  plans  to build  its  core  operations  through  (i)  improved
economies  of  scale in  servicing  costs;  (ii)  increased  productivity  using
proprietary  technology;  and  (iii)  expanded  and  diversified  variable  cost
origination  channels.  In addition,  HomeSide intends to pursue additional loan
portfolio  acquisitions and strategic  origination  relationships similar to its
existing  agreement  with  BankBoston,   N.A.  ("BKB")  and  Banc  One  Mortgage
Corporation ("Banc One").

        HomeSide's business activities consist primarily of:

          Mortgage  production:  origination and purchase of residential  single
     family mortgage loans through multiple channels  including  correspondents,
     strategic partners,  mortgage brokers,  co-issue partners,  direct consumer
     telemarketing and affinity programs;

          Servicing:  administration,   collection  and  remittance  of  monthly
     mortgage  principal  and  interest  payments,  collection  and  payment  of
     property  taxes and  insurance  premiums  and  management  of certain  loan
     default activities;

          Secondary marketing:  sale of residential single family mortgage loans
     as pools  underlying  mortgage-backed  securities  guaranteed  or issued by
     governmental  or  quasi-governmental  agencies or as whole loans or private
     securities to investors; and

          Risk management: management of a program designed primarily to protect
     the economic performance of the servicing portfolio that could otherwise be
     adversely affected by loan prepayments due to declines in interest rates.

Production

        HomeSide participates in several origination  channels,  with a focus on
wholesale origination.  Since the acquisition of BancBoston Mortgage Corporation
("BBMC"),   wholesale  channels  (correspondent,   co-issue,  and  broker)  have
represented more than 90% of HomeSide's total production.  Excluding the volumes
purchased  from BKB,  Barnett  Bank,  N.A.  ("Barnett")  and Banc One, no single
source within the correspondent or broker channels accounted for more than 7% of
total production since March 16, 1996.  HomeSide's  other  origination  channels
include  telemarketing,   direct  mail  campaigns  and  other  advertising,  and
mortgages related to affinity group and co-branding partnerships.  HomeSide also
purchases  servicing  rights  in bulk  from  time to  time.  This  multi-channel
production base provides access to and flexibility among production  channels in
a wide variety of market and economic conditions. The following table sets forth
production  detail by HomeSide's  origination  channels.  The periods  presented
coincide with the  commencement of operations of HomeSide and the acquisition of
HomeSide by the National (see Note 2 of the Consolidated Financial Statements):

RESIDENTIAL LOAN PRODUCTION BY CHANNEL
(DOLLARS IN MILLIONS)
                                                                               
                                                                               
                                            HOMESIDE              HOMESIDE 
                 FOR THE PERIOD FROM      PREDECESSOR            PREDECESSOR   
                  FEBRUARY 11, 1998    FOR THE PERIOD FROM   FOR THE PERIOD FROM
                         TO             MARCH 1, 1997 TO      MARCH 16, 1996 TO 
                 SEPTEMBER 30, 1998    FEBRUARY 10, 1998      FEBRUARY 28, 1997 
                 -------------------   -------------------   -------------------
Wholesale:           

  Correspondent          $11,309              $13,304              $11,113
  Co-issue (a)             2,906                5,584                8,222
  Broker                   1,980                1,305                  843
                         -------              -------              -------
    Total wholesale       16,195               20,193               20,178
Direct                       631                  337                  700
                         -------              -------              -------
   Total production       16,826               20,530               20,878
Bulk acquisitions (b)     18,947                3,446                4,073
                         -------              -------              -------
   Total production and                                          
          acquisitions   $35,773              $23,976              $24,951
                         =======              =======              =======

(a)  Represents the acquisition of servicing  rights,  not the underlying loans.
     Amounts  represent the unpaid  principal  balance of mortgage debt to which
     the acquired servicing rights relate.

(b)  Represents  the  acquisition  of servicing  rights from  another  servicer.
     Amounts  represent the unpaid  principal  balance of mortgage debt to which
     the acquired servicing rights relate.

        HomeSide  competes  nationwide  by  offering a wide  variety of mortgage
products  designed to respond to consumer  needs and tailored to address  market
competition.  HomeSide is primarily an  originator of fixed rate 15- and 30-year
mortgage loans,  which  collectively  represented 98% of the total production in
the period  from  February  11, 1998 to  September  30,  1998,  78% of the total
production in the HomeSide predecessor period from March 1, 1997 to February 10,
1998 and 73% of total production in the HomeSide  predecessor  period from March
16, 1996 to February 28, 1997.  HomeSide  also offers  other  products,  such as
ARMs, balloon, and jumbo mortgages.

        HomeSide's   national   loan   production   operation  has  resulted  in
geographically  diverse  originations,  enabling  HomeSide to diversify its risk
across  many  markets  in the  United  States.  HomeSide's  servicing  portfolio
composition  reflects  its  production  markets.  The  largest  segments  of the
servicing  portfolio by state on September  30, 1998 were  California  (14.1% of
unpaid principal balance), Florida (14.0%), Texas (6.9%),  Massachusetts (5.5%),
and Illinois (4.9%). The largest segments of the servicing portfolio by state on
February 10, 1998 were Florida (17.2% of unpaid principal  balance),  California
(15.3%),  Massachusetts  (7.0%),  Texas (6.3) and Maryland  (4.6%).  The largest
segments of the  servicing  portfolio by state on February 28, 1997 were Florida
(18.7% of unpaid principal balance),  California (15.4%),  Massachusetts (8.4%),
Texas (6.1%), and Maryland (4.6%).

        The mortgage banking  industry is generally  subject to seasonal trends.
These trends reflect the general national pattern of sales and resales of homes.
Sales and resales of homes  typically  peak during the spring and summer seasons
and decline to lower levels from  mid-November  through  February.  Refinancings
tend to be less seasonal and more closely  related to changes in interest rates.
Historically, changes in the interest rate environment have mitigated the impact
of seasonality on HomeSide's  results of  operations.  In addition,  delinquency
rates  typically  rise in the winter  months,  which result in higher  servicing
costs.  However,  late charge income has historically  been sufficient to offset
such incremental expenses.

        HomeSide's production strategy is to maintain and improve its reputation
as one of the  largest,  most  cost  effective  originators  of  mortgage  loans
nationwide.  HomeSide pursues this strategy through an emphasis on wholesale and
centralized direct production, the use of contract and delegated underwriters, a
high degree of automation in its processing and direct  originations and quality
control.  HomeSide plans to expand production through its low cost wholesale and
direct channels and to continue to streamline its production operation. HomeSide
plans to  continue  to pursue  bulk  acquisitions  in the  secondary  market for
mortgage servicing rights on an opportunistic basis.

Wholesale Production

Correspondent Production

        Through  its  correspondent  program,   HomeSide  purchases  loans  from
approximately  500 commercial  banks,  savings and loan  associations,  licensed
mortgage lenders and other financial intermediaries. The correspondent takes the
mortgage  application  and  processes  the loan,  which is  either  underwritten
through  contract  underwriters  or, in some cases,  the  correspondent  to whom
underwriting  authority has been delegated.  Closing  documents are submitted to
HomeSide  for legal  review and funding.  The  participants  in this program are
prequalified  and monitored on an ongoing basis by HomeSide.  If a correspondent
subsequently   fails  to  meet  HomeSide's   requirements,   HomeSide  typically
terminates  the  relationship.  Correspondents  are also  required to repurchase
loans in the event of fraud or  misrepresentation in the origination process and
for certain other reasons.

Co-Issue Production

        Co-issue  production,  which represents the purchase of servicing rights
from a correspondent  under contracts to deliver  specified volumes on a monthly
or  quarterly  basis,  is another  main  source of  HomeSide's  production.  The
co-issue  correspondent  controls the entire loan process  from  application  to
closing.  This  arrangement  particularly  suits large  originators who have the
ability to deliver on an automated basis. Reflecting this delegated underwriting
authority,   the   co-issue   correspondent   is   obligated   to  make  certain
representations  and warranties and is required to repurchase loans in the event
of fraud or  misrepresentation  in the origination  process or for certain other
reasons.

Broker Production

        Under its broker program, HomeSide funds loans at closing from a network
of  approximately  450  mortgage  brokers  nationwide.  The broker  controls the
process of application and loan processing. A pre-closing quality control review
is performed by HomeSide to verify the borrower's  credit.  All loans originated
through brokers are underwritten by HomeSide's  approved contract  underwriters.
Loans are funded by HomeSide  and may be closed in either the  broker's  name or
HomeSide's  name.  Participants  in this  program  prequalify  on the  basis  of
creditworthiness,  mortgage  lending  experience and reputation.  Each broker is
subject to annual and ongoing reviews by HomeSide.

Direct Production

     HomeSide's direct  production  includes the use of telemarketing to solicit
loans  from  several  sources,   including  refinancing  of  mortgage  loans  in
HomeSide's  existing  servicing  portfolio,  leads  generated  from  direct mail
campaigns and other  advertising,  and mortgages  related to affinity  group and
co-branding  partnerships.  HomeSide  believes  that these  efforts  will have a
significant  effect on increasing the percentage of loans captured by the direct
division from loan prepayments in HomeSide's  servicing  portfolio.  Refinancing
retention  represents  the  percentage of loans  refinanced  through  HomeSide's
direct channel that were serviced by HomeSide prior to refinancing.

Bulk Acquisition

     Bulk acquisition is the large scale purchase of mortgage  servicing rights.
In connection with such acquisitions,  HomeSide does not purchase the underlying
mortgage loans which were originated by other originators. HomeSide may purchase
servicing rights on an exclusive basis or through a competitive  bidding process
and plans to continue this practice on an  opportunistic  basis in order to grow
its servicing portfolio and benefit from economies of scale.


<PAGE>


Underwriting and Quality Control

Underwriting

        HomeSide's loans are  underwritten in accordance with applicable  Fannie
Mae,  FHLMC,  VA,  and  FHA  guidelines,  as well as  certain  private  investor
requirements.  The underwriting  process is organized by origination channel and
by loan type.  HomeSide  currently  employs  underwriters with an average of ten
years of underwriting experience.

        HomeSide requires approximately 80% of its correspondent lenders to have
their loans underwritten by third party contract underwriters prior to purchase.
These  contract  underwriters  are  designated  by HomeSide and include  General
Electric Capital Corp.,  Mortgage Guaranty Insurance Corp., and Private Mortgage
Insurance Corp.  HomeSide grants delegated  underwriting status to the remaining
approximately 20% of correspondents  which enables the  correspondents to submit
conventional loans to HomeSide without prior underwriting  approval.  Generally,
HomeSide grants delegated  underwriting status to its larger  correspondents who
meet  financial   strength,   delinquency,   underwriting  and  quality  control
standards,  and such  correspondents  are  monitored  regularly.  The FHA and VA
require  that  loans  be   underwritten   by  the   originating   lender  on  an
Agency-approved  or  delegated  basis.  If  issuance  of  FHA  guarantees  or VA
insurance certificates is denied, the correspondent must repurchase the loan.

       HomeSide's  underwriting  process for its retail production  operation is
fully  automated.  The automated  underwriting  technology  incorporates  credit
scoring and appraisal  evaluation systems.  These systems employ rules-based and
statistical  technologies to evaluate the borrower,  the property and salability
of the loan to the secondary market.  HomeSide believes that these  technologies
have  contributed  to  improved   productivity  and  reduced   underwriting  and
processing turnaround time.

Quality Control

        HomeSide  maintains a compliance and quality  assurance  department that
operates independently of the production,  underwriting, secondary marketing and
loan administration  department. For its production compliance process, HomeSide
randomly  selects a  statistical  sample of all closed loans monthly for review.
The sample  generally  comprises 3.5% - 4% of all loans closed each month.  This
review includes  reunderwriting of such loans, ordering second appraisals on 10%
of  the  sample,  reverifying  funds,  employment  and  final  applications  and
reordering credit reports. In addition,  a full underwriting review is conducted
on (i) all jumbo loans that  become  thirty  days  delinquent  in the first four
payments and jumbo loans that go into foreclosure in the first thirty-six months
and (ii) all  conventional  loans that become sixty days delinquent in the first
six payments. Document and file reviews are also undertaken to ensure regulatory
compliance.  In addition,  random reviews of the servicing  portfolio,  covering
selected aspects of the loan administration process, are conducted.

       HomeSide  monitors the performance of loan  underwriting  through quality
assurance reports,  HUD/VA reports and audits,  reviews and audits by regulatory
agencies,  investor reports and mortgage insurance company audits.  According to
HomeSide's quality control findings, less than 5% of its loans have underwriting
issues that affect salability to the secondary market.  Flaws in these loans are
generally corrected;  otherwise,  the holder of the mortgage-backed  security is
indemnified  against  future  losses  resulting  from such flaws by HomeSide or,
ultimately, the originating  correspondent.  Correspondents or co-issue partners
are required to repurchase any flawed loans originated by them.

Secondary Marketing

     HomeSide  customarily sells all loans that it originates or purchases while
retaining the servicing rights to such loans. HomeSide aggregates mortgage loans
into pools and sells these  pools,  as well as  individual  mortgage  loans,  to
investors  principally at prices  established  under forward sales  commitments.
HomeSide's  FHA and VA  loans  are  generally  pooled  and  sold in the  form of
GinnieMae ("GNMA") Mortgage Backed Securities.  Conforming conventional mortgage
loans are  generally  pooled and  exchanged  under the  purchase  and  guarantee
programs  sponsored  by Fannie  Mae and FHLMC for  Fannie  Mae  Mortgage  Backed
Securities  or FHLMC  participation  certificates,  respectively.  HomeSide pays
certain  guarantee  fees to the Agencies in connection  with these  programs and
then sells the GNMA,  Fannie Mae and FHLMC securities to securities  dealers.  A
limited number of mortgage loans (i.e. non-conforming loans) are sold to private
investors on a  servicing-released  basis. For the period from February 11, 1998
to September 30, 1998,  approximately  92% of the mortgage  loans  originated by
HomeSide  were sold to GNMA (34%),  Fannie Mae (36%),  and FHLMC (22%).  For the
HomeSide   predecessor   period  from  March  1,  1997  to  February  10,  1998,
approximately 92% of the mortgage loans originated by HomeSide were sold to GNMA
(47%),  Fannie Mae (31%), and FHLMC (14%). For the HomeSide  predecessor  period
from March 16, 1996 to February  28,  1997,  approximately  78% of the  mortgage
loans  originated  by HomeSide  were sold to GNMA (38%),  Fannie Mae (27%),  and
FHLMC (13%). The remaining were sold to private investors.

     The sale of mortgage  loans may generate a gain or loss to HomeSide.  Gains
or losses result primarily from two factors. First, HomeSide may purchase a loan
at a price  that may be  higher  or lower  than  HomeSide  would  receive  if it
immediately  sold the loan in the secondary  market.  These pricing  differences
occur principally as a result of competitive  pricing  conditions in the primary
loan origination market. Second, gains or losses may result from fluctuations in
interest  rates  that  create  changes  in the  market  value  of the  loans  or
commitments  to purchase  loans,  from the time the interest rate  commitment is
given to the mortgagor until the loan is sold to an investor.

     HomeSide  assesses  the  interest  rate risk  associated  with  outstanding
commitments that it has extended to fund loans and hedges the interest rate risk
of these  commitments  based upon a number of factors,  including  the remaining
term of the commitment,  the interest rate at which the commitment was provided,
current  interest  rates  and  interest  rate  volatility.  HomeSide  constantly
monitors  these  factors  and  adjusts  its  hedging on a daily basis as needed.
HomeSide uses the Quantitative Risk Management system, a sophisticated  hedging,
reporting and evaluation system, which has the ability to perform analyses under
various  interest  rate  scenarios.  HomeSide's  interest rate risk is currently
hedged using a combination  of forward sales of mortgage  backed  securities and
over-the-counter  options,  including  both  puts and  calls,  on  fixed  income
securities.  HomeSide  generally  commits to sell to investors for delivery at a
future time for a stated price all of its closed  loans and a percentage  of the
mortgage  loan  commitments  for which the interest  rate has been  established.
HomeSide aims to price loans competitively, hedge the interest rate risk of loan
originations and sell loans on a break-even  basis. For the period from February
11, 1998 to September 30, 1998, the HomeSide  predecessor  periods from March 1,
1997 to February 10, 1998 and March 16, 1996 to February 28, 1997,  HomeSide has
not experienced secondary marketing losses on an aggregate basis.

      HomeSide's  policy  is to sell  mortgage  loans on a  non-recourse  basis.
However,  in the  case of VA  loans  used to form  GNMA  pools,  the  VA's  loan
guarantees do not cover the entire principal balance of the loan and HomeSide is
responsible  for  losses  which  exceed  the  VA's  guaranteed  limitations.  In
connection   with   HomeSide's   loan   exchanges  and  sales,   HomeSide  makes
representations  and  warranties  customary in the  industry  relating to, among
other things,  compliance with laws,  regulations and program standards,  and to
the accuracy of information.  In the event of a breach of these  representations
and warranties,  HomeSide typically corrects such problems, but, if the problems
cannot be corrected,  may be required to repurchase  such loans.  In cases where
loans are originated by a correspondent,  HomeSide may sell the flawed loan back
to the correspondent under a repurchase obligation.

Loan Servicing

     HomeSide derives its revenues  predominantly from its servicing operations.
HomeSide anticipates that the sale of servicing rights will not be a significant
component of its business strategy in the future. Since its formation,  HomeSide
has also  maintained  a risk  management  program  designed to  protect,  within
certain  parameters,  the economic  value of its servicing  portfolio,  which is
subject to prepayment  risk when interest  rates decline,  providing  mortgagors
with refinancing opportunities.

     Loan servicing includes  collecting payments of principal and interest from
borrowers,  remitting  aggregate  loan  payments to  investors,  accounting  for
principal and interest  payments,  holding  escrow funds for payment of mortgage
related  expenses  such  as  taxes  and  insurance,  making  advances  to  cover
delinquent payments,  inspecting the mortgaged premises as required,  contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied  defaults,  and other  miscellaneous  duties related to loan
administration. HomeSide collects servicing fees from monthly mortgage payments.
These  fees  generally  range  from  0.25% to 0.50% of the  declining  principal
balances  of the loans per annum.  HomeSide's  weighted  average  servicing  fee
including  ancillary  income was 0.468% for the period from February 11, 1998 to
September  30, 1998,  0.438% for the HomeSide  predecessor  period from March 1,
1997 to February  10, 1998 and 0.432% for the HomeSide  predecessor  period from
March  16,  1996  to  February  28,  1997.   HomeSide  also  maintains   certain
subservicing  relationships  whereby  servicing is performed by another servicer
under an agreement with HomeSide,  which remains  contractually  responsible for
servicing the loans.  Subservicing  relationships are often entered into as part
of a bulk  servicing  acquisition  where the selling  institution  continues  to
perform servicing until the loans are transferred to the purchasing institution.

     HomeSide's  servicing  strategy  is  to  continue  to  build  its  mortgage
servicing  portfolio  and benefit from the  economies  of scale  inherent in the
business.  HomeSide  services  substantially  all of the mortgage  loans that it
originates. In addition, HomeSide purchases the rights to service mortgage loans
originated by other lenders.

     HomeSide's  servicing  strategy is also to enhance the profitability of its
servicing activities through low cost and efficient processes.  This strategy is
pursued through highly automated,  cost effective processing systems,  strategic
outsourcing   of  selected   servicing   functions  and  effective   control  of
delinquencies  and  foreclosures.  HomeSide  outsources  to third party  vendors
functions relating to insurance,  taxes and default management,  contributing to
HomeSide's ability to maintain a highly variable cost structure. Using a variety
of factors,  including  loans  serviced  per  employee and direct cost per loan,
management  believes  that  HomeSide  is  one  of the  nation's  most  efficient
servicers  based on  industry  surveys.  Management  believes  that its low cost
servicing provides it with a competitive advantage in the industry.


<PAGE>


Servicing Portfolio Composition

     HomeSide  originates  and  purchases  servicing  rights for mortgage  loans
nationwide.  The broad geographic distribution of HomeSide's servicing portfolio
reflects  the  national  scope of  HomeSide's  originations  and bulk  servicing
acquisitions.  Nine  states  accounted  for  59.9%  of  the  outstanding  unpaid
principal  balance  ("UPB") of HomeSide's  total  servicing  portfolio,  and the
largest volume by state is California  with a 14.1% share of the total portfolio
on September 30, 1998. Nine states accounted for 64.5% of the outstanding unpaid
principal  balance ("UPB") of HomeSide's  total servicing  portfolio on February
10,  1998,  while the largest  volume by state was Florida with a 17.2% share of
the total  portfolio.  Nine states accounted for 66.9% of the outstanding UPB of
HomeSide's  total  servicing  portfolio on February 28, 1997,  while the largest
volume by state was Florida with a 18.7% share of the total portfolio.  HomeSide
actively  monitors the  geographic  distribution  of its servicing  portfolio to
maintain a mix that it deems  appropriate and makes  adjustments as it considers
necessary.

     The following table sets forth the geographic distribution of the Company's
servicing portfolio as of September 30, 1998, February 10, 1998 and February 28,
1997:

<TABLE>
<CAPTION>
                        SERVICING PORTFOLIO BY STATE (a)

                                                     HOMESIDE                 HOMESIDE
                                                   PREDECESSOR               PREDECESSOR
                       AT SEPTEMBER 30, 1998   AT FEBRUARY 10, 1998      AT FEBRUARY 28, 1997
                       ---------------------   --------------------      --------------------
                        UPB       % OF UPB      UPB       % OF UPB        UPB        % OF UPB
                        ---       --------      ---       --------        ---        --------
(DOLLARS IN MILLIONS)
<S>                  <C>          <C>         <C>           <C>         <C>            <C>

   California        $15,859       14.1%      $14,858       15.3%       $13,686        15.4%
   Florida            15,750       14.0        16,664       17.2         16,559        18.7
   Texas               7,772        6.9         6,096        6.3          5,434         6.1
   Massachusetts       6,190        5.5         6,792        7.0          7,383         8.4
   Illinois            5,544        4.9         3,729        3.8          2,913         3.3
   Maryland            4,498        4.0         4,424        4.6          4,079         4.6
   Arizona             4,405        3.9         (b)          (b)          (b)           (b)
   Colorado            3,716        3.3         (b)          (b)          (b)           (b)
   Georgia             3,676        3.3         3,720        3.8          3,427         3.9
   Ohio                3,519        3.1         (b)          (b)          (b)           (b)
   Virginia            3,504        3.1         3,377        3.5          3,218         3.6
   New York            3,144        2.8         2,939        3.0          2,517         2.9
   Other (b)          34,832       31.1        34,327       35.5         29,244        33.1
                  ============ =========== ============ ============ ============= ============
   Total          $  112,409      100.0%      $96,926       100.0%      $88,460       100.0%
                  ============ =========== ============ ============ ============= ============
</TABLE>

     (a)  Servicing  statistics  are based on loans  serviced  by  HomeSide  and
exclude loans purchased but not yet on the servicing system.

      (b) No other  state  represents  more  than 2.8% of  HomeSide's  servicing
portfolio.

Servicing Portfolio by Loan Type

        At September 30, 1998, HomeSide's servicing portfolio consisted of $47.5
billion of FHA/VA  servicing and $67.4  billion of  conventional  servicing.  At
February 10, 1998,  HomeSide's servicing portfolio consisted of $46.4 billion of
FHA/VA  servicing and $52.5 billion of conventional  servicing.  At February 28,
1997,  HomeSide's  servicing  portfolio  consisted  of $29.4  billion  of FHA/VA
servicing and $59.0 billion of conventional servicing.

     The weighted average interest rate of the loans in the Company's  servicing
portfolio was 7.72% at September 30, 1998,  7.85% at February 10, 1998 and 7.92%
at February 28, 1997.  HomeSide's servicing portfolio of loans was stratified by
interest rate as follows:


<PAGE>

<TABLE>
<CAPTION>
                    SERVICING PORTFOLIO BY INTEREST RATE (a)

                                                HOMESIDE,  PREDECESSOR         HOMESIDE PREDECESSOR
                    AT SEPTEMBER 30, 1998          AT FEBRUARY 10, 1998          AT FEBRUARY 28,1997
               ------------------------------  ----------------------------  --------------------------
                  UPB                          UPB                           UPB                   
                (DOLLARS IN  % OF  CUMULATIVE (DOLLARS IN  % OF  CUMULATIVE  (DOLLARS IN  % OF  CUMULATIVE
INTEREST RATE    MILLIONS)    UPB    % OF UPB  MILLIONS)   UPB    % OF UPB    MILLIONS)   UPB    % OF UPB
-------------  ------------  ----  ----------  ----------  ----  ----------  -----------  ----  ----------
<S>            <C>           <C>   <C>         <C>         <C>   <C>         <C>          <C>   <C>
                 
Less than 6.0%     1,113      1.0%    1.0%         $922     0.9%     0.9%         $983     1.1%    1.1%
6.0% to 6.9%      13,491     12.0    13.0        10,851    11.2     12.1         9,633    10.9    12.0 
7.0% to 7.9%      56,217     50.0    63.0        41,895    43.2     55.3        37,542    42.4    54.4
8.0% to 8.9%      33,012     29.4    92.4        34,076    35.2     90.5        29,293    33.1    87.5
9.0% to 9.9%       5,907      5.2    97.6         6,331     6.5     97.0         7,274     8.2    95.7
10.0% to 10.9%     2,081      1.8    99.4         2,227     2.3     99.3         2,912     3.3    99.0
Over 11.0%           588      0.6   100.0           624     0.7    100.0           823     1.0   100.0
-------------  ------------ -----              ---------- -----              ----------- ----- 
Total           $112,409    100.0%              $96,926   100.0%               $88,460   100.0%
=============  ============ =====              ========== =====              =========== =====                                
</TABLE>

(a)  Servicing  statistics  are based on loans  serviced by HomeSide and exclude
     loans purchased not yet on servicing system.

Loan Servicing Portfolio Delinquencies, Foreclosures and Losses

     HomeSide is affected by loan  delinquencies  and  defaults on loans that it
services. Under certain types of servicing contracts,  particularly contracts to
service loans that have been pooled or securitized, HomeSide must forward all or
part of the scheduled payments to the owner of the loan, even when loan payments
are delinquent. Also, to protect their liens on mortgaged properties,  owners of
loans  usually  require a servicer  to  advance  scheduled  mortgage  and hazard
insurance and tax payments even if  sufficient  escrow funds are not  available.
HomeSide is generally reimbursed, subject to certain limitations with respect to
FHA/VA  loans as described  below,  by the  mortgage  owner or from  liquidation
proceeds for payments  advanced  that the servicer is unable to recover from the
mortgagor, although the timing of such reimbursements is typically uncertain. In
the interim,  HomeSide  absorbs the cost of funds  advanced  during the time the
advance  is  outstanding.   Further,  HomeSide  bears  the  increased  costs  of
collection  activities on delinquent and defaulted loans. HomeSide also foregoes
servicing income from the time such loans become  delinquent until  foreclosure,
when,  if any  proceeds  are  available,  HomeSide  may  recover  such  amounts.
Delinquency  rates  typically rise in the winter months,  which result in higher
servicing  costs.   However,   the  late  payment  fees  collected  income  have
historically been sufficient to offset such incremental expenses.

     HomeSide  periodically  incurs losses  attributable to servicing FHA and VA
loans for investors, including actual losses for final disposition of loans that
have been  foreclosed or assigned to the FHA or VA and accrued  interest on such
FHA or VA loans for which payment has not been  received.  The VA guarantees the
initial losses on a loan. The guaranteed amount generally ranges from 20% to 35%
of  the  original  principal  balance.  Before  each  foreclosure  sale,  the VA
determines  whether to bid by comparing  the  estimated net sale proceeds to the
outstanding principal balance and the servicer's accumulated  reimbursable costs
and fees.  If this amount is a loss and exceeds the  guaranteed  amount,  the VA
typically issues a no-bid and pays the servicer the guaranteed amount.  Whenever
a no-bid is issued,  the servicer absorbs the loss, if any, in excess of the sum
of the  guaranteed  principal  and amounts  recovered at the  foreclosure  sale.
HomeSide's  historical  delinquency and foreclosure  rate experience on VA loans
has generally been consistent with that of the industry.

     For   HomeSide,    servicing   losses   on    investor-owned    loans   and
foreclosure-related expenses, primarily representing losses on VA loans, totaled
$21.2  million for the period  February  11, 1998 to September  30, 1998,  $22.0
million for the HomeSide  predecessor  period March 1, 1997 to February 10, 1998
and $17.9  million for the  HomeSide  predecessor  period from March 16, 1996 to
February  28,  1997.  The  increases,  on  an  annualized  basis,  were  largely
attributable to the growth of the servicing portfolio and increased  foreclosure
losses,  which may  continue  at this  level as the  servicing  portfolio  ages.
Management  believes  that it has an  adequate  level of reserve  for  servicing
losses on investor-owned loans based on HomeSide's  servicing volume,  portfolio
composition,  credit  quality and  historical  loss rates,  as well as estimated
future losses.  Servicing losses are generally  greatest during the three to six
year age of the loan.

The  following   table  sets  forth   HomeSide's   delinquency  and  foreclosure
experience:


<PAGE>

                        SERVICING PORTFOLIO DELINQUENCIES
                             (PERCENT BY LOAN COUNT)

                                                                     
                                                  HOMESIDE        HOMESIDE 
                                                PREDECESSOR      PREDECESSOR    
                              AT SEPTEMBER 30,  AT FEBRUARY 10,  AT FEBRUARY 28,
                                    1998            1998             1997   
                              ----------------  ---------------  ---------------
Delinquent Mortgage Loans
 (at end of period)

30 Days                            3.72%              3.52%            3.27%
60 Days                            0.81               0.78             0.69
90 Days                            0.65               0.72             0.54
                              ----------------  ---------------  ---------------
   Total Delinquencies             5.18%              5.02%            4.50%
                              ================  ===============  ===============
Foreclosure Pending (at end
     of period)                    0.70%              0.74%            0.72%

Servicing Portfolio Hedging Program

     The value of HomeSide's servicing portfolio is subject to volatility in the
event of  unanticipated  changes in  prepayments.  As interest  rates  increase,
prepayments  by  mortgagors  decrease  as  fewer  owners  refinance,  increasing
expected future cash flows from servicing revenue. Conversely, as interest rates
decrease,  prepayments  by mortgagors  increase as homeowners  seek to refinance
their mortgages,  reducing expected future cash flows from servicing revenues on
those prepaid mortgages. Since the value of servicing rights is based on the net
present value of future cash flows,  the value of the  portfolio  decreases in a
declining interest rate environment and increases in a rising rate environment.

     HomeSide's risk management  policy is designed to minimize exposure to loss
in the value of the servicing portfolio caused by prepayments due to declines in
interest rates. The servicing  portfolio is valued using sophisticated cash flow
valuation tools.  Key assumptions  involved in the valuation  include  servicing
costs and revenues,  market  discount rates,  prepayment  speeds and a number of
other  variables.  The  value  is then  analyzed  under  various  interest  rate
scenarios that help HomeSide  estimate its exposure to loss. This potential loss
exposure  determines  the hedge  profile,  which is  monitored  daily and may be
adjusted to reflect significant moves in key variables such as interest rate and
yield curve changes and revised  prepayment  speed  assumptions.  Results of the
risk  management  program  depend on a variety of factors,  including  the hedge
instruments typically used by HomeSide,  the relationship between mortgage rates
and Treasury securities and certain other factors. See "Management's  Discussion
and Analysis of Financial  Condition and Results of Operations - Risk Management
Activities"  for the period from  February 11, 1998 to September  30, 1998,  the
HomeSide  predecessor  period  from March 1, 1997 to  February  10, 1998 and the
HomeSide predecessor period from March 16, 1996 to February 28, 1997.

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Statement No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities."  This  statement   standardizes  the  accounting  for
derivative  instruments  and  hedging  activities  by  requiring  that an entity
recognize  those items as assets or  liabilities  in the  statement of financial
position  and  measure  them at fair  value.  If certain  conditions  are met, a
derivative  instrument  may be  specifically  designated  as (a) a hedge  of the
exposure to changes in the fair value of a recognized asset or liability,  or of
an unrecognized  firm commitment,  (b) a hedge of the exposure to variability in
the cash flows of recognized assets,  liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment,  an
available-for-sale  security, a forecasted  transaction or a net investment in a
foreign  operation.  This statement is effective for fiscal  quarters  beginning
after  June 15,  1999.  Management  has not yet  determined  the  impact of this
statement on the presentation of the financial  statements of HomeSide or on the
nature of its hedging program.

Servicing Technology

      HomeSide's proprietary servicing technology accommodates all areas of loan
servicing,   including   loan   setup  and   maintenance,   cashiering,   escrow
administration,  investor  accounting,  customer service and default management.
The platform is mainframe  based,  with on-line,  real-time  architecture and is
supported by an experienced staff of over 30 technology providers.

      HomeSide expects to achieve significant  competitive  advantages over time
through the use of its proprietary  servicing  software.  At September 30, 1998,
HomeSide has  substantially  completed the conversion of its mortgage  servicing
portfolio to its proprietary  servicing software and services  approximately 1.4
million loans on the system. This architecture will support HomeSide's portfolio
growth up to  approximately  twice the number of loans  typically  serviced on a
single system. The system will also permit continued development of workflow and
other client-server applications, contributing to increased productivity.

Regulation

     As a United States  subsidiary  of a foreign  bank,  HomeSide is subject to
regulation,  supervision and examination by the Federal Reserve Bank. HomeSide's
mortgage  banking  business is also subject to the rules and  regulations of the
U.S.  Department of Housing and Urban Development  ("HUD"),  the Federal Housing
Administration ("FHA"), the Veterans Administration ("VA"), the Federal National
Mortgage  Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), the Government National Mortgage Association ("GNMA"
or "Ginnie  Mae") and other  regulatory  agencies  with respect to  originating,
processing, underwriting, selling, securitizing and servicing mortgage loans. In
addition,  there are other federal and state statutes and regulations  affecting
such  activities.  These  rules and  regulations,  among  other  things,  impose
licensing  obligations  on  HomeSide,   prohibit  discrimination  and  establish
underwriting guidelines which include provisions for inspections and appraisals,
require credit  reports on  prospective  borrowers and set maximum loan amounts.
Moreover,  lenders  such as HomeSide  are  required  annually to submit  audited
financial  statements to Fannie Mae, FHLMC, GNMA and HUD and to comply with each
regulatory  entity's own  financial  requirements.  HomeSide's  business is also
subject  to  examination  by Fannie  Mae,  FHLMC  and GNMA and state  regulatory
agencies at all times to assure compliance with applicable regulations, policies
and procedures.

     Mortgage  origination  activities  are subject to the provisions of various
federal and state statutes including, among others, the Equal Credit Opportunity
Act,  the Federal  Truth-in  Lending Act,  RESPA,  the Fair Housing Act, and the
regulations  promulgated  thereunder,  which  among other  provisions,  prohibit
discrimination,  prohibit  unfair and deceptive  trade practices and require the
disclosure of certain basic  information to mortgagors  concerning  credit terms
and settlement costs, limit fees and charges paid by borrowers and lenders,  and
otherwise  regulate  terms and  conditions of credit and the procedures by which
credit  is  offered  and  administered.  Many of the  aforementioned  regulatory
requirements  are designed to protect the interests of  consumers,  while others
protect the owners or insurers of mortgage  loans.  Failure to comply with these
requirements  can lead to loss of  approved  status,  termination  of  servicing
contracts without compensation to the servicers,  demands for indemnification or
loan repurchases,  class action lawsuits and administrative enforcement actions.
Such regulatory  requirements are subject to change from time to time and may in
the future become more restrictive,  thereby making compliance more difficult or
expensive or otherwise restricting HomeSide's ability to conduct its business as
it is now conducted.

     During  the  period  that  the  National,  BKB,  Barnett  or any  of  their
subsidiaries held a material  ownership  interest in HomeSide,  HomeSide and its
subsidiaries  (i)  were  under  the  jurisdiction,  supervision,  and  examining
authority of the Office of the  Comptroller  of the Currency  ("OCC"),  and (ii)
could  only  engage in  activities  that were part of,  or  incidental  to,  the
business of banking.  The OCC has specifically  ruled that mortgage banking is a
proper incident to the business of banking.

     There are  various  other  state and local laws and  regulations  affecting
HomeSide's  operations.  HomeSide  is  licensed  in those  states  that  require
licensing to originate,  purchase and/or service  mortgage  loans.  Conventional
mortgage  operations  may also be subject to state  usury  statutes.  FHA and VA
loans are exempt from the effect of such statutes.

Competition

     Mortgage bankers operate in a highly  competitive and fragmented market. As
of September 30, 1998, the largest  originator of loans  represented 7.4% of the
market and the largest servicer  represented  5.7%, while the top 30 originators
and servicers represented 56% and 52% of their markets,  respectively,  based on
data published by Inside Mortgage Finance.

<TABLE>
<CAPTION>
                            TOP 10 ORIGINATORS AND SERVICERS (DOLLARS IN BILLIONS)

9 MONTHS - 1998 ORIGINATIONS                        SERVICING PORTFOLIO AT SEPTEMBER 30, 1998
<S>                                       <C>        <C>                                       <C>   
 1  Norwest Mortgage, IA                  $74.8      1  Bank of America Mtg. & Affiliates, CA  $241.9
 2  Countrywide Credit Services, CA        61.4      2  Norwest Mortgage, IA                    232.7
 3  Chase Manhattan & Affiliates, NJ       54.3      3  Countrywide Credit Services, CA         194.6
 4  Bank of America Mtg. & Affiliates, NC  53.4      4  Chase Manhattan & Affiliates, NJ        183.7
 5  Fleet Mortgage Group, SC               24.7      5  Fleet Mortgage Group, SC                118.2
 6  Washington Mutual, WA                  24.7      6  HomeSide Lending, Inc., FL              115.8
 7  Dime/North American Mortgage Co., CA   21.1      7  Washington Mutual, WA                    92.6
 8  ABN AMRO Mortgage Group, IL            20.4      8  GE Capital Mortgage Svcs Inc., NJ        92.6
 9  HomeSide Lending, Inc., FL             19.3      9  First Nationwide Mortgage, CA            89.1
10 Cendant Mortgage Services, NJ           18.2     10 GMAC Mortgage Corp., PA                   88.0
Source:  Inside Mortgage Finance.
</TABLE>

      HomeSide competes with other mortgage bankers, financial institutions, and
other providers of financial services. The underwriting guidelines and servicing
requirements set by the participants in the secondary  markets are standardized.
As a result,  mortgage banking products (i.e.,  mortgage loans and the servicing
of those loans) have become  difficult  to  differentiate.  Therefore,  mortgage
bankers  compete  primarily on the basis of price or service,  making  effective
cost management essential.

     Mortgage bankers  generally seek to develop cost efficiencies in one of two
ways:  economies  of scale or  specialization.  Large  full-service  national or
regional  mortgage bankers have sought economies of scale through an emphasis on
wholesale  originations,  the introduction of automated  processing  systems and
expansion through acquisition.  Smaller companies frequently identify and pursue
a particular expertise or customer base in an attempt to create a market niche.

     The industry has experienced rapid consolidation which has been accelerated
by the introduction of significant technology  improvements and the economies of
scale  present in  mortgage  servicing.  The  automation  of many  functions  in
mortgage  banking,  especially  those  related to  servicing,  has reduced costs
significantly for industry participants. Many mortgage bankers that were not low
cost, high volume producers or did not operate in a low cost  specialized  field
experienced earnings declines in the nineties, causing many to exit the business
or to be acquired. Surviving cost effective firms purchased servicing portfolios
or other  companies to expand their servicing  economies of scale,  while others
acquired market niche operations. As evidence of this consolidation,  the top 25
mortgage loan servicers have increased their  aggregate  market share from 16.6%
in 1990 to 49.6% as of September 30, 1998.

Employees

     As of  September  30,  1998,  February  10,  1998 and  February  28,  1997,
respectively,  HomeSide had  approximately  2,356 total  employees,  1,891 total
employees and 1,689 total  employees,  substantially  all of who were  full-time
employees.  HomeSide has no unionized  employees and considers its  relationship
with its employees generally to be satisfactory.

ITEM 2.  PROPERTIES

     HomeSide's  corporate,   administrative,  and  servicing  headquarters  are
located in Jacksonville,  Florida, in facilities,  which comprise  approximately
145,000  square feet of owned  space and  approximately  189,000  square feet of
leased  space.  The  servicing  center  lease  expires on August 31, 1999 unless
HomeSide  exercises  its options to renew,  which could  extend the lease for an
additional six years.  HomeSide also leases approximately 104,000 square feet of
warehouse space in  Jacksonville,  Florida for storing certain loan files,  loan
servicing  documents and other corporate  records.  In addition HomeSide owns an
additional  190,000 square feet of space in San Antonio,  Texas.  On December 4,
1998, HomeSide entered into a long-term lease for a 137,000 square foot building
to be constructed  adjacent to its Jacksonville  headquarters.  The new building
should be ready for  occupancy by September  1999.  HomeSide  believes  that its
present facilities are adequate for its operations.

ITEM 3.  LEGAL PROCEEDINGS

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

     In recent years,  the mortgage  banking  industry has been subject to class
action  lawsuits  which  allege   violations  of  federal  and  state  laws  and
regulations,  including the propriety of collecting  and paying various fees and
charges.  Class action  lawsuits may be filed in the future against the mortgage
banking industry.

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

     None.

                                     PART II

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

            MATTERS

     As a consequence  of the merger with the  National,  there is no market for
the Parent's  common  equity.  The Parent is a  wholly-owned  subsidiary  of the
National.


<PAGE>


                                     PART II

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

The selected  consolidated  financial and operating  information of HomeSide set
forth below is for the periods from February 11, 1998 to September 30, 1998, and
the  HomeSide  predecessor  period from March 1, 1997 to  February  10, 1998 and
March 16, 1996 to February 28, 1997 should be read in  conjunction  with, and is
qualified in its entirety by reference to, the Consolidated Financial Statements
and the notes  thereto and in  conjunction  with  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations" of HomeSide included
elsewhere in this document. The periods presented coincide with the commencement
of operations of HomeSide and the  acquisition  of HomeSide by the National (see
Note 2 of the Consolidated Financial Statements):

<TABLE>
<CAPTION>
                                                                            HOMESIDE             HOMESIDE
(DOLLAR AMOUNTS IN THOUSANDS,                                              PREDECESSOR         PREDECESSOR
 EXCEPT  SHARE DATA)                              FOR THE PERIOD         FOR THE PERIOD      FOR THE PERIOD
                                                FEBRUARY 11, 1998 TO    MARCH 1, 1997 TO     MARCH 16, 1996 TO
                                                 SEPTEMBER 30, 1998     FEBRUARY 10, 1998    FEBRUARY 28, 1997
                                                --------------------    -----------------    -----------------
<S>                                             <C>                     <C>                  <C>
SELECTED STATEMENT OF EARNINGS DATA:            
Revenues:                                       
  Mortgage servicing fees                            $  312,678          $   393,292           $   308,906
    Amortization of mortgage servicing rights          (189,881)            (207,508)             (153,694)
                                                --------------------    -----------------    ------------------
       Net servicing revenue                            122,797              185,784               155,212 
    Interest income                                      99,749               97,050                81,507 
    Interest expense                                    (62,476)             (81,770)              (66,833)
                                                --------------------    -----------------    ------------------
      Net interest revenue                               37,273               15,280                14,674 
    Net mortgage origination revenue                     79,179               85,206                66,073 
    Other income                                         11,028                1,671                   682 
                                                --------------------    -----------------    ------------------
       Total revenues                                   250,277              287,941               236,641
                                                                                   
Expenses:                                                                                            
  Salaries and employee benefits                         73,983               75,419                72,976  
  Occupancy and equipment                                13,107               15,447                11,770  
  Servicing losses on investor-owned loans               21,202               21,974                17,934  
  Goodwill amortization                                  22,283                  592                   150  
  Other  expenses                                        39,156               37,639                40,616  
                                                --------------------    -----------------    ------------------  
          Total expenses                                169,731              151,071               143,446
Income before income taxes                               80,541              136,870                93,195
Income tax expense                                       40,101               53,379                37,278 
                                                --------------------    -----------------    ------------------   
     Net income                                      $   40,440          $    83,491           $    55,917    
                                                ====================    =================    ==================   
SELECTED BALANCE SHEET DATA AT END OF PERIOD:          
Mortgage loans held for sale                        $ 2,048,989         $  1,292,403           $   805,274
Mortgage servicing rights                             1,766,214            1,766,357             1,596,838 
Total assets                                          5,720,155            3,859,291             2,717,321  
Bank credit facility                                  2,749,000            2,074,956             1,818,503 
Long-term debt                                        1,185,926              770,466                21,128 
Total liabilities                                     4,364,647            3,178,468             2,105,277 
Total stockholders' equity                            1,355,508              680,823               612,044 
                                                 ===================    =================    =================
SELECTED OPERATING DATA:                                                                             
Volume of loan production                         $  16,826,364         $ 20,529,530          $ 20,877,535 
Loan servicing portfolio (at period end)            114,902,121           98,906,102            89,217,846 
Loan servicing portfolio (average                                                           
  outstanding during the period)                    106,857,298           94,963,812            74,677,171
Weighted average interest rate of the                                                                    
  servicing portfolio (at period end)                  7.72%                 7.85%                 7.92%  
Weighted average servicing fee of the                                                                 
  Servicing portfolio, including                                                             
  ancillary income (for the period)                   0.469%                0.438%                0.432%      
</TABLE>


<PAGE>



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

  HOMESIDE - FOR THE PERIOD FROM FEBRUARY 11, 1998 TO SEPTEMBER 30, 1998, THE
  HOMESIDE PREDECESSOR PERIOD FROM MARCH 1, 1997 TO FEBRUARY 10, 1998 AND THE
      HOMESIDE PREDECESSOR PERIOD FROM MARCH 16, 1996 TO FEBRUARY 28, 1997

                                     General

     HomeSide Lending,  Inc. (the "Company" or "HomeSide") is one of the largest
full  service  residential  mortgage  banking  companies  in the United  States.
HomeSide's   predecessor   ("HomeSide   Predecessor")  was  formed  through  the
acquisition  of the mortgage  banking  operations  of  BankBoston,  N.A.  ("BBMC
Predecessor"  to  HomeSide  Predecessor)  on March  16,  1996  and  subsequently
purchased  the  mortgage  banking  operations  of  Barnett  Banks,  Inc.  Unless
otherwise designated,  the term "HomeSide" refers to the Company for the periods
subsequent  to February 10, 1998, to HomeSide  Predecessor  for the periods from
March 16, 1996 to February 10, 1998 and to BBMC Predecessor for periods prior to
March 16, 1998.

     On February  10, 1998,  National  Australia  Bank,  Ltd.  (the  "National")
acquired all outstanding  shares of the common stock of HomeSide  International,
Inc. (the "Parent").  As consideration,  the National paid $27.825 per share for
all of the  outstanding  common  stock and  $17.7  million  cash to  retire  all
outstanding  stock  options.  The total purchase  price was  approximately  $1.2
billion.  The  transaction  was  accounted for as a purchase.  As a result,  all
assets and  liabilities  were recorded at their fair value on February 11, 1998,
and the  purchase  price in excess of the fair value of net assets  acquired  of
$716.4  million was recorded as goodwill.  Following the  transaction  described
above,  the National  owns 100% of the Parent's  common stock and the Parent has
become an indirect  wholly-owned  subsidiary of the  National.  The Company also
adopted a fiscal year end of  September  30 to conform to the fiscal year of the
National.

     HomeSide's  strategy  emphasizes  variable cost mortgage loan originations,
low cost mortgage  servicing and effective  risk  management.  Headquartered  in
Jacksonville,   Florida,  HomeSide  ranks  as  the  9th  largest  mortgage  loan
originator  and the 6th largest  servicer in the United  States at September 30,
1998 based on data published by Inside Mortgage Finance.

     The  following  periods   presented   coincide  with  the  commencement  of
operations of HomeSide and the acquisition of HomeSide by the National (see Note
2 of the Consolidated  Financial  Statements).  HomeSide's operating results are
not directly  comparable to its  historical  operating  results due, in part, to
different  balance  sheet  valuations  (estimated  fair  value  as  compared  to
historical cost).

Forward-Looking Statements

     The  Private  Securities  Litigation  Reform  Act of 1995  provides a "safe
harbor"   for  certain   forward-looking   statements.   This  report   contains
forward-looking  statements,  which  reflect the  Company's  current  views with
respect  to future  events  and  financial  performance.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  below,  which could cause actual results to differ  materially  from
historical  results  or  those  anticipated.   The  words  "believe,"  "expect,"
"anticipate," "intend," "estimate" and other expressions,  which indicate future
events and trends, identify forward-looking  statements,  which speak only as of
their dates.  The Company  undertakes no obligation to publicly update or revise
any  forward-looking  statements whether as a result of new information,  future
events or otherwise.  The following factors could cause actual results to differ
materially  from  historical  results or those  anticipated:  (1) the  Company's
ability to grow which is dependent on its ability to obtain additional financing
in the future for originating  loans,  investment in servicing  rights,  working
capital,  capital  expenditures  and general  corporate  purposes,  (2) economic
factors may negatively  affect the Company's  profitability  as the frequency of
loan default tends to increase in such  environments and (3) changes in interest
rates may affect the volume of loan originations and acquisitions,  the interest
rate  spread on loans  held for sale,  the amount of gain or loss on the sale of
loans  and the  value of the  Company's  servicing  portfolio.  These  risks and
uncertainties  are  more  fully  detailed  in the  Company's  filings  with  the
Securities and Exchange Commission.

Mortgage Banking

      Mortgage  banking  is a  specialized  branch  of  the  financial  services
industry which primarily involves (i) originating and purchasing  mortgage loans
("origination"  and/or  "production");  (ii) selling the originated mortgages to
third parties either as mortgage-backed securities or as whole loans ("secondary
marketing");  (iii)  servicing  of  mortgage  loans on  behalf  of the  ultimate
purchasers,  which  includes  the  collection  and  disbursement  of payments of
mortgage  principal  and  interest,  the  collection  of  payments  of taxes and
insurance  premiums to pay property taxes and insurance  premiums and management
of certain loan default activities  (collectively,  "servicing");  and (iv) risk
management,  a program primarily designed to protect the economic performance of
the servicing  portfolio that could otherwise be adversely affected by increased
loan prepayments due to declines in interest rates.

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

     Mortgage  bankers rely mainly on short-term  borrowings,  such as warehouse
lines, to finance the origination of mortgages that are sold.  Mortgage  bankers
also borrow on a longer term basis to finance their servicing assets and working
capital  requirements.  Revenues consist primarily of those related to servicing
and, to a lesser extent, fees and interest spreads from originations.  The major
expenses  of a mortgage  banker  include  costs of  financing,  operating  costs
related to origination and servicing and the amortization of mortgage  servicing
rights.

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

     HomeSide plans to build its core operations  through (i) improved economies
of scale in servicing  costs;  (ii)  increased  productivity  using  proprietary
technology;  and  (iii)  expanded  and  diversified  variable  cost  origination
channels.  In addition,  HomeSide  intends to pursue  additional  loan portfolio
acquisitions and strategic origination relationships.

Loan Production Activities

     As a  multi-channel  loan  production  lender,  HomeSide  has  one  of  the
industry's largest correspondent lending production  operations,  a full-service
brokered  loan  program and a national  production  center for  consumer  direct
mortgage  lending.  By  focusing on  production  channels  with a variable  cost
structure,  HomeSide  eliminates  the fixed costs  associated  with  traditional
mortgage branch offices.  Without the burden of high fixed cost loan origination
networks,  HomeSide  is  positioned  to  weather  a  variety  of  interest  rate
environments.  For the nine months ended September 30, 1998, HomeSide was ranked
the ninth largest originator in the United States,  according to Inside Mortgage
Finance,  with  approximately  2% market share of the  estimated  $1.0  trillion
single-family mortgage origination market.

     The following information regarding loan production activities for HomeSide
is presented to aid in  understanding  the results of  operations  and financial
condition  of HomeSide for the period from  February  11, 1998 to September  30,
1998,  and the HomeSide  predecessor  periods March 1, 1997 to February 10, 1998
and March 16, 1996 to February 28, 1997 (in millions):

                                           HOMESIDE               HOMESIDE  
                 FOR THE PERIOD FROM      PREDECESSOR            PREDECESSOR    
                  FEBRUARY 11, 1998    FOR THE PERIOD FROM   FOR THE PERIOD FROM
                         TO             MARCH 1, 1997 TO      MARCH 16, 1996 TO 
                 SEPTEMBER 30, 1998    FEBRUARY 10, 1998      FEBRUARY 28, 1997 
                 -------------------   -------------------   -------------------
Wholesale:                                                                      
                                                                                
  Correspondent          $11,309              $13,304              $11,113      
  Co-issue (a)             2,906                5,584                8,222      
  Broker                   1,980                1,305                  843      
                         -------              -------              -------      
    Total wholesale       16,195               20,193               20,178      
Direct                       631                  337                  700      
                         -------              -------              -------      
   Total production       16,826               20,530               20,878      
Bulk acquisitions (b)     18,947                3,446                4,073      
                         -------              -------              -------      
   Total production and                                                         
          acquisitions   $35,773              $23,976              $24,951      
                         =======              =======              =======      
                                                                                
(a)  Represents the acquisition of servicing  rights,  not the underlying loans.
     Amounts  represent the unpaid  principal  balance of mortgage debt to which
     the acquired servicing rights relate.
                                                                                
(b)  Represents  the  acquisition  of servicing  rights from  another  servicer.
     Amounts  represent the unpaid  principal  balance of mortgage debt to which
     the acquired servicing rights relate.

     Total loan production,  excluding bulk acquisitions,  was $16.8 billion for
the period from  February  11,  1998 to  September  30,  1998  compared to $20.5
billion for the HomeSide  predecessor  period from March 1, 1997 to February 10,
1998, a 21% increase on an annualized basis.  HomeSide's  correspondent  lending
and broker channels were the primary contributors to production volume increases
on an annualized basis. On June 5, 1998, HomeSide completed the addition of Banc
One as a  Preferred  Partner.  As a  Preferred  Partner,  Banc One  will  sell a
significant portion of the residential  mortgage loans it originates to HomeSide
over the next five years.  During the period from February 11, 1998 to September
30, 1998,  HomeSide also  purchased the operations of  NationsBank's  subsidiary
Loan America,  a national  broker  network.  This  purchase  will  contribute to
HomeSide's  expansion of its broker network, a production channel that is key to
HomeSide's variable cost origination strategy. Total loan production,  excluding
bulk  acquisitions,  of $20.5 billion for the HomeSide  predecessor  period from
March 1,  1997 to  February  10,  1998  was  relatively  equal  to the  HomeSide
predecessor period from March 16, 1996 to February 28, 1997.

      The interest rate environment has  significantly  affected the size of the
mortgage origination market. When interest rates decline,  increasing numbers of
mortgagees  refinance their loans. As a result, the mortgage  origination market
grows. The estimated  mortgage  origination  market for the year ending December
31,  1998 is $1.4  trillion  (estimated),  compared  to $0.8  trillion  and $0.8
trillion  for the years  ended  December  31, 1997 and 1996,  respectively.  The
percentage of refinance  volume is 50% (estimated) , 31% and 29% , respectively,
for the years ending December 31, 1998, 1997 and 1996.

      During  this  period of high  refinances,  HomeSide  has  strived  to keep
production at a level which is sustainable should the market size return to 1997
and 1996 volumes.  To maintain and increase the servicing  portfolio size during
this period of relatively  high  portfolio  runoff,  HomeSide has emphasized its
acquisitions strategy.

      Bulk  servicing  acquisitions  totaled  $18.9  billion for the period from
February 11, 1998 to September 30, 1998 and included a $16.6  billion  servicing
portfolio purchase from Banc One. This purchase was a continuation of HomeSide's
targeted  approach  to grow the  servicing  portfolio.  HomeSide  also made bulk
servicing  acquisitions  of $3.4  billion and $4.1  billion  during the HomeSide
predecessor  periods  from March 1, 1997 to February 10, 1998 and March 16, 1996
to February 28, 1997, respectively.

      As  borrowers  took  advantage  of declining  interest  rates,  HomeSide's
percentage of loan  production  attributable  to refinances  totaled 57% for the
period from  February 11, 1998 to September  30,  1998.  The interest  rate that
prevailed  during the period from February 11, 1998 to September  30, 1998,  was
favorable for fixed rate mortgages,  which totaled 95% of total fundings for the
period.

     HomeSide  continues  to  examine  a number  of ways to  diversify  and grow
revenue sources from its existing and new customer base. As part of this effort,
HomeSide  formed an alliance with a subprime  lender,  which allows  HomeSide to
offer  additional  mortgage-related  products  to the  production  network.  The
subprime lending division,  HomeSide  Equities,  launched  operations in January
1998.

Servicing Portfolio

     Management  believes  that HomeSide is one of the most  efficient  mortgage
loan  servicers in the  industry  based on its  servicing  cost per loan and the
number of loans serviced per employee.  The servicing  operation makes extensive
use  of  state-of-the-art   technology,   process   re-engineering  and  expense
management. With a portfolio size of $114.9 billion, HomeSide services the loans
of  approximately  1.4 million  homeowners  from across the United States and is
committed to protecting  the value of this  important  asset by a  sophisticated
risk management  strategy.  HomeSide anticipates its low cost of servicing loans
will  continue  to maximize  the  bottom-line  impact of its  growing  servicing
portfolio.  HomeSide's  focus on  efficient  and low cost  processes  is pursued
through the selective use of automation as well as the strategic  outsourcing of
selected  servicing   functions  and  effective  control  of  delinquencies  and
foreclosures.  At  September  30, 1998,  HomeSide  was ranked the sixth  largest
servicer in the United States,  with  approximately  3% market share of the $4.2
trillion single family mortgages outstanding.

     The  following  information  on the  dollar  amounts of loans  serviced  is
presented  to aid in  understanding  the  results of  operations  and  financial
condition  of HomeSide for the period from  February  11, 1998 to September  30,
1998,  and the HomeSide  predecessor  periods from March 1, 1997 to February 10,
1998 and March 16, 1996 to February 28, 1997 (in millions):


<PAGE>

<TABLE>
<CAPTION>

                                                              HOMESIDE               HOMESIDE  
                                    FOR THE PERIOD FROM      PREDECESSOR            PREDECESSOR    
                                     FEBRUARY 11, 1998    FOR THE PERIOD FROM   FOR THE PERIOD FROM
                                            TO             MARCH 1, 1997 TO      MARCH 16, 1996 TO 
                                    SEPTEMBER 30, 1998    FEBRUARY 10, 1998      FEBRUARY 28, 1997 
                                    -------------------   -------------------   -------------------
<S>                                  <C>                  <C>                   <C>
                             
Balance at beginning of period            $98,906                $89,218              $41,844
Acquisition of Barnett Mortgage              
   Company                                   -                      -                  33,082                              
Other additions                            35,773                 23,976               25,252
                                    -------------------   -------------------   -------------------
     Total additions                       35,773                 23,976               58,334
                                    -------------------   -------------------   -------------------
Scheduled amortization                      1,747                  2,035                1,733
Prepayments                                16,809                 11,176                6,226            
Foreclosures                                  848                    682                  514 
Sales of servicing                            373                    395                2,487(a)
                                    -------------------   -------------------   -------------------
     Total reductions                      19,777                 14,288               10,960
                                    -------------------   -------------------   -------------------
Balance at end of period                 $114,902                $98,906              $89,218
                                    ===================   ===================   ===================
</TABLE>

(a)  Includes  $1.9  billion of  servicing  sold as part of the sale of Honolulu
     Mortgage Company.

     The number of loans serviced at September 30, 1998 was 1,394,286,  compared
to 1,167,210 at February 10, 1998 and 1,070,210 at February 28, 1997. HomeSide's
strategy  is to build its  mortgage  servicing  portfolio  by  concentrating  on
variable  cost  loan  origination  strategies,  and as a  result,  benefit  from
improved  economies  of  scale.  A  key  to  HomeSide's  future  growth  is  its
proprietary servicing software. This system allows HomeSide to double the number
of loans typically serviced on a single system. At September 30, 1998,  HomeSide
has  substantially  converted its loan  servicing  portfolio to its  proprietary
servicing software.

Results of  Operations  for the period from  February 11, 1998 to September  30,
1998 compared to the HomeSide  predecessor  period from March 1,1997 to February
10, 1998:

Summary

     HomeSide's net income, excluding goodwill amortization from the acquisition
of HomeSide  by the  National,  increased  15% on an  annualized  basis to $62.7
million for the period from  February 11, 1998 to September  30, 1998 from $83.5
for the  HomeSide  predecessor  period from March 1, 1997 to February  10, 1998.
Total  revenues  for the period from  February  11, 1998 to  September  30, 1998
increased 33%, on an annualized basis, to $250.3 million from $287.9 million for
the HomeSide  predecessor period from March 1, 1997 to February 10, 1998. Strong
production  volumes,  growth in fee income, and lower cost of funds were the key
contributors to HomeSide's  success.  The U.S. housing market was  exceptionally
strong  during the period from  February  11, 1998 to September  30, 1998,  with
record low  mortgage  rates and high  mortgage  pre-payment  activity.  HomeSide
acquired Banc One Mortgage's $16.6 billion servicing  portfolio on June 5, 1998.
This acquisition  increased  HomeSide's servicing portfolio by 15% on that date.
As part of the acquisition,  Banc One agreed to sell HomeSide the loans produced
by its loan  production  networks,  which  contributed  to the  increase  in net
mortgage  origination  revenue.  Net interest  revenue  increased as a result of
increases in average  interest-earning  assets and reduced  borrowing costs from
improved  credit ratings and the issuance of medium-term  notes.  Total expenses
increased,  on an  annualized  basis,  for the period from  February 11, 1998 to
September  30, 1998 from the period from March 1, 1997 to February 10, 1998 as a
result of increases in production  volume,  amortization  expense related to the
goodwill  associated with the merger with the National (see Note 1) and expenses
associated  with  the  growing  mortgage  servicing   portfolio  and  high  loan
pre-payment activity.

Net Servicing Revenue

     Net servicing  revenue was $122.8  million for the period from February 11,
1998 to  September  30,  1998  compared  to  $185.8  million  for  the  HomeSide
predecessor  period  from March 1, 1997 to  February  10,  1998.  Net  servicing
revenue is comprised of mortgage  servicing fees,  ancillary  servicing revenue,
and amortization of mortgage servicing rights expense.

     Mortgage  servicing fees increased 22%, on an annualized  basis,  to $312.7
million for the period from  February 11, 1998 to September 30, 1998 from $393.3
million  for the  HomeSide  predecessor  period  from March 1, 1997 to  February
10,1998,  primarily as a result of the Banc One Mortgage  acquisition and growth
of the  servicing  portfolio  through loan  production  channels.  The servicing
portfolio  increased to $114.9  billion at September  30, 1998 compared to $98.9
billion at  February  10,  1998,  due to  increased  production  volume and bulk
acquisitions,  partially offset by prepayments and scheduled  amortization.  The
prepayment rate of the servicing  portfolio was 25% for the period from February
11, 1998 to September  30, 1998,  up from 16% from the period from March 1, 1997
to February 10, 1998. The prepayment  rate is affected by the level of refinance
activity,  which is driven by the relative level of mortgage  interest rates and
activity in the home purchase market.  HomeSide's weighted average interest rate
of the mortgage loans in the servicing portfolio was 7.72% at September 30, 1998
and 7.85% at February 10, 1998. The weighted  average  servicing fee,  including
ancillary  income,  for the  servicing  portfolio was 0.469% for the period from
February 11, 1998 to September 30, 1998 and 0.438% for the HomeSide  predecessor
period from March 1, 1997 to February  10,  1998.  The  increase in the weighted
average  servicing  fee for the period from  February 11, 1998 to September  30,
1998 compared to the HomeSide  predecessor period from March 1, 1997 to February
10, 1998 was due to growth of ancillary revenues,  including late fees and other
mortgage-related products.

     Amortization  expense  increased  40%, on an  annualized  basis,  to $189.9
million for the period from  February 11, 1998 to September 30, 1998 from $207.5
million for the HomeSide  predecessor  period from March 1, 1997 to February 10,
1998,  as a result of the record low  interest  rate  environment.  Amortization
charges are highly dependent upon the level of prepayments during the period and
changes in prepayment  expectations,  which are significantly  influenced by the
direction and level of long-term interest rate movements. A decrease in mortgage
interest  rates  results  in  an  increase  in  prepayment   estimates  used  in
calculating periodic amortization expense. Because mortgage servicing rights are
amortized  over the  expected  period of service  fee  revenues,  an increase in
mortgage  prepayment  activity  typically results in a shorter estimated life of
the mortgage servicing assets and, accordingly, higher amortization expense.

Net Interest Revenue

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

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

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

     Net  interest  revenue  increased  to $37.3  million  for the  period  from
February  11, 1998 to  September  30, 1998 from $15.3  million for the  HomeSide
predecessor  period from March 1, 1997 to February  10, 1998,  primarily  due to
increases  in net  interest  earned on  mortgage  loans held for sale and escrow
deposits  partially  offset by increased  interest expense on borrowings to fund
the growing  mortgage  servicing  assets.  The average balance of mortgage loans
held for sale  increased as a result of increased  production,  on an annualized
basis,  during the period from  February  11, 1998 to September  30,  1998.  The
principal  balances of prepaid mortgage loans are accumulated in escrow accounts
before they are remitted to  investors.  During  periods of  declining  interest
rates,  prepayments,  escrow balances and the related earnings increase.  During
the period from February 11, 1998 to September 30, 1998, net interest income was
also positively affected by lower funding rates obtained through improved credit
ratings,  the issuance of  medium-term  notes and net  interest  income from the
early pool buyout  program.  On June 23, 1998,  HomeSide  established  a line of
credit with the National with a borrowing  rate of LIBOR.  HomeSide  issued $410
million of medium-term  notes to the public market at an average  borrowing cost
of 6.0%  during the period from  February  11,  1998 to  September  30, 1998 and
$750.0  million of  medium-term  notes issued with an average  borrowing cost of
6.251% as of February 10, 1998. The proceeds were used to pay down existing bank
debt, purchase the Banc One servicing portfolio,  and fund the early pool buyout
program.  The early pool buyout  program  involves  the  purchase of  delinquent
government loans from pools early in the foreclosure  process,  thereby reducing
the unreimbursed interest expense that HomeSide incurs.

Net Mortgage Origination Revenue

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

     Net  mortgage  origination  revenue  was $79.2  million for the period from
February  11,  1998 to  September  30, 1998  compared  to $85.2  million for the
HomeSide  predecessor  period from March 1, 1997 to  February  10,  1998,  a 43%
increase on an annualized basis.  Favorable results were largely attributable to
the declining  mortgage interest rates, which sparked  significant  increases in
refinancing  levels and the  origination  market.  As a result,  HomeSide's loan
production  volumes  increased,   on  an  annualized  basis,  primarily  through
preferred seller  relationships and HomeSide's broker and correspondent  lending
channels.  The increase  also reflects an increase in margins due to a declining
interest rate environment.

Other Income

     Other income for the period from  February  11, 1998 to September  30, 1998
was $11.0 million compared to $1.7 million for the HomeSide  predecessor  period
from March 1, 1997 to February 10, 1998. The increase was primarily due to gains
on sales of reinstated  loans from the early pool buyout program and real estate
tax service fees.

Salaries and Employee Benefits

     Salaries and  employee  benefits  expense was $74.0  million for the period
from  February 11, 1998 to September  30, 1998 compared to $75.4 million for the
HomeSide,  Inc.  predecessor period from March 1, 1997 to February 10, 1998. The
increase on an annualized  basis was due to growth in the number of employees to
service the growing mortgage servicing portfolio,  increased prepayment activity
and increased  production volume.  Additional servicing employees were added for
the Banc One acquisition. Although substantially all of the servicing operations
acquired from Banc One were  integrated into the existing  Jacksonville  and San
Antonio  servicing  sites at September 30, 1998. The average number of full-time
equivalent employees increased to 2,356 for the period from February 11, 1998 to
September 30, 1998 from 1,891 for the  HomeSide,  Inc.  predecessor  period from
March 1, 1997 to February 10, 1998.

Occupancy and Equipment Expense

     Occupancy and equipment expense primarily includes rental expense,  repairs
and maintenance  costs,  certain computer  software expenses and depreciation of
HomeSide's  premises and  equipment.  Occupancy  and  equipment  expense for the
period from February 11, 1998 to September  30, 1998 was $13.1 million  compared
to $15.4  million  for the  HomeSide  predecessor  period  from March 1, 1997 to
February 10, 1998. The annualized  increase was mainly due to increased expenses
incurred to enhance processing systems and technology  expenditures necessary to
support targeted business growth.

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

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

     During the period  from  February  11,  1998 to  September  30,  1998,  the
servicing  losses  on  investor-owned  loans  and  foreclosure-related  expenses
totaled  $21.2 million  compared to $22.0  million for the HomeSide  predecessor
period from March 1, 1997 to February 10, 1998.  The increase,  on an annualized
basis,  was largely  attributable  to the growth of the servicing  portfolio and
increased  foreclosure losses, which may continue at this level as the servicing
portfolio ages.

     Included in accounts payable and accrued  liabilities at September 30, 1998
and  February  10,  1998  is  a  reserve  for  estimated   servicing  losses  on
investor-owned  loans of $21.7  million.  The reserve has been  established  for
potential losses related to the mortgage servicing  portfolio.  Increases to the
reserve are charged to earnings as servicing losses on investor-owned loans. The
reserve  is  decreased  for  actual  losses  incurred  related  to the  mortgage
servicing portfolio. HomeSide's historical loss experience on VA loans generally
has been consistent with industry experience.  Management believes that HomeSide
has  an  adequate  level  of  reserve  based  on  servicing  volume,   portfolio
composition,  credit  quality and  historical  loss rates,  as well as estimated
future losses.  Servicing losses are generally  greatest during the three to six
year age of the loan.

     The  following  table sets forth  HomeSide's  delinquency  and  foreclosure
experience:

                        SERVICING PORTFOLIO DELINQUENCIES                       
                             (PERCENT BY LOAN COUNT)                            
                                                                                
                                                                                
                                           SEPTEMBER 30, 1998  FEBRUARY 10, 1998
                                           ------------------  -----------------
Servicing Portflio Delinquencies                                                
 excluding bankruptcies (at end of period)                                     
                                                                              
30 Days                                        3.72%                 3.52%  
60 Days                                        0.81                  0.78     
90 Days                                        0.65                  0.72     
                                           ------------------  -----------------
   Total past due                              5.18%                 5.02%    
                                           ==================  =================
Foreclosure Pending (at end                                                
     of period)                                0.70%                 0.74%    
                                           ==================  =================
Weighted average portfolio age in months       46.1                  43.6

Other Expenses and Goodwill Amortization

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

     Other expenses,  excluding goodwill amortization of $22.3 million resulting
from the acquisition of HomeSide by the National,  were $39.2 million during the
period from February 11, 1998 to September  30, 1998,  compared to $37.6 million
for the HomeSide predecessor period from March 1, 1997 to February 10, 1998. The
annualized  increase  was  primarily  due to  expenses  associated  with  higher
production volumes and the growing mortgage servicing portfolio.

Income Tax Expense

     HomeSide's  income  tax  expense  was $40.4  million  for the  period  from
February  11,  1998 to  September  30, 1998 and $53.4  million for the  HomeSide
predecessor period from March 1, 1997 to February 10, 1998. The effective income
tax rate for the period from  February  11, 1998 to  September  30, 1998 and the
HomeSide  predecessor  period  from  March  1,  1997 to  February  10,  1998 was
approximately 50% and 39%, respectively. The increase was due to the tax effects
of goodwill as a result of the merger with the National.

Results of operations for the HomeSide  predecessor period from March 1, 1997 to
February  10, 1998  compared to the HomeSide  predecessor  period from March 16,
1996 to February 28, 1997

Summary

     HomeSide's  net income  increased  49% to $83.5 million for the period from
March 1, 1997 to February 10, 1998 from $55.9  million for the period from March
16, 1996 to February 28, 1997.  Total revenues for the period from March 1, 1997
to February 10, 1998 increased 22% to $287.9 million from $236.6 million for the
period from March 16, 1996 to February 28, 1997. The increases in net income and
revenues for the period from March 1, 1997 to February 10, 1998  compared to the
period from March 16, 1996 to February 28, 1997 were primarily  attributable  to
the  acquisition  of  Barnett  Mortgage  Company  ("BMC")  on May 31,  1996  and
increases  of $30.6  million  in net  servicing  revenue,  $19.1  million in net
mortgage  origination revenue and $0.6 million in net interest revenue.  The BMC
servicing portfolio was $33.1 billion at May 31, 1996. Its acquisition increased
HomeSide's  servicing  portfolio by 75% on that date,  and was a major factor in
the increase in net servicing revenue. In addition,  subsequent increases in the
size of the  servicing  portfolio  contributed  to the  increased  revenue.  The
servicing  portfolio  increased to $98.9 billion at February 10, 1998 from $89.2
billion at February 28, 1997, an 11% increase.  As part of the BMC  acquisition,
Barnett  agreed to sell  HomeSide  the  loans  produced  by the loan  production
networks retained by Barnett,  which contributed to the increase in net mortgage
origination  revenue.  Net interest revenue increased primarily because of lower
borrowing  costs resulting from the lower interest rate  environment  during the
period ending February 10, 1998,  improved terms for the bank line of credit and
the issuance of medium-term notes. The Company's improved credit ratings lowered
the cost of  borrowing  under the bank line of credit and  enabled  HomeSide  to
issue publicly traded notes, which expanded borrowing capacity.

 Net Servicing Revenue

     Net servicing  revenue was $185.8 million for the period from March 1, 1997
to February  10, 1998  compared to $155.2  million for the period from March 16,
1996 to February 28,  1997.  Mortgage  servicing  fees  increased  27% to $393.3
million  for the period  from March 1, 1997 to  February  10,  1998 from  $308.9
million for the period from March 16, 1996 to February  28,1997,  primarily as a
result of the BMC acquisition and growth of the servicing portfolio through loan
production  channels and bulk servicing  acquisitions.  The servicing  portfolio
increased  to $98.9  billion at February 10, 1997  compared to $89.2  billion at
February 28, 1997.  HomeSide's  weighted  average  interest rate of the mortgage
loans in the  servicing  portfolio  was 7.85% at February  10, 1998 and 7.92% at
February 28, 1997.  The weighted  average  servicing  fee,  including  ancillary
income,  for the  servicing  portfolio was 0.438% and 0.432% for the period from
March 1, 1997 to  February  10,  1998 and the  period  from  March  16,  1996 to
February 28, 1997, respectively.  The increase in the weighted average servicing
fee for the period  from March 1, 1997 to  February  10,  1998  compared  to the
period from March 16, 1996 to February  28, 1997 was due to growth of  ancillary
revenues, including late fees and other mortgage-related products.  Amortization
expense increased to $207.5 million for the period March 1, 1997 to February 10,
1998 from $153.7 million for the period from March 16, 1996 to February 28, 1997
mainly as a result of a higher average balance of mortgage  servicing rights and
a decrease of 86 basis points in average mortgage interest rates from the period
from March 16,  1996 to  February  28,  1997 to the period from March 1, 1997 to
February 10, 1998.

 Net Interest Revenue

     Net interest  revenue  increased  $0.6 million for the period from March 1,
1997 to February  10, 1998 to $15.3  million  from $14.7  million for the period
from March 16, 1996 to February  28,  1997,  primarily  due to improved  funding
rates obtained through improved credit ratings,  the issue of medium-term  notes
and the adoption of an early pool buyout  program.  During the period from March
1, 1997 to February 10, 1998,  HomeSide  issued  $750.0  million of  medium-term
notes to the public market at an average cost of 6.251% as of February 10, 1998.
The proceeds  were used to pay down existing  bank debt,  increasing  HomeSide's
borrowing  capacity.  An immediate benefit of this increased  borrowing capacity
was the initiation of an early pool buyout program,  which involves the purchase
of  delinquent  government  loans from pools early in the  foreclosure  process,
thereby reducing the unreimbursed interest expense that HomeSide incurs.

     Interest  income  increased from the period from March 16, 1996 to February
28, 1997 to the period from March 1, 1997 to February 10,  1998,  primarily as a
result of an increase of $246.6 million in the average balance of loans held for
sale. Interest expense increased from the period from March 16, 1996 to February
28, 1997 to the period  from March 1, 1997 to  February  10, 1998 as a result of
increased  borrowings  to  fund  growth  of the  servicing  portfolio  and  loan
origination  activity.  These  expenses  were  offset by an  increase in credits
received on  borrowings  as a result of higher  average  balances  of  custodial
deposits.

Net Mortgage Origination Revenue

     Net  mortgage  origination  revenue  was $85.2  million for the period from
March 1, 1997 to February 10, 1998 compared to $66.1 million for the period from
March 16,  1996 to  February  28,  1997,  a 29%  increase.  The  increase in net
mortgage  origination  revenue  during the period from March 1, 1997 to February
10, 1998 as  compared to the period from March 16, 1996 to February  28, 1998 is
due in part to an  increase  in  loan  production  volumes  resulting  from  the
preferred seller relationships with Barnett and BankBoston and HomeSide's broker
and correspondent lending channels. The increase also reflects larger gains from
secondary marketing activities.

Salaries and Employee Benefits

     Salaries and  employee  benefits  expense was $75.4  million for the period
from March 1, 1997 to February 10, 1998 compared to $73.0 million for the period
from  March  16,  1996 to  February  28,  1997 due to  growth  in the  number of
employees as a result of the purchase of the BMC mortgage  servicing  operations
acquired on May 31, 1996. The average number of full-time  equivalent  employees
increased  to 1,805 for the period from March 1, 1997 to February  10, 1998 from
1,593 for the period from March 16, 1996 to February 28, 1997.

Occupancy and Equipment Expense

     Occupancy  and  equipment  expense  for the  period  from  March 1, 1997 to
February  10, 1998 was $15.4  million  compared to $11.8  million for the period
from March 16, 1996 to February 28, 1997. The increase in expense was mainly due
to increases in the costs of information  systems required to handle the growing
mortgage servicing portfolio.

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

     During the period from March 1, 1997 to February  10, 1998,  the  servicing
losses on investor-owned  loans and  foreclosure-related  expenses totaled $22.0
million compared to $17.9 million for the period from March 16, 1996 to February
28, 1997. The increase was largely  attributable  to the growth of the servicing
portfolio  resulting  from loan  production  and increased  foreclosure  losses.
Included in accounts  payable and accrued  liabilities  at February 10, 1998 and
February 28, 1997 is a reserve for estimated  servicing losses on investor-owned
loans of $21.7 million.

     The  following  table sets forth  HomeSide's  delinquency  and  foreclosure
experience:


<PAGE>


                        SERVICING PORTFOLIO DELINQUENCIES

                             (PERCENT BY LOAN COUNT)

                                           SEPTEMBER 30, 1998  FEBRUARY 10, 1998
                                           ------------------  -----------------
Servicing Portflio Delinquencies                                                
 excluding bankruptcies (at end of period)                                     
                                                                              
30 Days                                        3.52%                 3.27%  
60 Days                                        0.78                  0.69     
90 Days                                        0.72                  0.54     
                                           ------------------  -----------------
   Total past due                              5.02%                 4.50%    
                                           ==================  =================
Foreclosure Pending (at end                                                
     of period)                                0.74%                 0.72%    
                                           ==================  =================

Other Expenses

     Other  expenses  during the period from March 1, 1997 to February  10, 1998
were $38.2 million, compared to $40.8 million for the period from March 16, 1996
to February 28, 1997. The decrease was primarily due to decreases in advertising
and certain loan origination expenses.

Income Tax Expense

     HomeSide's  income tax expense was $53.4  million for the period from March
1, 1997 to  February  10,  1998 and $37.3  million for the period from March 16,
1996 to February 28, 1997. The increase was  attributable  to an increase in net
income.  The  effective  income  tax rate for the  period  from March 1, 1997 to
February  10, 1998 and the period  from March 16, 1996 to February  28, 1997 was
approximately 39% and 40%, respectively.

Risk Management Activities

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

     During the period from  February 11, 1998 to September  30, 1998,  HomeSide
utilized options on U.S.  Treasury bond and note futures and U.S.  Treasury bond
and note  futures to protect a  significant  portion of the market  value of its
mortgage  servicing  portfolio  from a  decline  in value.  The risk  management
contracts used by HomeSide have  characteristics such that they tend to increase
in value as interest rates decline.  Conversely, these risk management contracts
tend to decline in value as interest rates rise.  Accordingly,  changes in value
of these risk management instruments will tend to move inversely with changes in
value of HomeSide's mortgage servicing rights.

     These risk management  instruments are designated as hedges on the purchase
date and such  designation  is at a level at least as  specific  as the level at
which  mortgage  servicing  rights  are  evaluated  for  impairment.   The  risk
management  instruments  are  marked-to-market  with  changes  in  market  value
deferred  and  applied as an  adjustment  to the basis of the  related  mortgage
servicing  right asset being  hedged.  As a result,  any changes in market value
that are deferred are amortized and evaluated for  impairment in the same manner
as the related  mortgage  servicing  rights.  The  effectiveness  of  HomeSide's
hedging activity can be measured by the correlation between changes in the value
of the risk  management  instruments  and  changes  in the  value of  HomeSide's
mortgage servicing rights.  This correlation is assessed on a quarterly basis to
ensure that high correlation is maintained over the term of the hedging program.
If  management's   ongoing   assessment  of  correlation   indicates  that  high
correlation is not being achieved,  the Company will discontinue the application
of hedge accounting and recognize a gain or loss to the extent the hedge results
have not been  offset by changes in value of the hedged  asset  during the hedge
period. During the periods presented, HomeSide has experienced a high measure of
correlation  between changes in the value of mortgage  servicing  rights and the
risk management  contracts.  However,  in periods of rising interest rates,  the
increase in values of mortgage servicing rights may outpace the decline in value
of the options  included in the hedge position,  because the loss on the options
is limited to the premium paid.

     During the period from  February 11, 1998 to September  30, 1998,  deferred
gains on risk  management  contracts  resulted  in net  deferred  hedge gains of
$389.6  million which are included in the carrying  value of mortgage  servicing
rights.  Activity in the deferred  hedge account during the period from February
11, 1998 to September 30, 1998 is as follows (in thousands):


<PAGE>


        Net deferred hedge balance at February 11, 1998               -
        Net deferred hedge gains                                394,157
        Amortization of net deferred hedge gains                 (4,585)

                                                             ===========
        Net deferred hedge balance at September 30, 1998      $  389,572
                                                             ===========

     HomeSide's  future cash needs as they relate to its hedging program will be
influenced by such factors as long-term  interest rates,  loan production levels
and  growth in the  mortgage  servicing  portfolio.  The fair value of open risk
management  contracts at September 30, 1998 was $120.2 million,  which was equal
to  their   carrying   amount   because  the  risk   management   contracts  are
marked-to-market  at each reporting date. See "-Liquidity and Capital Resources"
for further  discussion  of HomeSide's  sources and uses of cash.  See Note 3 of
Notes to  Consolidated  Financial  Statements  for a  description  of HomeSide's
accounting  policy  for its risk  management  contracts.  See Notes 13 and 14 of
Notes to Consolidated Financial Statements for additional fair value disclosures
with respect to HomeSide's risk management contracts.

Liquidity and Capital Resources

     The  Company's   principal  financing  needs  are  the  financing  of  loan
origination  activities and the investment in mortgage servicing rights. To meet
these  needs,  the  Company  currently  utilizes  funding  from  an  independent
syndicate of banks and from the National,  including a warehouse credit facility
and  a  servicing-related  facility,   medium-term  notes  and  cash  flow  from
operations.  In the  past,  the  Company  has also  utilized  short-term  credit
facilities  and  public  offerings  of  common  stock.   HomeSide  continues  to
investigate  and pursue  alternative  and  supplementary  methods to finance its
growing  operations  through the public and private capital  markets.  These may
include methods designed to expand the Company's  financial  capacity and reduce
its cost of capital.  In addition,  to facilitate the sale and  distribution  of
certain mortgage products,  HomeSide Mortgage  Securities,  Inc., a wholly-owned
subsidiary of HomeSide, may continue to issue mortgage backed securities.

Operations

     Net cash used in  operations  for the  period  from  February  11,  1998 to
September  30,  1998 was $342.3  million.  Net cash used in  operations  for the
HomeSide  predecessor  period from March 1, 1997 to February 10, 1998 was $231.0
million.  Net cash provided by operations  for the HomeSide  predecessor  period
from March 16, 1996 to February 28, 1997 was $216.6 million. The primary uses of
cash in operations were to fund loan  originations  and pay corporate  expenses.
These uses of cash were offset by cash provided from servicing fee income,  loan
sales and principal repayments.  Cash flows from loan originations are dependent
upon current  economic  conditions  and the level of long-term  interest  rates.
Decreases  in  long-term   interest  rates  generally   result  in  higher  loan
refinancing  activity,  which  results in higher cash demands to meet  increased
loan  production  levels.  Higher cash demands to meet increased loan production
levels are primarily met through borrowings and loan sales.

Investing

     Net cash used in investing activities for the period from February 11, 1998
to September 30, 1998 was $677.9 million.  Net cash used in investing activities
was $773.7 million and $862.2 million for the HomeSide  predecessor periods from
March 1, 1997 to February 10, 1998 and March 16, 1996 to February 28, 1997. Cash
was used for the purchase and origination of mortgage  servicing rights. For the
period from February 11, 1998 to September 30, 1998 and the HomeSide predecessor
period from March 1, 1997 to February 10,  1998,  cash was also used for funding
the early pool  buyout  program.  During the period  from  February  11, 1998 to
September  30, 1998 and the  HomeSide  predecessor  period from March 1, 1997 to
February  10,  1998,  these uses of cash were offset by net  proceeds  from risk
management  contracts,  while  during the period from March 16, 1997 to February
28, 1997, cash was used to purchase risk management contracts. During the period
from February 11, 1998 to September  30, 1998,  HomeSide also made a net payment
of $201.0  million to acquire the  servicing  portfolio of Banc One.  During the
period from March 16, 1996 to February 28, 1997,  HomeSide  made net payments of
$133.4 million and $106.2 million to acquire certain mortgage banking operations
of BBMC and BMC,  respectively  (see Note 4 of Notes to  Consolidated  Financial
Statements).  Future uses of cash for investing  activities will be dependent on
the mortgage  origination market and HomeSide's  hedging needs.  HomeSide is not
able to estimate the timing and amount of cash uses for future  acquisitions  of
other mortgage banking entities, if such acquisitions were to occur.

Financing

     Net cash  provided by financing  activities  was  $1,023.1  million for the
period from  February 11, 1998 to September  30,  1998,  $773.7  million for the
HomeSide  predecessor  period from March 1, 1997 to February 10, 1998 and $862.2
million for the HomeSide  predecessor period from March 16, 1996 to February 28,
1997.  The primary source of cash from  financing  activities  during the period
from February 11, 1998 to September 30, 1998 and the HomeSide predecessor period
from March 1, 1997 to  February  10, 1998 was from the  issuance of  medium-term
notes and net borrowings from HomeSide's line of credit.  The primary sources of
cash from financing activities during the period from March 16, 1996 to February
28, 1997 were net borrowings  under  HomeSide's  lines of credit,  proceeds from
issuance of common stock and from the issuance of Notes.  Cash used in financing
activities  during  the  period  ended  September  30,  1998  and  the  HomeSide
predecessor  period  ended  February  10,  1998 was used for the payment of debt
issue costs. Cash used in financing activities for the period ended February 28,
1997 was used to repay a bridge loan,  partially  repay Notes and the payment of
debt issue costs.

     During the period from  February 11, 1998 to September  30, 1998,  net cash
used in operations was $342.3 million, net cash used in investing activities was
$677.9  million  and net cash  provided by  financing  activities  was  $1,023.1
million,  resulting in a net increase in cash of $2.9 million.  HomeSide expects
that to the extent cash  generated  from  operations  is  inadequate to meet its
liquidity needs,  those needs can be met through  financing from its bank credit
facility and other  facilities  which may be entered into from time to time,  as
well as from the issuance of debt securities in the public markets. Accordingly,
HomeSide  does not  currently  anticipate  that it will make sales of  servicing
rights  to  any  significant   degree  for  the  purpose  of  generating   cash.
Nevertheless, in addition to its cash and mortgage loans held for sale balances,
HomeSide's portfolio of mortgage servicing rights provides a potential source of
funds to meet liquidity  requirements,  especially in periods of rising interest
rates when loan origination volume slows.  Repurchase agreements also provide an
alternative to the bank line of credit for mortgages held for sale.  Future cash
needs are highly  dependent on future loan  production  and  servicing  results,
which are influenced by changes in long-term interest rates.

Year 2000

General.  In common with many business users of computers  around the world, the
Company  has  investigated  to what extent the date change from 1999 to 2000 may
affect its business.  The Company has established a program designed to minimize
the impact of the change to 2000 on the Company and its customers.  The Board of
Directors  has made the work  associated  with the change to 2000 a key priority
for management.

The Company uses and is dependent upon a significant number of computer software
programs  and  operating  systems to conduct its  business.  Such  programs  and
systems  include  those  developed and  maintained by the Company,  software and
systems  purchased  from  outside  vendors and  software and systems used by the
Company's third party providers. The Company recognizes that the Year 2000 issue
is one of  the  most  complex  data  processing  problems  faced  by  businesses
worldwide.  As the Company  approaches the century change, its primary objective
is to maintain "business as usual."

The  Company  began  its   information   technology  Year  2000  assessment  and
remediation  efforts in the third quarter of calendar 1996 under the sponsorship
of its executive  management.  A formal,  enterprise-wide  program  commenced in
January 1998.  The Year 2000 issue has been  identified  as a top priority.  The
Company's executive management and Board of Directors are provided with frequent
detailed updates. The Company has dedicated resources to assess, repair and test
programs, applications,  equipment and facilities. The Company has established a
Year 2000 Program Office that is coordinating the preparations for the change to
2000 with each business unit throughout the Company.

The Company's  program  involves an extensive  review of its own  operations and
scoping the work that needs to be completed to minimize  any  potential  impact.
This includes  reviewing the possible  effects on the Company arising out of how
third parties manage their transition to 2000. The work  demonstrates that there
are two possible key impacts:

        Internal  - the  change to 2000  could  cause  interruptions,  errors in
        calculations or delays to the Company's  critical business processes via
        unexpected system or application malfunctioning.

        External  - the  impact  on the  Company's  own  operations  from  third
        parties,  including  customers,   vendors,  suppliers,   regulators  and
        electronic  distribution channels which may be impacted by the change to
        2000. This includes any secondary or systemic impact that may arise from
        the  change  to 2000  and the  risk of  disruption  in the  capital  and
        secondary mortgage markets on which the Company is dependent.

The Company's  strategy for  addressing  Year 2000 focuses on four teams,  which
together  address  all  aspects  of  the  Company's  business.  The  Information
Technology  team  addresses  all  of  the  Mainframe,   LAN  and  client  server
applications.  The End User  Computing (or Business) team addresses the business
risks within each of the operating departments, including facilities' risk. This
area of the strategy involves the greatest  concentration of embedded chips. The
Enterprise  team  addresses  the  corporate-wide  risks  posed by the Year 2000,
including business  continuity planning to be implemented by individual business
units. Finally, the Year 2000 Program Office coordinates the Company's Year 2000
readiness  efforts and is responsible  for  communications,  vendor  management,
project documentation and reporting.  The Company's Year 2000 Program Office and
overall  Year 2000  Program are managed by a Year 2000  Program  Director  whose
full-time resources and  responsibilities are dedicated to this effort under the
sponsorship of the Chief Financial Officer and Chief Information Officer.

Throughout  all phases of the Year 2000  Program,  including  the  inventory and
assessment  phases,  the Year 2000 teams aim to complete all required work while
minimizing  disruption to the current  service  delivery  levels of the Company.
Central  management of the project is executed using fully  dedicated staff with
high levels of subject  matter  knowledge.  In order to speed the assessment and
remediation  aspects of the mainframe  and client server IT projects,  a factory
philosophy has been adopted using Paragon  Computer  Professionals,  Inc. as the
primary  outsourcer.  Contractors  are  used  internally  where  subject  matter
expertise is not required.

State of Readiness.  The Company's  approach to preparing for the change to 2000
includes a standard set of methods and tools,  customized  as applicable to each
team, to coordinate and drive the project to completion.

The approach consists of six phases:

1.   Assessment  - Defining  each system and process to  determine  if there are
     date  dependencies  and  how  to  resolve  them.  For  business  continuity
     purposes, assessment includes identifying event and dependency risk.

2.   Remediation - Implementing  the steps  identified in the assessment  phase,
     including code remediation and development of contingency plans.

3.   Testing  -  Developing  and  implementing  test  scripts  to  determine  if
     remediated  code is correct and  assurance  testing of business  continuity
     plans.

4.   Implementation  - Moving all approved  changes from testing into production
     and execution of contingency plans as may be required.

5.   Check-Off - Formally  acknowledging  that each process has been implemented
     and is functioning correctly.

6.   Clean  Management  -  Employing  procedures  and  practices  to prevent the
     reintroduction of non-compliant  applications,  products and processes into
     the operating environment, once check-off has been completed.

The  Company's  Information  Technology  and Business  Teams have  substantially
completed its  assessment of the  Company's  systems and business  processes for
Year 2000 vulnerability.  The assessment has included substantially all hardware
and software systems,  embedded systems,  buildings and equipment,  and business
processes.   The  assessment  has  also  included  a  review  of  the  Company's
dependencies on third parties, including vendors, suppliers and customers.

The Company has  established  certain key  milestones  in its Year 2000 Program.
Those milestones are:

     o    Assessment  of  substantially  all systems and  processes  by July 31,
          1998;

     o    Remediation and internal testing of all mission critical  applications
          substantially completed by December 31, 1998;

     o    End-to-end testing of all mission critical systems with material third
          parties substantially completed by March 31, 1999; and

     o    Remediation and testing of all non-mission  critical systems and clean
          management of all systems through 1999.

The  Company  has  completed  its  assessment  of  all  systems  and  processes.
Remediation and internal testing of mission critical systems is underway and, as
of the date of this filing, substantially complete. The Company is presently "on
time" in complying with the  milestones  and internal  timetable the Company has
established in preparation  for the change to 2000 in line with its  regulator's
suggested  completion  dates for core  systems.  Set forth  below is a graphical
depiction of the Company's state of readiness in the first five action phases of
the  Company's  project  plan,  divided to show  progress as to the  Information
Technology  (IT) portion of the project,  the  Company's  two primary  servicing
systems,  and the end-user  computing  portion of the project as of December 11,
1998:

<TABLE>
<CAPTION>


           IT ACHIEVEMENTS (EXCLUDES SERVICING SYSTEMS)                                   %

                                                                       DATE           COMPLETE

 ASSESSMENT
<S>                                                                    <C>            <C>

 Full assessment of all IT components impacted by the turn of           6/30/98          100%
 the century.

 REMEDIATION

 Repair or Replace all IT components found to be non-compliant.         9/30/98           68%
                                                                       10/31/98           91%
                                                                       12/11/98          100%
 TESTING INTERNAL

 Test all IT Y2K impacted internal components in a simulated and        9/30/98           30%
 real future date environment.                                         10/31/98           41%
                                                                       12/11/98           76%
                                                                       12/31/98           82%
                                                                        3/31/99          100%

 TESTING EXTERNAL

 Testing with customers,and vendors/service providers.                 12/11/98            0%
                                                                        3/31/99           65%
                                                                        6/30/99          100%
 IMPLEMENTATION

 Place into the production operating environment all IT                 9/30/98           17%
 components tested and deemed to be Y2K ready.                         10/31/98           26%
                                                                       12/11/98           87%
                                                                        3/31/99          100%

 CHECK-OFF

 Official sign-off by the business and technology owner of the          9/30/98            5%
 component that the component is Y2K ready.                            10/31/98           17%
                                                                       12/11/98           65%
                                                                        3/31/99          100%
</TABLE>

The charts set forth above show the status of  completion of the number of gross
technology  applications  identified by the Company for remediation  measured by
each of the  various  phases of the  Company's  Year 2000  Program.  This  chart
measures  the  progress  on   thirty-four   (34)  key   Information   Technology
applications,  of which 15 have been designated as mission critical. As to these
thirty-four (34) key applications,  as of December 15, 1998,  assessment is 100%
complete,  remediation is 100% complete,  and internal  testing is 76% complete.
The balance of testing is  primarily  end-to-end  testing  with  material  third
parties, which is scheduled to take place prior to March 31, 1999.

The Company's two most critical  business  applications are its primary mortgage
servicing  software  systems:   MSP  (licensed  from  and  supported  by  Alltel
Information Services, Inc.) and ALSS (a proprietary software system supported by
the Company).  Because of their critical importance to the Company's operations,
these systems are not included in the above charts. Rather, progress as to these
two  systems  is set  forth  separately  in the  charts  below.  As to these two
systems,  as of December 15, 1998,  assessment is 100% complete,  remediation is
100% complete,  and internal testing is 70% complete.  The balance of testing is
primarily end-to-end testing with material third parties,  which is scheduled to
take place prior to March 31, 1999.

<TABLE>
<CAPTION>

               IT ACHIEVEMENTS (SERVICING SYSTEMS)                                        %

                                                                       DATE           COMPLETE

 ASSESSMENT
<S>                                                                    <C>            <C>

 Full assessment of all IT components impacted by the turn of           9/30/98          100%
 the century.

 REMEDIATION

 Repair or Replace all IT components found to be non-compliant.         9/30/98           90%
                                                                       12/11/98          100%
 TESTING INTERNAL

 Test all IT Y2K impacted internal components in a simulated and       12/11/98           69%
 real future date environment.                                         12/31/98           95%
                                                                        3/31/99          100%

 TESTING EXTERNAL

 Testing with customers,and vendors/service providers.                 12/31/99            0%
                                                                        3/31/99          100%                     

 IMPLEMENTATION

 Place into the production operating environment all IT                12/31/98           50%
 components tested and deemed to be Y2K ready.                          3/31/99          100%


 CHECK-OFF

 Official sign-off by the business and technology owner of the         12/31/98           50%
 component that the component is Y2K ready.                             3/31/99          100%

</TABLE>

The  Company's  Year 2000  Program  also  addresses  end-user  computing  issues
presented by the year 2000 change.  The  following  charts  depict the Company's
progress in addressing  systems and business  processes  other than  information
technology  systems.  As to those business processes and systems, as of December
15, 1998,  assessment is 100% complete,  remediation is 96% complete and testing
is 56% complete. The balance of remediation is scheduled for completion by March
31, 1999.  Testing,  implementation  and  check-off is scheduled to be completed
prior to June 30, 1999.

<TABLE>
<CAPTION>
                  END-USER COMPUTING ACHIEVEMENTS                                        %
                                                                        DATE         COMPLETE

 ASSESSMENT
<S>                                                                    <C>           <C>

 Full assessment of all non-IT components impacted by the turn of      12/11/98           94%
 the century.

 REMEDIATION

 Repair or replace all non-IT components found to be non-compliant.    12/11/98           51%
                                                                        3/31/99           90%
                                                                        6/30/99          100%
 TESTING

 Test all non-IT Y2K impacted components in a simulated and real       12/11/98           39%
 future date environment. Includes testing with customers,and           3/31/99           60%
 vendors/service providers.                                             6/30/99          100%

 IMPLEMENTATION

 Place into the production operating environment all non-IT            12/11/98            0%
 components tested and deemed to be Y2K ready.                          3/31/99           40%
                                                                        6/30/99          100%

 CHECK-OFF

 Official sign-off by the business owner of the non-IT component       12/11/98            0%
 that the component is Y2K ready.                                       3/31/99           40%
                                                                        6/30/99          100%
</TABLE>

The  information  set  forth  above is not  weighted  to  reflect  the  relative
criticality of individual  applications.  Moreover, not all applications require
the same level of effort for remediation and testing.  Therefore,  a significant
percentage of completion of one phase of the program,  taken out of context, may
not fully reflect the Company's overall state of preparedness.  In addition, the
reality of the Year 2000 work, its breadth, dependencies and linkages (including
satisfactory  and timely  delivery by key vendors)  means that there may be some
work which will not be completed by the milestone target.

The Company has  relationships  with vendors,  customers and other third parties
that rely on software  and systems that may not be ready for the change to 2000.
However, it is not possible in all cases to obtain complete, accurate and timely
information  regarding the Year 2000  programs of third  parties.  Further,  the
Company's  ability to direct such third parties efforts or change relations with
such  third  parties  is often  limited.  There can be no  assurance  that third
parties on which the Company  relies will  complete  their Year 2000 programs on
time or that Year 2000  failures by such third  parties will not have a material
adverse effect on the Company's results of operations.

The Company is currently reviewing the Year 2000 efforts of its mission critical
vendors, customers and service providers. The Company has identified a number of
mission  critical  third  parties  whose Year 2000  failure  may  reasonably  be
expected  to  have a  material  adverse  impact  on  the  Company's  results  of
operations.  Examples  of such third  parties  include:  the  Company's  primary
software  licensor,  Alltel  Information  Services,  Inc.;  the  Company's  sole
provider of insurance  processing  services;  the Company's sole provider of tax
payment  services;  and the  Company's  sole provider of  foreclosure  services.
Catastrophic  failure by any of these  parties  would  have a  material  adverse
effect on the Company.  The Company is targeting  these mission  critical  third
parties for particular  scrutiny  regarding their preparations for the change to
2000.  That  process is ongoing and testing is planned for the first  quarter of
1999. The Company is also scheduled to  participate  in  inter-industry  testing
sponsored  by the  Mortgage  Bankers  Association  of  America  and the  Federal
National Mortgage Association in the first quarter of 1999.

The Company has been  successful  in  negotiating  Year 2000  amendments  to its
contracts  with several  mission  critical  vendors.  These  amendments  contain
representations  and warranties by the vendors as to their state of readiness to
meet the Year 2000 challenge and  indemnification and other remedies in favor of
the Company in the event the Company  suffers a loss because the vendor does not
successfully manage the change to 2000.

Cost of Year 2000  Efforts.  The  Company  acknowledges  that  work  needs to be
carried out in virtually  all aspects of its business to ensure that the Company
successfully  manages the change to 2000. The Company presently  estimates these
costs to total approximately $15.0 million.

Year 2000 costs are based on  management's  best  estimates,  which were derived
utilizing  numerous   assumptions  of  future  events  including  the  continued
availability  of certain  resources,  third party  modification  plans and other
factors.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved and actual  results  could  differ  materially  from those  plans.  The
Company does not  separately  track the indirect costs incurred in its Year 2000
program.

Through September 30, 1998, the Company had expended  approximately $4.7 million
of its total budget.  Through  November 30, 1998, the most recent date for which
information  is  available  prior  to this  filing,  the  Company  had  expended
approximately $5.8 million of its total Year 2000 budget. A significant  portion
of the budget is allocated to testing and will be expended in the period  ending
March 31, 1999, the scheduled conclusion of end-to-end testing. In addition, the
Company  anticipates  significant  expenditures  after March 31, 1999 associated
with employee retention efforts,  continued testing, clean management of systems
and  maintenance  of its Year 2000  Program  Office.  The Company  expensed  its
remediation costs as they were incurred,  with the exception of new hardware and
software  purchases,  which were capitalized.  The source of funds for Year 2000
remediation is operating income of the Company.  The percentage of the Company's
information  technology  budget  devoted to Year 2000 efforts in the fiscal year
ended September 30, 1998 was approximately  23%. The percentage of the Company's
information  technology  budget  devoted to Year 2000 efforts in the fiscal year
ending  September 30, 1999 is estimated at 13%. The Company is unable to readily
determine  the cost of  replacement  of  non-compliant  systems  that are  being
replaced  in  the  ordinary  course  of  business.  No  significant  information
technology projects have been deferred due to Year 2000 efforts.

The Company's  Year 2000 Program is complex and reliant upon  coordination  with
numerous  third parties.  Accordingly,  the effort and costs in any given period
will depend upon progress. The Company's current Year 2000 budget of $15 million
is based on the  current  status  of the Year 2000  Program  and is  subject  to
change.  The budget of $15  million  does not take into  account  any  potential
losses the Company may suffer as a result of Year 2000  failures,  or any claims
for loss or damage  that may be asserted  against the Company by third  parties,
which may result if the Company or third parties do not successfully  manage the
effect of the Year 2000 date change.

Risks.  The  Company's  risk  management  office  is  actively  involved  in the
Company's  Year 2000 Program.  The most  reasonably  likely worst case Year 2000
scenario,   disregarding  the  Company's  remediation  efforts  and  contingency
planning,  is a failure in its loan servicing  software and/or  systems.  Such a
failure  would  result  in  material  disruption  in  the  Company's  operations
preventing it from  discharging its contractual  obligations to service mortgage
loans in an accurate and timely  fashion.  The  consequences  of such disruption
could  include,  among other things,  revocation  of the Company's  status as an
FHA/VA   approved   lender/servicer   and  Fannie   Mae/Freddie   Mac   approved
seller/servicer,  incorrect processing and/or reporting of payments to consumers
and investors,  a material loss of revenue,  and  litigation  with third parties
alleging losses related to servicing failure.

While  working to ensure that the  Company's  primary  objective  of business as
usual  before,  during and through 2000 is  achieved,  there can be no guarantee
that its Year 2000 program will be  successful  in all respects or that the date
change for 1999 to 2000 will not  materially  affect the  Company's  business in
some form.

Contingency Planning. The Company's Year 2000 Program is based on the assumption
that 100% impact coverage is neither feasible nor practical. It is possible that
the  Company or third  parties on which the Company  depends may have  unplanned
system  difficulties  during the transition  through 2000, or that third parties
may not successfully manage the change to 2000.  Therefore,  an integral part of
the  Company's  Year 2000 Program is the  development  of  contingency  plans in
anticipation  of systems or third party  failure.  These  contingency  plans are
being  developed for individual  applications,  systems and business  processes.
Individual  departments  within the Company,  acting under the  supervision  and
direction of the Year 2000 Program  Enterprise team, are reviewing and adjusting
existing business continuity planning to incorporate these circumstances, and to
seek to ensure that the Company  meets its primary  objective  of  "business  as
usual" before, during and through 2000.

The foregoing  disclosure,  including the  description of a worst case Year 2000
scenario,  is furnished in response to and in  compliance  with the Statement of
the  Commission  Regarding  Disclosure of Year 2000 Issues and  Consequences  by
Public  Companies,  Investment  Advisers,  Investment  Companies,  and Municipal
Securities Issuers, Securities Act Rel. No. 33-7448 (July 30, 1998)

Quantitative and Qualitative Market Risk

Interest  rate risk is the most  significant  market  risk  affecting  HomeSide.
Interest rate risk is the possibility  that changes in interest rates will cause
unfavorable  changes  in net income or in the value of  interest  rate-sensitive
assets, liabilities and commitments. From a corporate perspective, the economics
of the Company's production and servicing lines-of-business can be leveraged, in
part, to mitigate the Company's  exposure to interest rate risk. In addition and
as part  of its  risk  management  programs,  the  Company  purchases  financial
instruments and enters into financial  agreements with off-balance sheet risk in
the normal course of business to manage its exposure to interest rate risk.  The
Company uses  financial  instruments  for the purpose of managing  interest rate
risks to protect  the value of its  mortgage  loans  held for sale and  mortgage
commitment pipeline.  Risk management instruments are used by HomeSide to manage
interest rate risk  associated with the value of its mortgage  servicing  rights
which have  characteristics such that they tend to decrease in value as interest
rates decline and increase in value as interest rates rise.  Interest rate swaps
are also used to convert funding  sources to floating rates.  The Company has no
market risk sensitive instruments held for trading purposes.

Management  actively  monitors and manages its  exposure to interest  rate risk.
Various valuation tools are employed to perform sensitivity analyses in order to
quantify the financial  impact of changes in interest rates.  These analyses are
performed for various  interest rate scenarios to capture the expected  economic
change in market value of  rate-sensitive  assets,  liabilities and commitments.
Additionally,  the  analyses are  performed  to capture the expected  accounting
impact on future earnings for a specified time frame.

Several modeling techniques are utilized including static shock, option adjusted
spread,  option pricing,  and discounted cash flow models.  A number of key rate
sensitive  assumptions are included in the modeling such as implied  volatility,
prepayment  rates,  and yield  requirements.  Various  analyses of the Company's
exposure to interest  rate risk are reviewed on at least a monthly  basis by the
Company's Asset/Liability Committee, which reports to the Board of Directors.

The  sensitivity   analyses  described  above  were  applied  to  the  Company's
rate-sensitive  assets,  liabilities,  commitments  and  the  Company's  on- and
off-balance  sheet financial  instruments at September 30, 1998. The sensitivity
analyses  reflect that an  instantaneous  50 basis point increase in rates would
result in a positive  variance  to net income of $9.0  million  over a simulated
12-month period.  An instantaneous 50 basis point decrease in rates would result
in a negative variance to net income of $12.0 million over a simulated  12-month
period.  Under neither rate scenario  would net income be affected by impairment
of  rate-sensitive  assets.  The  sensitivity  analyses  relate  solely  to  the
Company's   rate-sensitive  assets,   liabilities,   commitments  and  financial
instruments  at September 30, 1998 and do not capture  changes in cash flows and
earnings  related to certain  production and servicing  activities that would be
expected to affect  financial  performance in the simulated  rate  environments.
Accordingly,  the aforementioned variances should not be viewed as indicative of
the  actual  changes  in  financial  performance  that  would  occur  in a  rate
environment equivalent to the one simulated.

For  additional  information,  see  "Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of Operations - Risk  Management  Activities",
Note 13,  "Disclosures  About Fair Value of Financial  Instruments" and Note 14,
"Risk  Management and Off-Balance  Sheet Financial  Instruments" in the Notes to
Consolidated Financial Statements in the Company's Annual Report.


<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
HomeSide Lending, Inc.

We have audited the accompanying  consolidated balance sheet of HomeSideLending,
Inc. and  subsidiaries  as of September 30, 1998,  and the related  consolidated
statements of income,  changes in stockholder's  equity,  and cash flows for the
period from  February 11, 1998 through  September 30, 1998.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of  HomeSideLending,
Inc.  and  subsidiaries  as of  September  30,  1998,  and  the  results  of its
operations  and its cash flows for the period from  February  11,  1998  through
September 30, 1998 in conformity with generally accepted accounting principles.

                              KPMG PEAT MARWICK LLP

October 16, 1998

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholder of HomeSide Lending, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of  HomeSide
Lending,  Inc.,  (see  Note 1) and  subsidiaries  as of  February  10,  1998 and
February 28, 1997 (not included herein), and the related consolidated statements
of income,  changes in stockholder's  equity and cash flows for the periods from
March 1, 1997 to February  10, 1998 and March 16,  1996 to  February  28,  1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of HomeSide Lending,
Inc. and subsidiaries as of February 10, 1998 and February 28, 1997(not included
herein) and the results of their operations and their cash flows for the periods
from March 1, 1997 to February 10, 1998 and March 16, 1996 to February 28, 1997,
in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Jacksonville, Florida
April 15, 1998


<PAGE>



<TABLE>
<CAPTION>

                     HOMESIDE LENDING, INC. and SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (Dollars in Thousands, Except Share Data)

                                                                                  HomeSide
                                                                                 Predecessor
                                                        September 30, 1998    February 10,1998
                                                        ------------------    ----------------
<S>                                                     <C>                   <C>
ASSETS
Cash and cash equivalents                                         $ 35,008            $32,113
Mortgage loans held for sale, net                                2,048,989          1,292,403
Mortgage servicing rights, net                                   1,766,214          1,766,357
Early pool buyout advances                                         759,579            374,097
Accounts receivable, net                                           272,005            227,294
Premises and equipment, net                                         45,657             41,982
Goodwill, net                                                      677,049              8,870
Other assets                                                       115,654            116,175
                                                        -------------------     --------------
Total Assets                                                    $5,720,155         $3,859,291
                                                        ===================     ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable                                                   $2,749,000         $2,074,956
Long-term debt                                                   1,185,926            770,466
Deferred income taxes                                              192,781            197,243
Accounts payable and accrued liabilities                           236,940            135,803
                                                        -------------------     --------------
Total Liabilities                                                4,364,647          3,178,468
                                                        -------------------     --------------
Commitments and Contingencies

Stockholder's Equity:
  Common stock:
     Common  stock,  $1.00  par  value,  100  shares   
         authorized,   issued  and outstanding, all
         pledged as second priority collateral on the
         long-term debt of the Parent                                            
  Additional paid-in capital                                     1,322,387            573,092
  Retained earnings                                                 33,121            107,731
                                                        -------------------     --------------
Total Stockholder's Equity                                       1,355,508            680,823
                                                        -------------------     --------------
Total Liabilities and Stockholder's Equity                      $5,720,155         $3,859,291
                                                        ===================     ==============
</TABLE>

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


<PAGE>


<TABLE>
<CAPTION>

                     HOMESIDE LENDING, INC. and SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Dollars in Thousands)

                                                                           HOMESIDE              HOMESIDE
                                                                          PREDECESSOR           PREDECESSOR
                                               FOR THE PERIOD FROM       FOR THE PERIOD        FOR THE PERIOD
                                                FEBRUARY 11, 1998             FROM                  FROM
                                                       TO               MARCH 1, 1997 TO     MARCH 16, 1996 TO
                                               SEPTEMBER 30, 1998      FEBRUARY 10, 1998     FEBRUARY 28, 1997
                                               ------------------      -----------------     -----------------
<S>                                            <C>                     <C>                   <C>
REVENUES:
Mortgage servicing fees                              $312,678                $393,292              $308,906
Amortization of mortgage servicing rights            (189,881)               (207,508)             (153,694)
                                               ------------------    --------------------    -------------------
    Net servicing revenue                             122,797                 185,784               155,212
Interest income                                        99,749                  97,050                81,507
Interest expense                                      (62,476)                (81,770)              (66,833)
                                               ------------------    --------------------    -------------------
    Net interest revenue                               37,273                  15,280                14,674               
Net mortgage origination revenue                       79,179                  85,206                66,073
Other income                                           11,028                   1,671                   682
                                               ------------------    --------------------    -------------------
    Total Revenues                                    250,277                 287,941               236,641

EXPENSES:
Salaries and employee benefits                         73,983                  75,419                72,976
Occupancy and equipment                                13,107                  15,447                11,770
Servicing losses on investor-owned loans
   and foreclosure-related expenses                    21,202                  21,974                17,934
Goodwill amortization                                  22,283                     592                   150
Other expenses                                         39,156                  37,639                40,616
                                               ------------------    --------------------    -------------------
    Total Expenses                                    169,731                 151,071               143,446
Income before income taxes                             80,546                 136,870                93,195
Income tax expense                                     40,101                  53,379                37,278
                                               ------------------    ====================    ===================
Net Income                                            $40,445                 $83,491               $55,917
                                               ==================    ====================    ===================
</TABLE>

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


<PAGE>


<TABLE>
<CAPTION>

                     HOMESIDE LENDING, INC. and SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                    (dollars in thousands, except share data)

                                                                     Additional
                                              Numbers      Common      Paid-in       Retained
                                             of Shares     Stock       Capital       Earnings        Total
                                            ----------------------------------------------------------------
<S>                                                 <C>               <C>           <C>           <C>       
Balance, February 11, 1998                          100       --      $1,322,387    $     --     $1,322,387
  Net Income                                         --       --          --            40,439       40,439
  Dividends declared and paid to Parent              --       --          --            (7,318)      (7,318)
                                            ----------------------------------------------------------------
Balance, September 30, 1998                         100       --      $1,322,387    $   33,121    $1,355,508
                                            ================================================================
HomeSide Predecessor Balance,                        
  March 15, 1996                                     --       --      $   --         $    --      $    -- 
Issuance of common stock                            100       --          --              --           --
Contribution associated with                                                                   
  BancBoston Mortgage Corporation                    
  acquisition, net                                   --       --         290,000          --         290,000
Contribution associated with              
  Barnett Mortgage Company acquisition, net          --       --         244,294          --         244,294
Additional capital contributions                     --       --          38,798          --          38,798
Net income                                           --       --          --            55,917        55,917
Dividends declared and paid to Parent                --       --          --           (16,965)      (16,965) 
                                            ----------------------------------------------------------------
HomeSide Predecessor Balance, 
  February 28, 1997                                 100       --         573,092        38,952       612,044
                                            ----------------------------------------------------------------
Net income                                           --       --          --            83,491        83,491
Dividends declared and paid to Parent                --       --          --           (14,712)      (14,712)
                                            ----------------------------------------------------------------
HomeSide Predecessor Balance,                       
  February 10, 1998                                 100       --       $ 573,092     $ 107,731      $680,823
                                            ================================================================
</TABLE>

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


<PAGE>


<TABLE>
<CAPTION>

                     HOMESIDE LENDING, INC. and SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)

                                                                                         HOMESIDE              HOMESIDE
                                                                                        PREDECESSOR           PREDECESSOR
                                                             FOR THE PERIOD FROM       FOR THE PERIOD        FOR THE PERIOD
                                                              FEBRUARY 11, 1998             FROM                  FROM
                                                                     TO               MARCH 1, 1997 TO     MARCH 16, 1996 TO
                                                             SEPTEMBER 30, 1998      FEBRUARY 10, 1998     FEBRUARY 28, 1997
                                                             ------------------      -----------------     -----------------
<S>                                                          <C>                     <C>                   <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Net income                                                     $40,440                     $83,491              $55,917
Adjustments to reconcile net income to net cash
(used in) provided by  operating activities:
  Amortization of mortgage servicing rights                    189,881                     207,508              153,694
  Depreciation and amortization                                 24,595                       8,850                8,173
  Servicing losses on investor-owned loans                       9,960                      12,346               13,683
  Deferred income tax expense                                   18,089                      56,352               37,278
  Capitalized servicing rights                                    --                          --                (21,015)
  Mortgage loans originated and purchased for sale         (12,697,763)                (23,975,752)         (12,504,567)
  Proceeds and principal repayments of mortgage             12,008,178                  23,540,371           12,572,217
   loans held for sale
  Change in accounts receivable                                (11,694)                    (82,121)             (63,378)
  Change in other assets and accounts payable and
   accrued liabilities                                           9,879                     (82,036)             (35,448)
                                                             ------------------      -----------------     -----------------
Net cash (used in) provided by operating activities           (408,435)                   (230,991)             216,554

CASH FLOWS USED IN INVESTING ACTIVITIES:

Purchase of premises and equipment, net                        (20,067)                    (17,252)              (4,929)
Acquisition of mortgage servicing rights                      (392,396)                   (519,694)            (475,729)
Net proceeds from (purchases of) risk management contracts     387,276                     137,393             (141,944)
Purchase of early pool buyout advances, net of repayments     (385,580)                   (374,097)                --
Acquisition of Banc One Mortgage Corp., net of repayments     (201,000)
Acquisition of BancBoston Mortgage Corp., net of                                                 
 cash acquired                                                    --                          --               (133,392)
Acquisition of Barnett Mortgage Co., net of cash acquired         --                          --               (106,244)
                                                                                
                                                             ------------------      -----------------     -----------------
Net cash used in investing activities                         (611,767)                   (773,650)            (862,238)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from banks and short-term lines of credit       624,044                     256,453              334,170
Issuance of notes payable                                      410,000                     750,000                 --
Payment of debt issue costs                                     (3,262)                     (7,017)             (11,681)
Repayment of long-term debt                                       (372)                       (661)                (567)
Capital contributions from the Parent                             --                          --                393,418
Dividends paid to the Parent                                    (7,313)                    (14,712)             (16,965)
                                                             ------------------      -----------------     -----------------
Net cash provided by financing activities                    1,023,097                     984,063              698,375

Net (decrease) increase in cash and cash equivalents             2,895                     (20,578)              52,691

Cash and cash equivalents at beginning of period                32,113                      52,691                 --
                                                             ------------------      -----------------     -----------------
Cash and cash equivalents at end of period                     $35,008                     $32,113              $52,691
                                                             ==================      =================     =================
</TABLE>

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


<PAGE>



                                    HOMESIDELENDING, INC. AND SUBSIDIARIES
                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

HomeSide Lending, Inc. ("HomeSide" or the "Company") is primarily engaged in the
mortgage banking business and as such originates,  purchases, sells and services
mortgage loans throughout the United States. As discussed in Note 2, on February
10, 1998 National Australia Bank, Ltd. (the "National") acquired all outstanding
shares of the common stock of HomeSide  International,  Inc. (the  "Parent") and
the Company  adopted a fiscal year end of  September 30 to conform to the fiscal
year of the National.  HomeSide's predecessor ("HomeSide Predecessor") commenced
operations  and was formed  through  the  acquisition  of the  mortgage  banking
operations of BankBoston,  N.A. ("BBMC Predecessor" to HomeSide  Predecessor) on
March 16, 1996 and  subsequently  purchased the mortgage  banking  operations of
Barnett Banks, Inc. Unless otherwise  designated,  the term "HomeSide" refers to
the  Company for the  periods  subsequent  to  February  10,  1998,  to HomeSide
Predecessor for the periods from March 16, 1996 to February 28, 1998 and to BBMC
Predecessor  for  the  periods  prior  to  March  16,  1998.  The   accompanying
consolidated  financial  statements of HomeSide include the accounts of HomeSide
and its subsidiaries,  after elimination of all material  intercompany  balances
and transactions. Amounts of acquired companies have been included from the date
of acquisition.

HomeSide is a wholly-owned  subsidiary of HomeSide  Holdings,  Inc.,  which is a
wholly-owned subsidiary of HomeSide International,  Inc. (the "Parent")(see Note
2).  The  Parent  has no  operations  and its only  significant  assets  are its
investments in HomeSide Holdings,  Inc.,  HomeSide and certain  capitalized debt
issue costs.  The Parent has $130 million in outstanding  long-term debt. All of
the stock of HomeSide  Holdings,  Inc. and HomeSide is pledged as  collateral on
the debt of the Parent.  The Parent is dependent  upon  dividends  from HomeSide
Holdings,  Inc. and HomeSide for the cash flow necessary to service the Parent's
debt.

The  accompanying  financial  statements  of HomeSide  Lending,  Inc.  have been
prepared for the period from February 11, 1998 to September 30, 1998 to coincide
with the acquisition of HomeSide by the National and the subsequent  adoption of
a  September  30  fiscal  year  end.  The  accompanying  consolidated  financial
statements  of HomeSide  Predecessor  have been  prepared  using its February 28
fiscal year end and are presented for the period from march 16, 1996 to February
28, 1997 to coincide with the commencement of operations of HomeSide Predecessor
and for the period March 1, 1997 to February 10, 1998 when HomeSide  Predecessor
was acquired by the National.

2.  ORGANIZATION

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

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

On January 9,  1998,  NationsBank  Corporation,  now  BankAmerica,  Corporation,
acquired all the outstanding common stock of Barnett Banks, Inc.

On February 10, 1998,  National  Australia Bank, Ltd. (the "National")  acquired
all outstanding shares of the common stock of the Parent. As consideration,  the
National paid $27.825 per share for all of the outstanding common stock and paid
$17.7 million cash to retire all outstanding  stock options.  The total purchase
price was  approximately  $1.2 billion.  The National paid for the purchase with
borrowed and available  funds.  The transaction was accounted for as a purchase.
As a result,  all assets and  liabilities  were  recorded at their fair value on
February  11, 1998,  and the  purchase  price in excess of the fair value of net
assets  acquired of $716.4  million  was  recorded as  goodwill.  Following  the
transaction  described  above, the National now owns 100% of the Parent's common
stock and the Parent  has  become an  indirect  wholly-owned  subsidiary  of the
National.  HomeSide also adopted a fiscal year end of September 30 to conform to
the fiscal year of the National.  The "HomeSide  Predecessor"  periods presented
coincide  with the  commencement  of operations of the Company on March 16, 1996
and the acquisition by the National on February 10, 1998.

 3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

The  preparation of financial  statements  and notes thereto in conformity  with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that  affect the  reported  amounts  of  assets,  liabilities,
revenues  and  expenses  and the  disclosed  amount of  contingent  liabilities.
Although  the  Company  has  internal  control  systems in place to ensure  that
estimates  can be  reliably  measured,  actual  results  may  differ  from those
estimates. It is not anticipated that such differences would be material.

Risk management of mortgage loan originations

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

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

Risk management of mortgage servicing rights

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

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

Options on U.S.  Treasury bond and note futures and U.S.  Treasury bond and note
futures  have been  purchased  by HomeSide to manage  interest  rate risk.  When
purchased, the options and futures contracts are designated to a specific strata
of   mortgage   servicing   rights.   The  risk   management   instruments   are
marked-to-market  and changes in market value are included as adjustments to the
basis of the related mortgage servicing right asset being hedged. Deferred hedge
gains and losses are amortized  and evaluated for  impairment in the same manner
as the related mortgage  servicing  rights.  Correlation  between changes in the
risk management contracts and changes in value of HomeSide 's mortgage servicing
rights is  assessed  on a quarterly  basis to ensure  that high  correlation  is
maintained  over  the  term of the  hedging  program.  If  management's  ongoing
assessment of correlation indicates that high correlation is not being achieved,
the Company will discontinue the application of hedge accounting and recognize a
gain or loss to the extent the hedge  results have not been offset by changes in
value of the hedged asset during the hedge period.

Mortgage loans

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

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

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

Mortgage servicing rights

Mortgage  servicing  rights are the rights to receive a portion of the  interest
coupon and fees collected from the mortgagor for performing  specified servicing
activities.  The total cost of loans originated or acquired is allocated between
the mortgage  servicing  rights and the mortgage  loans,  without the  servicing
rights,  based on relative fair values.  The value of servicing  rights acquired
through bulk acquisitions is capitalized at cost.

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

Accounts receivable

Accounts  receivable  includes  advances,  consisting  primarily of payments for
property  taxes and  insurance  premiums,  accrued  servicing  fees,  as well as
principal  and interest  remitted to investors  before they are  collected  from
mortgagors,  made  in  connection  with  loan  servicing  activities.   Accounts
receivable  also  includes  loans  purchased  from  mortgage-backed   securities
serviced by HomeSide for others and mortgage claims filed primarily with the FHA
and the VA.

Early pool buyout advances

Early pool buyout advances consist of delinquent  government loans in process of
foreclosure  that have been  purchased  from  pools.  The  program  reduces  the
unreimbursed interest expense that HomeSide incurs. The funding of the purchases
of these  delinquent  loans for the early pool  buyout  program is  recorded  as
interest  expense.  Interest income earned from the guarantor  agency during the
foreclosure process is accrued to match the funding expense incurred.  Scheduled
interest  payments made to the investor before the loans were purchased from the
pool are  recorded as early pool  buyout  advances  with a reserve for  advances
which will not ultimately be collected.

Premises and equipment

Premises  and  equipment  are  carried  at cost less  accumulated  depreciation.
Depreciation  is computed  using the  straight-line  method  over the  estimated
useful  lives  of  the  assets,  which  range  up  to  thirty  years.  Leasehold
improvements  are  amortized  over  the  shorter  of the  estimated  life of the
improvement or the term of the lease.

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

The Company capitalizes certain software  development and implementation  costs.
Development  and  implementation  costs  are  expensed  until  the  company  has
determined that the software will result in probable  future  economic  benefits
and  management  has  committed to funding the project.  Thereafter,  all direct
external  implementation  costs and purchase  software costs are capitalized and
amortized using the  straight-line  method over the remaining  estimated  useful
lives, not exceeding five years.

Goodwill

Goodwill,  representing the excess of the purchase  consideration  over the fair
value of the  identifiable  net assets  aquired on the date of  acquisition,  is
recognized as an asset.  Goodwill is amortized  from the date of  acquisition by
systematic  charges on a  straight-line  basis against income over the period in
which  the  benefits  are  expected  to  arise,  but  not  exceeding  20  years.
Accumulated  goodwill  amortization at September 30, 1998 was $22.8 million. The
carrying value of goodwill is reviewed at least annually.  If the carrying value
of goodwill exceeds the value of the expected future benefits, the difference is
charged against income.

Mortgage servicing fees

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

Related  custodial  deposits are segregated in trust accounts,  principally held
with depository institutions, and are not included in the accompanying financial
statements.

Interest expense

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

Net mortgage origination revenue

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

Servicing losses on investor-owned loans and foreclosure-related expenses

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

A reserve for estimated  servicing losses on  investor-owned  loans is available
for potential losses related to the mortgage servicing portfolio and is included
in accounts payable and accrued liabilities (see Note 7).

Income taxes

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

Deferred tax  liabilities  are  recognized for temporary  differences  that will
result in amounts  taxable in the future and deferred tax assets are  recognized
for  temporary  differences  and tax benefit  carryforwards  that will result in
amounts  deductible or creditable in the future. Net deferred tax liabilities or
assets are recognized  through charges or credits to the deferred tax provision.
A deferred tax valuation  reserve is  established  if it is more likely than not
that all or a portion of the deferred  tax assets will not be realized.  Changes
in the deferred tax valuation reserve are recognized  through charges or credits
to the  deferred  tax  provision.  The  effect of  enacted  changes  in tax law,
including  changes in tax rates,  on  deferred  tax  assets and  liabilities  is
recognized in income in the period that includes the enactment date.

Statement of cash flow

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

New accounting standards

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Statement No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities."  This  statement   standardizes  the  accounting  for
derivative  instruments  and  hedging  activities  by  requiring  that an entity
recognize  those items as assets or  liabilities  in the  statement of financial
position  and  measure  them at fair  value.  If certain  conditions  are met, a
derivative  instrument  may be  specifically  designated  as (a) a hedge  of the
exposure to changes in the fair value of a recognized asset or liability,  or of
an unrecognized  firm commitment,  (b) a hedge of the exposure to variability in
the cash flows of recognized assets,  liability or forecasted transaction or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment,  an
available-for-sale  security, a forecasted  transaction or a net investment in a
foreign  operation.  This statement is effective for fiscal  quarters  beginning
after  June 15,  1999.  Management  has not yet  determined  the  impact of this
statement on the presentation of the financial  statements of HomeSide or on the
nature of its hedging program .

In October 1998, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting   Standards  No.  134,  "Accounting  for  Mortgage-Backed
Securities  Retained after  Securitization  of Mortgage Loans Held for Sale by a
Mortgage Banking  Enterprise." This statement further amends Statement No. 65 to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking  activities  classify the resulting  mortgage-backed
securities or other retained  interests  based on its ability and intent to sell
or hold those  investments.  This  statement is  effective  for the first fiscal
quarter beginning after December 15, 1998. Management expects that the impact of
this statement on the presentation of the financial  statements of HomeSide will
be immaterial.

4.  ACQUISITIONS

Acquisition of Banc One Mortgage Corporation

On April 1, 1998,  HomeSide  entered  into an  agreement  with Banc One Mortgage
Corporation  ("Banc One") to acquire the mortgage  servicing assets of Banc One.
HomeSide  and Banc One have also  entered  into a Preferred  Partner  agreement,
whereby Banc One will sell a  significant  portion of its  residential  mortgage
loan  production  to  HomeSide  over the next five  years.  The  total  purchase
consideration  for the mortgage  servicing  assets was $201.0  million cash. The
mortgage  servicing rights acquired relate to mortgage  servicing loans of $16.6
billion.  The  transaction  closed  on June 5, 1998 and was  accounted  for as a
purchase.  The excess of the aggregate purchase price over the fair value of net
assets acquired and is being amortized over 20 years.

The  unaudited  condensed  pro forma  statement  of income for the  period  from
February 11, 1998 to September 30 1998 and the HomeSide  predecessor period from
March 1, 1997 to February 10, 1998,  assuming  Banc One had been  acquired as of
the beginning of the period is as follows (in millions):

                            PRO FORMA FOR THE PERIOD    PRO FORMA FOR THE PERIOD
                             FROM FEBRUARY 11, 1998      FROM MARCH 1, 1997 TO
                              TO SEPTEMBER 30, 1998         FEBRUARY 10, 1998
                            ------------------------    ------------------------

Net servicing revenue              $129.5                        $202.6 
Net interest  revenue                29.5                           1.2
Net mortgage origination
 revenue                             81.1                          90.1        
Other income                         11.0                           1.7        
                            ------------------------    ------------------------
   Total revenues                   251.1                         295.6         
Expenses                           (174.7)                       (162.1)
                            ------------------------    ------------------------
Income before income taxes           76.4                         133.5         
Income tax expense                  (38.7)                        (52.1)
                            ------------------------    ------------------------
Net income                         $ 37.7                        $ 81.4
                            ========================    ========================

The  purchase  accounting  adjustments  in the  above  pro  forma  statement  of
operations  are based on the actual  purchase price and the amount of assets and
liabilities  actually acquired.  No adjustments have been made for restructuring
costs that might have been  incurred  or for cost  efficiencies  that might have
been realized during the period presented.  Accordingly, these pro forma results
are not indicative of future results.

Acquisition of Loan America

         On April  6,  1998,  HomeSide  signed  an  agreement  with  NationsBank
Corporation  ("NationsBank")  whereby  NationsBank  agreed  to sell  HomeSide  a
national  wholesale  mortgage loan network  which was formerly  owned by Barnett
Banks, Inc. The transaction  closed on May 29, 1998. The excess of the aggregate
purchase  price over the fair  value of net  assets  acquired  was  recorded  as
goodwill and is being amortized over 20 years.

Acquisition of BancBoston Mortgage Corporation

On March 15, 1996,  HomeSide  acquired from  BankBoston  all of the  outstanding
stock of  BancBoston  Mortgage  Corporation  ("BBMC"),  which  was  subsequently
renamed  HomeSide  Lending , Inc.  Certain  assets and  liabilities of BBMC were
retained by BankBoston,  including BBMC's mortgage retail production  operations
in New England. HomeSide made cash payments of $139.5 million in cash and issued
$86.8 million of common stock to BankBoston in consideration for certain assets,
net of assumed liabilities,  and the stock of BBMC. Also, in connection with the
BBMC  acquisition,  the  Investors  purchased  approximately  55%  of  the  then
outstanding common stock of HomeSide for $107.2 million in cash. Simultaneously,
BankBoston paid approximately $1.0 million in cash for all of HomeSide's class C
non-voting  common stock. In consideration of services rendered to HomeSide with
respect to the BBMC Acquisition, class B non-voting stock valued at $1.0 million
was issued to an investment  bank.  Management  purchased  common stock for $4.1
million in cash,  $1.9 million of which was financed by loans from HomeSide.  On
May 31,  1996,  HomeSide  paid an  additional  $5.0  million  to  BankBoston  in
connection with the closing of the Barnett Mortgage Company ("BMC") acquisition.
The transaction  was accounted for under the purchase method of accounting.  The
assets and  liabilities  of BBMC were recorded at their fair values at March 16,
1996,  which  totaled $1.5  billion and $1.2  billion,  respectively.  The total
purchase  price paid for BBMC,  including  transaction  costs and interest,  was
$247.0  million.  The excess of fair value of net assets  acquired over cost was
$56.0 million and was allocated as a reduction mortgage servicing rights.

Acquisition of Barnett Mortgage Company

On May 31, 1996,  HomeSide acquired from Barnett certain assets,  net of assumed
liabilities,  and the outstanding  common stock of BMC (the "BMC  Acquisition").
Certain assets and liabilities of BMC were retained by Barnett,  including those
assets of BMC and its subsidiaries (other than Honolulu Mortgage Company,  Inc.)
associated  with the loan  origination or production  activities.  HomeSide made
cash payments of $228.0 million to Barnett in consideration  for certain assets,
net of assumed  liabilities,  and the stock of BMC. In  connection  with the BMC
Acquisition,  an affiliate of Barnett  purchased shares of HomeSide common stock
for an aggregate  purchase price of $118.0 million.  Also in connection with the
BMC Acquisition,  BankBoston and the Investors paid approximately  $42.3 million
in cash for additional  shares of HomeSide.  The  transaction  was accounted for
using the  purchase  method of  accounting  and,  accordingly,  the  results  of
operations of HomeSide include BMC from the date of acquisition.  The assets and
liabilities  of BMC were recorded by HomeSide at their  estimated fair values at
May 31, 1996, which totaled $764.8 million and $521.4 million, respectively. The
total purchase price paid for BMC,  including  transaction  costs and interests,
was $235.0 million.  The excess of the purchase price over the fair value of net
assets  acquired  was $8.4  million and was  allocated  to goodwill and is being
amortized on a straight-line basis over 15 years.

The unaudited  condensed pro forma statement of income for the period from March
16, 1996 to February  28, 1997,  assuming BMC had been  acquired as of March 16,
1996 is as follows (in millions):

                                           HomeSide Predecessor
                                         Pro Forma for the Period
                                          From March 16, 1996 to
                                             February 28, 1997
                                         -------------------------
   Net servicing revenue                           $167.3
   Net interest  revenue                             (4.5)
   Net mortgage origination revenue                  67.1
   Other income                                       0.7
                                         ------------------------
           Total revenues                           230.6
   Expenses                                        (157.5)
                                         ------------------------
   Income before income taxes
     and extraordinary loss                          73.1
   Income tax expense                               (29.5)
                                         ------------------------
   Income before extraordinary loss                  43.6
   Extraordinary loss                                (6.4)
                                         ------------------------
    Net income                                     $ 37.2
                                         ========================

The  purchase  accounting  adjustments  in the  above  pro  forma  statement  of
operations  are based on the actual  purchase price and the amount of assets and
liabilities  actually acquired.  No adjustments have been made for restructuring
costs that might have been  incurred  or for cost  efficiencies  that might have
been realized during the period presented.  Accordingly, these pro forma results
are not indicative of future results.

5.  MORTGAGE SERVICING RIGHTS

An analysis of mortgage servicing rights is as follows (in thousands):

                                                           HOMESIDE
                                                         PREDECESSOR
                                 SEPTEMBER 30, 1998     FEBRUARY 10, 1998
                                 ------------------     -----------------
Beginning balance                    $1,766,357             $1,596,838
Additions                               593,862                416,822
Sales of servicing                       (9,967)                  (342)
Net deferred hedge gain, 
  net of amortization                  (394,157)               (39,453)
Amortization                           (189,881)              (207,508)
                                   ------------------ ------------------
Ending balance                       $1,766,214             $1,766,357
                                   ================== ==================

6. PREMISES AND EQUIPMENT

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

                                                                  HOMESIDE
                                                                 PREDECESSOR
                                          SEPTEMBER 30, 1998  FEBRUARY 10, 1998
                                          ------------------  -----------------
Land                                           $3,451              $ 3,451
Buildings and building improvements             9,932               10,604
Furniture and equipment                        29,327               22,464
Leasehold improvements                          6,234               14,717
                                          ------------------  -----------------
                                                48,944              51,236
Accumulated depreciation and amortization       (3,287)             (9,254)
                                          ------------------  -----------------
Ending balance                                 $45,657             $41,982
                                          ==================  =================

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

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

                                                                   HOMESIDE
                                                                  PREDECESSOR
                                       FOR THE PERIOD           FOR THE PERIOD
                                      FEBRUARY 11, 1998         MARCH 1, 1997 TO
                                   TO SEPTEMBER 30, 1998       FEBRUARY 10, 1998
                                   ---------------------       -----------------
Beginning balance                         $ 21,650                $  21,650
Provision for servicing losses on                        
      investor-owned loans                  10,314                   12,346
Charge-offs                                (10,341)                 (12,747)
Recoveries                                      27                      401
                                   ---------------------       -----------------
Ending balance                            $ 21,650                $  21,650
                                   =====================       =================

8.      NOTES PAYABLE

Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                              WEIGHTED AVERAGE INTEREST RATE
                                             TOTAL         AT PERIOD END    DURING THE PERIOD
                                          OUTSTANDING
                                        -----------------  -------------    -----------------
<S>                                        <C>                 <C>                <C>  
Bank line of credit                        $ 995,000           5.88%              5.96%
National Australia Bank Unsecured          
  Facility                                 1,754,000           5.66%              5.67%
                                        -----------------
  Total, September 30, 1998               $ 2,749,000
                                        =================

Bank line of credit, February 10, 1998    $ 2,074,956          6.00%              6.04%
                                        =================
</TABLE>

On June 23, 1998,  HomeSide entered into an unsecured  revolving credit facility
with the National pursuant to which it can borrow up to $2.1 billion, subject to
any lending limitations imposed by regulatory  authorities.  As of September 30,
1998, regulations limited the National's ability to lend funds to HomeSide , its
non-bank affiliate,  to approximately $1.8 billion.  The interest rates on these
borrowings are equal to 30 day LIBOR.

HomeSide borrows funds on a demand basis from an independent  syndicate of banks
under a $2.5 billion credit facility  which, at the request of HomeSide,  may be
increased  to $3.0  billion.  The line of  credit is used to  provide  funds for
HomeSide's business of originating,  acquiring and servicing mortgage loans. The
line of credit includes both a warehouse  credit  facility,  which is limited to
98%  of the  fair  value  of  eligible  mortgage  loans  held  for  sale,  and a
servicing-related  facility,  which is capped at $950.0 million. On February 14,
2000, the line of credit will terminate. The credit agreement contains covenants
that impose limitations and restrictions on HomeSide,  including the maintenance
of certain net worth and ratio  requirements.  Under certain  circumstances  set
forth  in  the  credit   agreement,   borrowings   under  the  agreement  become
collateralized  by  HomeSide's  assets.  HomeSide  is  in  compliance  with  all
requirements  included  in the  credit  agreement.  At  September  30,  1998 and
February 10, 1998, $1.0 billion and $2.1 billion, respectively, were outstanding
under the credit line.  The amount  outstanding  at September 30, 1998 under the
bank line of credit is comprised of a warehouse credit facility of $1.0 billion.
The amount  outstanding  at February  10, 1998 is made up of a warehouse  credit
facility  of $1.2  billion  and a  servicing  related  credit  facility  of $0.9
billion.

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

9.  LONG-TERM DEBT

Long-term debt,  including the fair value adjustments  resulting from the merger
with the National, consists of the following (in thousands):

                                                       HOMESIDE
                                                      PREDECESSOR
                        SEPTEMBER 30, 1998         FEBRUARY 10, 1998
                        ------------------         -----------------
Medium-term notes         $   1,161,629               $  750,000
Mortgage note payable            24,297                   20,466
                        -------------------        ------------------
  Total                   $   1,185,926             $    770,466
                        ===================        ==================

Medium-term notes

As of September 30, 1998,  $850.0 million of the outstanding  medium-term  notes
had been effectively converted by interest rate swap agreements to floating-rate
notes. The weighted average borrowing rates on medium-term borrowings issued for
the period  from  February  11,  1998 to  September  30,  1998 and the  HomeSide
predecessor period from March 1, 1997 to February 10, 1998, including the effect
of the interest  rate swap  agreements,  was 6.0% and 6.25%,  respectively.  Net
proceeds from the issuance were primarily used to reduce the amounts outstanding
under the bank credit agreement.  Amounts were subsequently reborrowed under the
bank credit facility to fund the early pool buyout program.

As of September 30, 1998, outstanding medium-term notes issued by HomeSide under
a $1.5 billion shelf registration statement were as follows (in thousands):

  Issue Date       Outstanding Balance      Interest Rate     Maturity Date

May 20, 1997            $   250,000            6.875%         May 15, 2000
June 30, 1997               200,000            6.875%         June 30, 2002
June 30, 1997                40,000            6.820%         July 2, 2001
July 1, 1997                 15,000            6.860%         July 2, 2001
July 31, 1997               200,000            6.750%         August 1, 2004
September 15, 1997           45,000            6.770%         September 17, 2001
March 19, 1998               60,000            5.688%         March 20, 2000
April 23, 1998              125,000            5.788%         April 24, 2001
May 22, 1998                225,000            6.200%         May 15, 2003
                   ----------------------
  Total                 $ 1,160,000   
                   ======================

As of September 30, 1998,  $340.0  million was  available  for future  issuances
under the shelf registration.

11.25% Notes of Parent

On May 14, 1996,  the Parent  issued  $200.0  million of 11.25% notes  ("Notes")
maturing on May 15, 2003 and paying interest  semi-annually in arrears on May 15
and November 15 of each year,  commencing  on November  15, 1996.  The Notes are
redeemable  at the option of the Parent,  in whole or in part, at any time on or
after May 15,  2001,  at  certain  redemption  prices.  The  indenture  contains
covenants that impose limitations and restrictions on the Parent,  including the
maintenance of certain net worth and ratio requirements.  In addition, the Notes
are secured by a second priority  pledge of the common stock of the Parent.  The
Parent is in compliance with all net worth and ratio  requirements  contained in
the  indenture  relating  to the  notes.  The  amount  of Notes  outstanding  at
September 30, 1998 is $130.0 million.

On February 5, 1997, the Parent issued  8,452,500  shares of common stock to the
public at $15 per share. A portion of the proceeds from the offering was used to
pre-pay $70.0  million of the Notes at a premium of $7.9 million.  In connection
with the early  repayment  of the Notes,  the Parent  wrote off a portion of the
unamortized  debt issuance  costs related to the Notes and incurred a prepayment
penalty equal to one year's interest on the Notes retired . The loss amounted to
$6.4  million,  net of tax,  and was  recorded  as an  extraordinary  item.  The
remaining  proceeds were used to reduce amounts  outstanding under the bank line
of credit.

Mortgage note payable

HomeSide  assumed a mortgage note payable that is due in 2017 and bears interest
at a stated  rate of 9.50%.  HomeSide's  main  office  building  is  pledged  as
collateral.  A purchase  accounting  premium  was  recorded in  connection  with
HomeSide assuming the mortgage note payable.

Principal  payments due on long-term  debt at September  30, 1998 are as follows
(in thousands):

             Fiscal Year

             1999                                               $       272
             2000                                                   310,300
             2001                                                   225,329
             2002                                                   200,362
             2003                                                   355,398
             Thereafter                                             211,526
             Unamortized purchase accounting premium                 34,596
                                                       =====================
               Total                                            $ 1,337,783
                                                       =====================


10. INCOME TAXES

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

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

                                            HOMESIDE              HOMESIDE
                                           PREDECESSOR           PREDECESSOR
                FOR THE PERIOD FROM       FOR THE PERIOD        FOR THE PERIOD
                 FEBRUARY 11, 1998             FROM                  FROM
                        TO               MARCH 1, 1997 TO     MARCH 16, 1996 TO
                SEPTEMBER 30, 1998      FEBRUARY 10, 1998     FEBRUARY 28, 1997
                ------------------      -----------------     ------------------
Current:
   Federal         $23,399                    $ 2,856              $   -  
   State             2,794                        -                    - 
                ------------------      -----------------     ------------------
                   $32,193                    $ 2,856              $   - 
Deferred
   Federal           4,459                     42,462               30,872
   State             3,449                      8,061                6,406
                ------------------      -----------------     ------------------
                   $ 7,908                    $50,523              $37,278
                ------------------      -----------------     ------------------
Total              $40,101                    $53,379              $37,278
                ==================      =================     ==================

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


<PAGE>



<TABLE>
<CAPTION>

                                                                     HOMESIDE              HOMESIDE
                                                                    PREDECESSOR           PREDECESSOR
                                         FOR THE PERIOD FROM       FOR THE PERIOD        FOR THE PERIOD
                                          FEBRUARY 11, 1998             FROM                  FROM
                                                 TO               MARCH 1, 1997 TO     MARCH 16, 1996 TO
                                         SEPTEMBER 30, 1998      FEBRUARY 10, 1998     FEBRUARY 28, 1997
                                         ------------------      -----------------     ------------------
<S>                                      <C>                     <C>                   <C>  
Statutory federal income tax rate             35.0%                   35.0%                  35.0%
State income and franchise taxes,
  net of federal tax effect                    4.0%                    3.5%                   4.0%
Goodwill                                      10.8%                     -                      - 
Other                                           -                       .5%                   1.0%
                                         --------------------- -------------------- ---------------------
  Effective income tax rate                   49.8%                   39.0%                  40.0%
                                         ===================== ==================== =====================
</TABLE>

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

                                                                    HOMESIDE
                                                                   PREDECESSOR
                                          SEPTEMBER 30, 1998   FEBRUARY 10, 1998
                                          ------------------   -----------------
Deferred tax assets:
   Net operating loss carryforwards            $ 11,229            $ 23,114
   Alternative minimum tax credit 
     carry forward                                 -                  2,856
   Loss reserves                                 19,535              25,404
   Hedge activities                              73,899              30,754
   Purchase Accounting Adjustment                32,630                 -
   Other assets                                     -                 4,879
                                          ------------------   -----------------
      Total gross deferred tax assets          $137,293            $ 87,007
                                          ==================   =================

Deferred tax liabilities:
   Mortgage servicing fees                     $313,856            $267,871
   Other liabilities                             16,218              16,379
                                          ------------------   -----------------
     Total gross deferred tax liabilities       330,074             284,250
                                          ------------------   -----------------
        Net deferred tax liability             $192,781            $197,243
                                          ===================  =================

In assessing  the  realizability  of deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which these temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities,  projected future taxable income
and tax planning  strategies in making this assessment.  No valuation  allowance
was  recorded  September  30,  1998  or  February  10,  1998.  The  Company  has
consolidated  tax net operating loss  carryforwards at September 30, 1998. These
carryforwards expire in the years 2001 to 2011.

11.  LEASE COMMITMENTS

HomeSide leases office facilities and equipment under noncancelable  leases that
include  renewal options and escalation  clauses which extend into 2010.  Rental
expense for leases of office  facilities  and equipment  was $4.0 million,  $4.5
million and $3.9 million for the period  February 11, 1998 to September 30, 1998
and for the HomeSide  predecessor periods March 1, 1997 to February 10, 1998 and
March 16, 1996 to February 28, 1997,  respectively.  HomeSide's  minimum  future
lease commitments are as follows (in thousands):

FISCAL YEAR
1999                $ 5,669
2000                  4,199
2001                  3,993
2002                  3,935
2003                  3,278
Thereafter            9,422
                  -----------
     Total          $30,496
                  ===========

12.  SUPPLEMENTAL CASH FLOW INFORMATION

HomeSide paid $57.2 million, $58.8 million, and $60.1 million of interest during
the period  from  February  11, 1998 to  September  30,  1998,  March 1, 1997 to
February  10,  1998,  and March 16, 1996 to  February  28,  1997,  respectively.
HomeSide  paid taxes  totaling  $2.7  million  and $0.3  million for the periods
February 11, 1998 to September  30, 1998 and March 1, 1997 to February 10, 1998,
respectively.  HomeSide  received  $70.1  million  and  $51.7  million  cash for
reinstated  loans from early pool buyout  advances for the period from  February
11,  1998 to  September  30,  1998  and  March 1,  1997 to  February  10,  1998,
respectively.

In connection with the acquisitions of BBMC and BMC,  HomeSide recorded non-cash
assets  and  assumed   liabilities,   including  fair  value   adjustments,   of
approximately  $2.3  billion and $1.7 billion for the periods from March 1, 1997
to February 10, 1998 and March 16, 1996 to February 28, 1997, respectively.

13.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

   Cash and cash equivalents

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

   Mortgage loans held for sale

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

   Accounts receivable, early pool buyout advances and accounts payable 

Carrying amounts are considered to approximate fair value.

   Risk management contracts

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

   Notes payable

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

   Long-term debt

Fair value of long-term debt is estimated by discounting  estimated  future cash
flows using a rate  consistent  with the  Company's  current  borrowing  rate as
adjusted for the effects of certain prepayment penalties.


<PAGE>


   Commitments to originate mortgage loans

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

   Forward contracts to sell mortgages

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

   Options on mortgage-backed securities and U.S. treasury bond and note futures

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

   Interest rate swaps

The fair values of interest rate swaps are estimated based on dealer quotes.

Fair Value

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

<TABLE>
<CAPTION>

                                                                             HOMESIDE PREDECESSOR
                                                 SEPTEMBER 30, 1998            FEBRUARY 10, 1998
                                                 ------------------            -----------------
                                                CARRYING        FAIR         CARRYING         FAIR
                                                 AMOUNT         VALUE         AMOUNT          VALUE
                                                --------       --------      --------        -------
<S>                                            <C>           <C>             <C>           <C> 
ASSETS
Cash and cash equivalents                      $   35,008    $   35,008      $   32,113    $   32,113
Mortgage loans held for sale                    2,048,989     2,064,853       1,292,403     1,296,685
Accounts receivable                               272,005       272,005         227,294       227,294
Early pool buyout advances                        759,579       759,579         374,097       374,097
Risk management contracts for
   mortgage servicing rights                      120,211       120,211          43,947        43,947

LIABILITIES

Notes payable                                   2,749,000     2,749,000       2,074,956     2,074,956
Long-term debt                                  1,337,783     1,312,983         770,466       799,893
Accounts payable and accrued liabilities          236,940       236,940         135,802       135,802

OFF-BALANCE SHEET(1)
Commitments to originate mortgage loans             --           23,522            --          (1,510)
Mandatory forward contracts to sell                                                   
      mortgages                                     --          (45,557)           --          (3,621)
Mandatory forward contracts to sell U.S.                                              
       treasuries                                   --             (463)           --              65
Options on mortgage-backed  securities              6,120         2,864           3,543         5,890
Options on U.S treasury bond futures                  113            57             743           604
Interest rate swaps                                 --           24,800            --          13,496
</TABLE>

---------------------------------------------
(1) Parenthesis denote a liability

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

These estimates are subjective in nature and involve  uncertainties  and matters
of significant  judgment and,  therefore,  cannot be determined  with precision.
Changes in any of these  assumptions  used in calculating  fair value would also
significantly  affect the  estimates.  Further,  the fair value  estimates  were
calculated as of September 30, 1998 and February 10, 1998. Subsequent changes in
market interest rates and prepayment  assumptions could significantly change the
fair value.


<PAGE>


14.  RISK MANAGEMENT AND OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

As discussed in Note 3, HomeSide utilizes risk management financial  instruments
to manage  interest  rate risk  related to the value of its  mortgage  servicing
rights.  A  summary  of  HomeSide  's  position  in  risk  management  financial
instruments at September 30, 1998 and February 10, 1998 is included below.

The fair  value of  HomeSide  's risk  management  contracts  is based on quoted
market prices of the  underlying  instruments at September 30, 1998 and February
10, 1998. The notional  amounts  represent the par value of the underlying  U.S.
Treasury bonds or notes. However, the notional amounts are not recognized in the
balance sheet and should not be considered as a measure of credit risk or future
cash requirements.

The amount of the risk management  contracts  maintained depends on factors such
as interest rates, interest rate volatility and growth in the mortgage servicing
portfolio.  HomeSide is subject to market risk to the extent that interest rates
fluctuate; however, the purpose of the risk management contracts is to hedge the
value of the mortgage  servicing  rights  portfolio.  HomeSide's risk management
financial  instruments  qualify  as  hedges,  and  gains or  losses  on the risk
management  instruments  correlate  with  movements in the value of the mortgage
servicing rights. Cash requirements for HomeSide 's option contracts are limited
to premiums paid. Cash  requirements for futures  contracts are managed based on
limits established by HomeSide 's risk management  committee.  HomeSide's credit
risk on its risk  management  contracts  is limited  because the  contracts  are
traded on a national exchange which guarantees counterparty performance.

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

  Options and forward contracts

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

HomeSide  is  exposed  to  credit  loss in the  event of  nonperformance  by the
counterparties to the various  instruments.  HomeSide controls credit and market
risk  associated  with  interest rate products by  establishing  and  monitoring
limits  with  counterparties  as to the  types and  degree of risks  that may be
undertaken.  HomeSide  's exposure to credit risk in the event of default by the
counterparties for the options was $57.4 million at September 30, 1998 and $57.0
million at February 10, 1998.

HomeSide 's exposure to credit risk in the event of default by the  counterparty
for mandatory forward  commitments to sell mortgage loans and related options is
the difference  between the contract price and the current market price,  offset
by any available margins retained by HomeSide or an independent  clearing agent,
which  totaled $0.4 million at September  30, 1998 and $30.2 million at February
10, 1998.

The amount of credit risk as of September 30, 1998 and February 10, 1998, if all
counterparties  failed  completely  and if the  margins,  if  any,  retained  by
HomeSide  or an  independent  clearing  agent  were to become  unavailable,  was
approximately  $37.4  million  and  $4.4  million,  respectively,  for all  risk
management  instruments related to mortgage servicing rights and the origination
and selling of mortgage loans.

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


<PAGE>

<TABLE>
<CAPTION>

                                                                      HomeSide Predecessor 
                                              September 30, 1998        February 10, 1998 
                                              ------------------   --------------------------     
                                           Notional                 Notional
                                            Amount     FairValue(1)  Amount     Fair Value (1)
                                           ---------   -----------  --------    --------------
<S>                                        <C>         <C>          <C>         <C>
Purchased commitments to sell 
  Mortgage loans:
  Mandatory forward contracts              3,281,196     ($45,640)  2,847,668     ($3,556)
  Options on mortgage-backed
      securities                           1,845,000        2,864     835,000       5,890
   Options on U.S. treasury
      bond futures                           127,000           57     145,000         604
Risk management contracts on
   Mortgage servicing rights:
   Options on U.S. treasury
      bond/note futures                    7,905,900       57,368   4,440,100      50,487
   Futures contracts on U.S. treasury
      bonds/notes                          5,545,500       62,843   2,121,800      (6,540)
</TABLE>
----------------------------------------
(1)  Parenthesis  denote liability.  Fair value represents the amount at which a
     given  instrument  could be exchanged in an arms length  transaction with a
     third party as of the balance sheet date.

  Commitments to originate mortgage loans

HomeSide  regularly enters into  commitments to originate and purchase  mortgage
loans at a future date subject to compliance with stated conditions. Commitments
to originate  mortgage loans have off-balance  sheet risk to the extent HomeSide
does not have matching  commitments  to sell loans,  which  exposes  HomeSide to
lower  of cost  or  market  valuation  adjustments  in a  rising  interest  rate
environment.  Additionally,  the extension of a commitment,  which is subject to
HomeSide 's credit review and approval  policies,  gives rise to credit exposure
when certain borrowing conditions are met and the loan is made. Until such time,
it represents only potential  exposure.  The obligation to lend may be voided if
the customer's financial condition deteriorates or if the customer fails to meet
certain  conditions.  Commitments to originate mortgage loans do not necessarily
reflect future cash requirements since some of the commitments will not be drawn
upon before  expiration.  Commitments  to originate  mortgage loans totaled $4.1
billion  and  $3.2  billion  at  September  30,  1998  and  February  10,  1998,
respectively.

  Mortgage loans sold with recourse

HomeSide sells mortgage loans with recourse to various investors and retains the
servicing rights and  responsibility for credit losses on these loans. The total
outstanding  balance of loans sold with recourse does not necessarily  represent
future cash outflows. The total outstanding principal balance of loans sold with
recourse was $15.0  million and $16.7 million at September 30, 1998 and February
10, 1998, respectively.

  Servicing commitment to investors

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

  Purchase mortgage servicing rights commitments

HomeSide routinely enters into commitments to purchase mortgage servicing rights
associated  with mortgages  originated by third  parties,  subject to compliance
with stated conditions.  These commitments to purchase mortgage servicing rights
correspond  to mortgage  loans having an  aggregate  loan  principal  balance of
approximately  $4.3 billion and $0.6 billion at September  30, 1998 and February
10, 1998, respectively.

   Interest rate swaps

The amount of credit risk as of September 30, 1998 if all counterparties  failed
completely was approximately $24.8 million for interest rate swaps.


<PAGE>


  Geographical concentration of credit risk

HomeSide is engaged in business nationwide and has no material  concentration of
credit risk in any geographic region. For additional information on geographical
distribution see "Servicing Portfolio  Composition Servicing Portfolio by State"
under Item 1 of this document.

15.  CONTINGENCIES

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

16.  EMPLOYEE BENEFITS

HomeSide  offers a 401(k) defined  contribution  benefit plan in which employees
may contribute a portion of their compensation.  Substantially all employees are
eligible  for  participation  in the plan.  The Company  matches 100% of amounts
contributed  up to 4% of an employee's  compensation.  Further,  the Company may
contribute  additional  amounts at its discretion.  Total expense related to the
benefit plan was approximately $4.1 million and $3.0 million for the period from
February 11, 1998 to September 30, 1998 and the HomeSide predecessor period from
March 16, 1997 to February 10, 1998, respectively.

17.  QUARTERLY FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>

(in thousands)                          For the Three       For the Three    For the Period From
                                        Months Ended        Months Ended      February 11, 1998
                                     September 30, 1998     June 30, 1998     to March 31, 1998
                                     ------------------     -------------    -------------------
<S>                                       <C>                   <C>                <C>    
Revenue                                   $104,469              $99,650            $46,158
Expenses                                    71,255               66,726             31,750
Provision for income taxes                  16,347               16,236              7,518
                                     -------------------- ------------------ ---------------------
Net income                                $ 16,867              $16,688            $ 6,890
                                     ==================== ================== =====================
</TABLE>
<TABLE>
<CAPTION>

                                                            HOMESIDE PREDECESSOR
                                    --------------------- ----------------- ------------------ ------------------
  (in thousands)                    For the Period From    For the Three      For the Three      For the Three
                                    December 1, 1997 to     Months Ended      Months Ended       Months Ended
                                     February 10, 1998     November 30,      August 31, 1997      May 31, 1997
                                                                1997
                                    -------------------    --------------    ---------------     -------------
<S>                                       <C>                   <C>               <C>                 <C>   
  Revenue                                 $62,264               $75,619           $76,330             70,727
  Expenses                                 35,943                38,241            39,432             37,454
  Provision for income taxes               11,433                14,577            14,391             12,978
                                    -------------------    --------------    ---------------     -------------
  Net income                              $17,888               $22,801           $22,507            $20,295
                                    ===================    ==============    ===============     =============
</TABLE>
<TABLE>
<CAPTION>

                                                            HOMESIDE PREDECESSOR
                                 --------------------- ------------------ ----------------- --------------------
  (in thousands)                    For the Three        For the Three     For the Three    For the Period From
                                     Months Ended        Months Ended       Months Ended     March 16, 1996 to
                                  February 28, 1997    November 30, 1996  August 31, 1996      May 31, 1996
                                  -----------------    -----------------  ---------------      ------------
<S>                                      <C>                   <C>                <C>               <C>    
  Revenue                                $68,841               $68,073            $63,640           $36,087
  Expenses                                39,987                40,335             40,515            22,609
  Provision for income taxes              10,898                11,373              9,481             5,526
                                 --------------------- ------------------ ----------------- --------------------
  Net income                             $17,956               $13,365            $13,644           $ 7,952 
                                 ===================== ================== ================= ====================
</TABLE>

18. OTHER RELATED PARTY TRANSACTIONS

For the HomeSide  predecessor  period  March 1, 1997 through  February 10, 1998,
HomeSide  paid  BankBoston  and  Barnett  approximately  $5.2  million  and $0.5
million,   respectively,  for  certain  corporate  services.  For  the  HomeSide
predecessor period March 16, 1996 to February 28, 1997, HomeSide paid BankBoston
and Barnett approximately $2.5 million and $0.9 million, respectively, for these
services.

For the HomeSide  predecessor  period  March 1, 1997 through  February 10, 1998,
HomeSide paid  approximately  $5.3 million and $45.4 million,  respectively,  to
BankBoston and Barnett for the purchase of mortgage  servicing  rights.  For the
HomeSide  predecessor  period  from March 1, 1996  through  February  28,  1997,
HomeSide paid  approximately  $4.7 million and $27.6 million,  respectively,  to
BankBoston and Barnett for the purchase of mortgage  servicing rights.  HomeSide
also purchases the mortgage  servicing  rights to the mortgage loans  BankBoston
and Barnett hold in their portfolios.  For the HomeSide predecessor period March
1, 1997 through February 10, 1998,  HomeSide purchased mortgage servicing rights
for loans retained by BankBoston and Barnett totaling approximately $1.6 million
and $9.5 million,  respectively.  For the HomeSide predecessor period from March
16, 1996 to February 28, 1997 HomeSide  purchased  mortgage servicing rights for
loans retained by BankBoston and Barnett totaling approximately $1.3 million and
$8.2 million,  respectively.  The BankBoston and Barnett  purchases  represented
2.8% and 20.4%, respectively, of the Company's total production for the HomeSide
predecessor  period from March 1, 1997 to February  10,  1998.  For the HomeSide
predecessor  period of March 16, 1996 through  February 28, 1997, the BankBoston
and  Barnett  purchases  represented  2.8%  and  16.0  %,  respectively,  of the
Company's total production.

For the  HomeSide  predecessor  period  March  1,  1997 to  February  10,  1998,
BankBoston  and Barnett paid $3.8 million and $29.1  million in servicing  fees,
respectively,  and were  consistent  with the fees  charged by HomeSide to other
investors.  For the HomeSide  predecessor  period March 16, 1996 to February 28,
1997,  BankBoston  and Barnett paid $5.3 million and $ 23.6 million in servicing
fees, respectively.

As a result of NationsBank Corporation's acquisition of Barnett Banks, Inc., the
Company agreed to release  Barnett from a five year agreement to sell certain of
its mortgage  loans to HomeSide.  In  consideration,  the Company  received $3.0
million cash in June 1998.

On June 23, 1998,  HomeSide entered into an unsecured  revolving credit facility
with the National pursuant to which it can borrow up to $2.1 billion, subject to
any lending limitations imposed by regulatory  authorities.  As of September 30,
1998,  regulations limited the National's ability to lend funds to HomeSide, its
non-bank affiliate,  to approximately $1.8 billion.  The interest rates on these
borrowings are equal to 30 day LIBOR.

19.  SUBSEQUENT EVENTS

On October 21,  1998,  HomeSide  established  a $1.5  billion  commercial  paper
program.  A total of $.15 billion of  commercial  paper was issued at an average
borrowing rate of LIBOR less 2 basis points as of November 30, 1998.

On December 4, 1998,  HomeSide  entered into a Pooling and  Servicing  Agreement
with Bank One Trust Company, N.A., as Trustee, and HomeSide Funding Corporation,
as  Transferor,  pursuant  to which  approximately  $41  million  in  delinquent
mortgage  loans,  which HomeSide had repurchased  from GNMA pools,  were sold to
HomeSide Funding Corporation.  The loans were then sold to the HomeSide Mortgage
Loan  Buyout  Trust  1998-A.  This  transaction  allowed  HomeSide  to sell  the
delinquent loans while retaining the servicing rights and attendant income.

On December 3, 1998,  HomeSide  announced  that it had entered  into a Preferred
Partner  relationship  with People's  Bank,  the largest bank  headquartered  in
Connecticut.  Under the Preferred  Partner  relationship,  HomeSide will service
substantially  all new mortgage loans  originated by People's Bank. In addition,
HomeSide  purchased  the  servicing  rights to  approximately  $2.7  billion  in
mortgage  loans  serviced  by  People's  and  will  provide   subservicing   for
approximately $2.3 billion in mortgage loans held in People's portfolio.

On  December 4, 1998,  HomeSide  entered  into a  long-term  lease for a 137,000
square  foot   building  to  be   constructed   adjacent  to  its   Jacksonville
headquarters. The new building should be ready for occupancy by September 1999.

On April 10,  1998,  Banc One  Corporation  and First  Chicago  NBD  Corporation
entered into an Agreement and Plan of  Reorganization  pursuant to which the two
banks  then  merged  effective  October  1,  1998.  HomeSide  has  reviewed  its
agreements  with Banc One  Corporation  and has determined  that the merger with
First  Chicago NBD is unlikely to have a material  adverse  impact on HomeSide's
relationship with Banc One.


<PAGE>


BBMC (ACQUIRED BY HOMESIDE, INC. ON MARCH 15, 1996 AND NOW KNOWN AS HOMESIDE 
                               LENDING, INC.)

   ITEM 6. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION

      The following table sets forth summary historical  consolidated  financial
and operating information for BBMC (formerly BancBoston Mortgage Corporation and
the BBMC  predecessor to the Issuer) for the periods prior to its acquisition by
the  Parent.  Such  information  should  be read  in  conjunction  with,  and is
qualified in its entirety by reference to, the Consolidated Financial Statements
and the Notes  thereto and in  conjunction  with  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  of BBMC  included
elsewhere in this document.
<TABLE>
<CAPTION>

                                                 FOR THE PERIOD
                                               FROM JANUARY 1, 1996
                                    1995        TO MARCH 15, 1996
                                --------------  --------------------
CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
<S>                              <C>             <C>
Revenues:
Mortgage servicing fees               $173,038         $38,977
Gain (loss) on risk management    
  contracts                            108,702        (128,795)
Amortization of mortgage servicing                              
  rights                              (108,013)         (7,245)
                                --------------  --------------------
     Net servicing  revenue            173,727         (97,063)
Interest income                         24,324           8,423
Interest expense                       (27,128)        (10,089)
                                --------------  --------------------
     Net interest revenue               (2,804)         (1,666)
Net mortgage origination revenue                     
  (expense)                              3,417           7,638
Gain on sales of servicing rights       10,230             -
Other income                               511             253
                                --------------  --------------------
          Total revenues               185,081         (90,838)
Expenses:
Salaries and employee benefits          45,381          10,287
Occupancy and equipment                 10,009           2,041
Servicing losses on investor-owned     
  loans                                  9,981           5,560
Real estate acquired                     1,054             291
Other  expenses                         21,896           7,377
                                --------------- --------------------
          Total expenses                88,321          25,556
Income (loss) before income taxes
  and cumulative effects of changes   
  in accounting  principles            $96,760       ($116,394)
                                ==============  ====================
Net income (loss)                      $58,826        ($73,861)
                                ==============  ====================

SELECTED BALANCE SHEET DATA (AT
  PERIOD END):
Mortgage loans held for sale       $   388,436    $    628,504
Mortgage servicing rights              551,338         542,862
Total assets                         1,254,303       1,520,357
Note payable to Bank of Boston         966,000       1,256,000
Total Liabilities                    1,067,712       1,407,627
Total stockholders' equity             186,591         112,730

SELECTED OPERATING DATA
Volume of loans originated and 
 acquired                          $ 9,567,521     $ 4,187,603(a)

Loan servicing portfolio (at period                  
  end)                              41,555,354      44,158,163(a)
Loan servicing portfolio (average)  39,283,700      43,158,072(a)
Weighted average interest rate (at                   
  period end)                           7.97%            7.90%(a)
Weighted average servicing fee                       
  (average for period)                 0.383%           0.380%(a)
</TABLE>

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

(a)  Period  information is for the period January 1, 1996 to March 31, 1996 and
     period end information is at March 31, 1996.


<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS BANCBOSTON MORTGAGE CORPORATION--FOR THE PERIODS JANUARY 1, 1996
TO MARCH 15, 1996 AND JANUARY 1, 1995 TO MARCH 31, 1995 AND FOR THE YEAR ENDED
                                DECEMBER 31, 1996

GENERAL

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

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

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

RESULTS OF OPERATIONS

Summary

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

        The increase in net income in 1995 as compared to 1994 was primarily due
to factors that resulted  from a decrease in interest  rates coupled with growth
in BBMC's servicing portfolio. The lower interest rate environment resulted in a
gain related to BBMC's risk management  activities in 1995 as compared to a loss
in  1994.  BBMC  also  benefited  from  a 9%  increase  in  the  balance  of its
residential servicing portfolio from $38.0 billion at December 31, 1994 to $41.6
billion at December 31, 1995. The increases were partially offset,  however,  by
higher  mortgage  servicing  rights  amortization  charges as a result of larger
mortgage servicing volumes and higher prepayment activity in 1995.

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

Net Servicing Revenue

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

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

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

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

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

Risk Management Activities

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

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

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

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

Net Interest Revenue/Expense

        Net interest  expense was $2.4 million in 1994 and $2.8 million in 1995.
Interest income decreased $7.3 million in 1995 as compared with 1994,  primarily
as a result of a decrease ~in the average  rate earned on  warehouse  loans from
9.52% in 1994 to 7.78% in 1995.  The  reduction in interest  income on warehouse
loans was  partially  offset by a $2.1  million  increase in interest  earned on
mortgage loans held for investment.  Interest expense  decreased $6.8 million in
1995 as compared  with 1994 as a result of a decline in the average rate paid on
BBMC's borrowings from 7.14% in 1994 to 6.89% in 1995.

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

Net Mortgage Origination Revenue

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

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

Gain on Sales of Servicing Rights

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

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

Salaries and Employee Benefits

        Salaries and employee  benefits  increased from $40.4 million in 1994 to
$45.4 million in 1995, or 12.4%.  Including  capitalized direct loan origination
costs (principally salary and employee benefits), salaries and employee benefits
increased  from $51.5 million to $56.5  million from 1994 to 1995, or 9.7%.  The
increase  included  a $3.9  million  increase  in  salaries  and a $1.1  million
increase in  benefits  and were the result of a larger  staff  needed to support
BBMC's growing servicing portfolio.  The increases in salaries and benefits were
partially  offset by the outsourcing of certain default  administration  and tax
payment  administration   activities  during  1995.  BBMC  determined  that  the
performance of these services on a contracted basis was more cost effective than
maintaining  the  personnel  and  infrastructure  necessary  to carry  out these
functions in-house.  Salaries and employee benefits decreased from $11.7 million
in the first  quarter of 1995 to $10.3  million in the first quarter of 1996, or
12.1%. If capitalized  direct loan  origination  costs  (principally  salary and
employee  benefits) were included,  the salaries and employee benefits increased
from $12.8  million in the first  quarter of 1995 to $13.5  million in the first
quarter of 1996,  or 5.8%.  The increase  reflected  general  salary and benefit
increases as compared to the first quarter of 1995 and a slight  increase in the
number of full time  equivalent  employees  from  1,117 as of March 31,  1995 to
approximately 1,120 as of March 15, 1996.


<PAGE>



Occupancy and Equipment Expense

        Occupancy and equipment  expense  increased from $9.0 million in 1994 to
$10.0  million in 1995,  or 11.1%,  due  primarily  to the  acquisition  of Bell
Mortgage and the larger servicing  operations.  Occupancy and equipment  expense
decreased $0.4 million,  from $2.4 million for the first quarter of 1995 to $2.0
million for the first  quarter of 1996.  The  decrease  was  primarily  due to a
decline in equipment  repair and  maintenance  expenses in the first  quarter of
1996 as compared to the first quarter of 1995.

Servicing Losses on Investor-Owned Loans

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

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

Real Estate Owned Expense

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

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

Other Expenses

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

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

Provision for (Benefit from) Income Taxes

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

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

Accounting Changes

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

LIQUIDITY AND CAPITAL RESOURCES

Overview

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

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

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

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

Impact of Inflation

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

New Accounting Standard

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


<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
BancBoston Mortgage Corporation

We have  audited  the  accompanying  consolidated  balance  sheet of  BancBoston
Mortgage  Corporation  as of December  31,  1995,  and the related  consolidated
statements of operations and retained  earnings and cash flows for the year then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

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

Coopers & Lybrand L.L.P.

Jacksonville, Florida

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


<PAGE>


REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors of
BancBoston Mortgage Corporation

We have  audited  the  accompanying  consolidated  balance  sheet of  BancBoston
Mortgage Corporation and subsidiaries (see Note 1) as of March 15, 1996, and the
related  consolidated  statements of operations  and retained  earnings and cash
flows for the period from  January 1, 1996 to March 15,  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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

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

Arthur Andersen LLP

Jacksonville, Florida
March 14, 1997


<PAGE>





                         BANCBOSTON MORTGAGE CORPORATION
 (The BBMC Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now 
                   known as HomeSide Lending, Inc. -- Note 1)

                           CONSOLIDATED BALANCE SHEETS

                                                  AT DECEMBER 31,   AT MARCH 15,
  (in thousands)                                       1995            1996
                                                -----------------   ------------
               ASSETS
  Cash.......................................      $      830         $  23,216
  Mortgage loans
    Held for sale, net.......................         388,436           628,504
    Held for investment......................          33,183            65,068
  Purchased mortgage servicing rights, net...         533,891           522,469
  Excess mortgage servicing receivable, net..          17,447            20,393
  Accounts receivable........................          82,473            65,599
  Accounts receivable from Bank of Boston and 
    affiliates...............................             343                --
  Pool loan purchases........................          65,272            56,261
  Mortgage claims receivable, net............          45,422            17,563
  Accrued income tax receivable..............              --            40,867
  Deferred tax asset.........................          40,724            36,390
  Real estate acquired.......................           2,627             2,797
  Premises and equipment, net................          25,386            25,071
  Other assets...............................          18,269            16,159
                                                =================   ============
            Total Assets.....................      $1,254,303        $1,520,357
                                                =================   ============

      LIABILITIES & STOCKHOLDER'S EQUITY
  Note payable to Bank of Boston.............      $  966,000        $1,256,000
  Accounts payable and accrued liabilities...          51,683           137,837
  Accrued income taxes.......................          36,213                --
  Long-term debt.............................          13,816            13,790
                                                -----------------   ------------
            Total liabilities................       1,067,712         1,407,627
                                                -----------------   ------------
  Commitments and Contingencies
    (Notes 9, 11, 12, 13, 15, and 16) 
Stockholder's Equity:
    Common stock, $1 par value per share:
       10,000 shares authorized; 100 shares
       issued and outstanding                              --                --
    Additional paid-in capital...............         156,666           156,666
    Retained earnings (accumulated deficit)..          29,925           (43,936)
                                                -----------------   ------------
            Total stockholder's equity.......         186,591           112,730
                                                -----------------   ------------
            Total Liabilities and 
              Stockholder's Equity                 $1,254,303        $1,520,357
                                                =============   ================

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


<PAGE>


<TABLE>
<CAPTION>

                         BANCBOSTON MORTGAGE CORPORATION
 (The BBMC Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now 
                   known as HomeSide Lending, Inc. -- Note 1)

           CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

                                                                                   FOR THE PERIOD
                                                                 YEAR ENDED       JANUARY 1, 1996
                                                                DECEMBER 31,          THROUGH
                                                                    1995           MARCH 15, 1996
                                                              --------------      ---------------
(IN THOUSANDS)
<S>                                                            <C>                 <C>
   Revenues:                                                                                          
     Mortgage servicing fees..............                       $173,038              $38,977
     Gain (loss) on risk management contracts                     108,702             (128,795)
     Amortization of mortgage servicing rights                   (108,013)              (7,245)
                                                              ---------------------------------------
        Net servicing revenues............                        173,727              (97,063)
                                                              ---------------------------------------
     Interest income......................                         24,324                8,423
     Interest expense.....................                        (27,128)             (10,089)
                                                              ---------------------------------------
        Net interest revenue (expense)....                         (2,804)              (1,666)
                                                              ---------------------------------------
     Net mortgage origination revenue.....                          3,417                7,638
     Gain on sales of servicing rights....                         10,230                   --
     Other income.........................                            511                  253
                                                              ---------------------------------------
             Total Revenues...............                        185,081              (90,838)
                                                              ---------------------------------------
   Expenses:                                                                     
     Salaries and employee benefits.......                         45,381               10,287
     Occupancy and equipment..............                         10,009                2,041
     Servicing losses on investor-owned loans                       9,981                5,560
     Real estate acquired.................                          1,054                  291
     Other expenses.......................                         21,896                7,377
                                                              ---------------------------------------
             Total Expenses...............                         88,321               25,556
                                                              ---------------------------------------
   Income (loss) before income taxes and cumulative
     effect of change in accounting principle                      96,760             (116,394)
   Income tax expense (benefit) before cumulative                                
     effect of change in accounting principle:                                   
     Current..............................                         47,646              (46,867)
     Deferred.............................                         (9,712)               4,334
                                                              ---------------------------------------
             Total Income Tax Expense (Benefit)                    37,934              (42,533)
                                                              ---------------------------------------
             Net Income (Loss)............                         58,826              (73,861)
   Retained Earnings (Accumulated Deficit), January 1             (28,901)              29,925
                                                              ---------------------------------------
   Retained Earnings (Accumulated Deficit), end of

     period...............................                         $29,925            $(43,936)
                                                              =======================================
</TABLE>

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


<PAGE>



                         BANCBOSTON MORTGAGE CORPORATION
 (The BBMC Predecessor, acquired by HomeSide, Inc. on March 15, 1996 and now 
                   known as HomeSide Lending, Inc. -- Note 1)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                  FOR THE PERIOD
                                                   YEAR ENDED    JANUARY 1, 1996
                                                  DECEMBER 31,       THROUGH
                                                      1995        MARCH 15, 1996
                              (IN THOUSANDS)      ------------    --------------
Cash flows provided by (used in)                        
  operating activities:                                           
  Net income (loss)...................              $  58,826       $ (73,861)
  Adjustments to reconcile net income                   
   (loss) to cash
  provided by (used in) operations:                  
  Cumulative effect of change in accounting
   for mortgage servicing fees, net of tax                 --              --
  Amortization.....................                   108,404           7,327
  Depreciation.....................                     3,133             719
  Servicing losses on investor-owned                    
   loans.................................               9,981           5,560
  Deferred tax (benefit) expense...                    (9,712)          4,334
  Gain on sale of mortgage servicing                  
   rights................................             (10,230)             --
  (Gain) loss on risk management                     
    contracts............................            (108,702)        128,795
  Write down of real estate acquired.....               1,699           1,067  
  Capitalized excess mortgage servicing            
   receivable............................              (7,513)         (3,967)
  Mortgage loans originated and
   purchased for sale....................          (4,816,964)     (2,027,741)
  Proceeds and principal repayments
   of mortgage loans held for sale.......           4,694,909       1,787,673
  Change in accounts receivable....                   (16,053)         17,217
  Change in pool loan purchases....                    12,205           9,011
  Change in mortgage claims                
   receivable............................              (5,383)         25,863
  Change in accrued income taxes.........              31,388         (77,080)
  Change in other assets and accounts
   payable and accrued liabilities.......             (11,899)         82,622
                                                  ------------------------------
 Net cash provided by (used in)
  operating activities...................             (65,911)       (112,461)
                                                  ------------------------------

Cash flows provided by (used in)                        
 investing activities:                                           
 Principal payments on (net
  origination) of mortgage loans                
  held for investment..............                    12,966         (31,885)
 Purchase of premises and equipment..                  (3,141)           (404)
 Acquisition of Bell Mortgage........                    (891)             --
 Purchase of mortgage servicing rights               (193,013)        (60,171)
 Proceeds from (amounts paid for) risk
  management contracts, net                            27,120         (63,426)
 Proceeds from real estate acquired..                   2,610             759
 Proceeds from sales of mortgage             
  servicing rights......................               28,649              --
                                                  ------------------------------
Net cash used in investing              
 activities.............................             (125,700)       (155,127)
                                                  ------------------------------

Cash flows provided by (used in)                        
 financing activities:                                           
 Borrowings from Bank of Boston......               3,669,085       1,692,500
 Repayments to Bank of Boston........              (3,482,106)     (1,402,500)
 Repayment of long-term debt.........                    (191)            (26)
                                                  ------------------------------
Net cash provided by (used in)
 financing activities................                 186,788         289,974
                                                  ------------------------------
Net increase (decrease) in cash.......                 (4,823)         22,386
Cash at January 1...................                    5,653             830
                                                  ------------------------------
Cash at end of period...............                $     830       $  23,216
                                                  ==============================

Supplemental disclosures of cash flow
 information:

Cash paid during the year for:                        
     Interest.........................              $  27,498       $   9,211
     Income taxes.....................              $  16,258       $  30,213
                                                  ==============================

Supplemental schedule of non-cash                       
 investing activities:

BBMC purchased bulk mortgage 
 servicing rights during the
 years 1994 and 1995. In conjunction                $  23,022       $      --
 with purchases, accounts payable
 were assumed..........................
                                                  ==============================



<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

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

Interest rate products

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

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

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

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

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

Mortgage loans

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

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

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

Purchased and originated mortgage servicing rights

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

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

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

Excess mortgage servicing receivable

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

Accounts receivable

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


<PAGE>


Pool loan purchases

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

Mortgage claims receivable

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

Real estate acquired

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

Premises and equipment

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

Other assets

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

Mortgage servicing fees

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

Servicing losses on investor-owned loans

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

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

Net mortgage origination revenue

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

Income taxes

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

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

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

3. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS MORTGAGE SERVICING  RECEIVABLE
PMSR consist of the following:

                                      December 31,    March 15,
                                          1995            1996
                                     ---------------- -----------------
(in thousands)

PMSR                                 $ 954,931        $ 951,817
Accumulated amortization              (421,040)        (429,348)
                                     ================ =================
Balance                              $ 533,891        $ 522,469
                                     ================ =================

EMSR consist of the following:

                                     December 31,     March 15,
                                         1995            1996
                                     ---------------- -----------------
                                              (in thousands)

PMSR                                 $  66,465        $  70,432
Accumulated amortization               (49,018)         (50,039)
                                     ================ =================
Balance                              $  17,447        $  20,393
                                     ================ =================


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

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

                                           December 31,     March 15,
                                                1995            1996
                                           ---------------- -----------------
                                                    (in thousands)

Balance at January 1                       $   (6,650)      $  (9,400)
Servicing losses on investor-owned loans       (9,981)         (5,560)
Charge-offs                                     7,473           2,725
Recoveries                                       (242)             -
                                         ================ =================
Ending Balance                             $   (9,400)       $(12,235)
                                         ================ =================



5. MORTGAGE SERVICING PORTFOLIO

        BBMC's residential  mortgage  servicing  portfolio totaled $41.5 billion
and $44.2  billion at December  31, 1995 and March 15, 1996,  respectively,  and
included  mortgage-backed  securities  of $28.5  billion  and $29.1  billion  at
December  31,  1995 and  March  15,  1996,  respectively.  In  addition,  BBMC's
commercial  loan  servicing  portfolio  totaled $0.9 billion and $0.2 billion at
December 31, 1995 and March 15, 1996, respectively.  Related fiduciary funds are
segregated in trust accounts, principally deposited with Bank of Boston, and are
not included in the accompanying consolidated financial statements.

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

6. PREMISES AND EQUIPMENT

        Premises and equipment consist of the following:

                                           December 31,     March 15,
                                                1995            1996

                                           ---------------- -----------------
                                                    (in thousands)

Land                                       $        4,086   $       4 086
Building                                           14,477          14,476
Furniture and Equipment                            26,870          25,967
Leasehold improvements                                824             877
                                           ---------------- -----------------
                                                  46,257           45,406
Accumulated depreciation and amortization        (20,871)         (20,335)
                                           ================ =================
Balance                                    $      25,386    $      25,071
                                           ================ =================


7. NOTE PAYABLE TO BANK OF BOSTON

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

8. LONG-TERM DEBT

        Long-term debt consists of a 30-year mortgage note, payable monthly with
interest at 9.5%,  maturing in 2017.  BBMC's main office  building is pledged as
collateral.  Principal  payments due on long-term debt as of March 15, 1996, are
as follows:

                                March 15, 1996
                            ---------------------
                               (in thousands)

1997                        $           230
1998                                    234
1999                                    258
2000                                    283
2001                                    312
Thereafter                           12,473
                            =====================
Total Due                   $        13,790
                            =====================

9. EMPLOYEE BENEFITS

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

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

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

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

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

The components of post-retirement benefits expense for the year ended December
 31 were as follows:
                                                                   1995

                                                               -------------
                                                               (In Thousands)

Service cost (benefits earned during the period)               $    53
Interest cost on projected benefit obligation                      264
Amortization:
   Unrecognized net asset                                          250
   Unamortized gain                                                (53)
                                                               =============
Net post-retirement benefit cost                               $  514
                                                               =============

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

                                                                1995
                                                            --------------
                                                            (In Thousands)
Accumulated post-retirement benefit
   obligation for retirees                                  $   3,515
Unrecognized net gain                                           1,541
Unrecognized net obligation                                    (4,250)
                                                            ==============
Post-retirement benefit liability                           $     806
                                                            ==============

Assumptions used in actuarial computations were:

                                                                   1995
                                                            -------------------
Rate of increase in future
   compensation levels                                            4.50%
Weighted average discount rate                                    7.25%
Medical inflation rate                                       8% declining to
                                                                5% in 1999

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

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

10. INCOME TAXES

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

                                       December 31,     March 15,
                                            1995           1996
                                       ---------------- -----------------
                                                (In Thousands)

PMSR                                   $    34,008      $    28,167
EMSR                                         8,957            8,881
Reserve for estimated servicing
   losses on investor-owned loans            3,657            4,759
Other                                       (1,301)          (1,303)
Valuation reserve                           (4,597)          (4,114)
Net deferred tax assets,
                                       ================ =================
   Net of reserve                      $    40,724      $     36,390
                                       ================ =================

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

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

                                           December 31,     March 15,
                                                1995           1996
                                           ---------------- -----------------
                                                    (In Thousands)
Current tax provision (benefit)            $    47,646      $   (46,867)
Deferred tax (benefit) expense on income        (8,651)           4,817
Change in valuation reserve                     (1,061)            (483)
                                           ---------------- -----------------
Net deferred tax (benefit) expense              (9,712)           4,334
Income tax provision (benefit) before
   cumulative effect of changes in

   accounting principles                        37,934          (42,533)
Total income tax provision (benefit)       $    37,934      $   (42,533)
                                           ================ =================

        The  following  table  reconciles  the  expected  federal tax  provision
(benefit) on income  (loss)  before  cumulative  effect of change in  accounting
principle,  based on the  federal  statutory  tax rate of 35%, to the actual tax
provision   (benefit)  before   cumulative   effect  of  changes  in  accounting
principles:

                                                 December 31,     March 15,
                                                      1995           1996
                                                 ---------------- --------------
                                                          (In Thousands)

Expected tax provision (benefit) applicable to
   income (loss) before cumulative effect of
   change in accounting principle                $   33,866       $  (40,738)
Effect of:
   State income taxes, net of federal tax
     benefits                                         3,774              743
   Other                                                294           (2,538)
                                                 ---------------- --------------
Actual tax provision (benefit) before
   cumulative effect of change in                                             
   accounting principle                          $   37,934       $  (42,533)
                                                 ================ ==============

11. LEASE COMMITMENTS

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

                                 December 31,     March 15,
                                      1995           1996
                                 ---------------- -----------------
                                          (In Thousands)

1996                             $   1,996        $   1,837
1997                                   622            1,910
1998                                   280            1,764
1999                                    52            1,079
2000                                    -               107
Thereafter                              -                21
                                 ---------------- -----------------
Total                            $   2,950        $   6,718
                                 ================ =================

12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

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

Options and forward contracts

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

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

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


<PAGE>



        The following is a summary of BBMC's notional amounts and fair values of
interest rate products as of December 31, 1995, and March 15, 1996:
<TABLE>
<CAPTION>

                                                         December 31, 1995                March 15, 1996
                                                     Notional        Estimated      Notional       Estimated
                                                      Amount       Fair Value(1)     Amount      Fair Value(1)
                                                   -------------- ---------------- ------------ ----------------
                                                                          (In Thousands)
<S>                                                <C>             <C>              <C>          <C>
Purchased commitments to sell mortgage loans:
   Mandatory forward contracts                     $  1,169,559     $    (9,798)    $   941,087    $   16,099
   Options on mortgage-backed securities                315,000             -           653,000         7,607
Risk management contracts:
   Purchased                                          3,107,500         118,753         781,000        17,990
   Sold                                                 295,000         (33,833)            -             -
</TABLE>
                                                   

(1)  Fair  value  represents  the  amount at which a given  instrument  could be
     exchanged  in an  arms  length  transaction  with a third  party  as of the
     balance sheet date.

(2)  See  Note  14  for  additional  disclosures  on  fair  value  of  financial
     instruments.

Commitments to originate mortgage loans

        BBMC regularly enters into commitments to originate  mortgage loans at a
future  date  subject to  compliance  with  stated  conditions.  Commitments  to
originate mortgage loans have off-balance sheet risk to the extent BBMC does not
have matching  commitments to sell loans, which exposes BBMC to lower of cost or
market   valuation   adjustments   in  a  rising   interest  rate   environment.
Additionally,  the extension of a commitment,  which is subject to BBMC's credit
review  and  approval  policies,  gives  rise to credit  exposure  when  certain
borrowing conditions are met and the loan is made.

        Until such time, it represents only potential  exposure.  The obligation
to lend may be voided if the customer's  financial condition  deteriorates or if
the customer fails to meet certain conditions. Commitments to originate mortgage
loans do not  necessarily  reflect  future cash  requirements  since some of the
commitments  are expected to expire  without  being drawn upon.  Commitments  to
originate  mortgage loans totaled $885.6 million at December 31, 1995 and $956.4
million at March 15, 1996.

Mortgage loans sold with recourse

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

Servicing commitments to investors

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

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

Geographical concentration of credit risk

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

13. OTHER RELATED PARTY TRANSACTIONS

        BBMC services mortgage loans for Bank of Boston and its affiliates.  The
balances of those  portfolios  totaled $2.0 billion and $2.0 billion at December
31, 1995 and March 15, 1996,  respectively.  Related servicing fees are included
in mortgage  servicing  fees and were $7.6 million and $1.2 million for the year
ended  December  31, 1995 and for the period  January 1, 1996 to March 15, 1996,
respectively.  BBMC  reimburses  Bank of Boston and its  affiliates  for certain
occupancy and supplies costs.  Total costs  reimbursed were $0.7 million for the
year ended  December 31, 1995 and $0.2 million for the period January 1, 1996 to
March 15, 1996.

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

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

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

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

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

14.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

Cash

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

Mortgages held for sale

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

Mortgages held for investment

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

        Accounts   receivable,   pool  loan   purchases,   and  mortgage  claims
receivable,  net Carrying  amounts are considered to approximate fair value. All
amounts  that are  assumed  to be  uncollectible  within a  reasonable  time are
written off.

Excess mortgage servicing receivable

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

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

Note payable to Bank of Boston

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

Long-term debt

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

Commitments to originate mortgage loans

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

Forward contracts to sell mortgages

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

Options on mortgage-backed securities

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

The estimated fair values of BBMC's financial instruments are as follows:
<TABLE>
<CAPTION>

                                                     December 31, 1995                  March 15, 1996
                                                  Carrying          Fair         Carrying           Fair
                                                   Amount          Value          Amount            Value
                                               --------------- --------------- -------------- ------------------
                                                                        (In Thousands)
<S>                                            <C>             <C>               <C>            <C>
ASSETS
Cash                                           $       830     $       830        $  23,216      $   23,216
Mortgages held for sale                            388,436         395,984          628,504         633,993
Mortgages held for investment                       33,183          35,003           65,068          65,068
Accounts receivable                                 82,816          82,816           65,599          65,599
Pool loan purchases                                 65,272          65,272           56,261          56,261
Mortgage claims receivable                          45,422          45,422           17,563          17,563
Excess mortgage servicing receivable                17,447          19,117           20,393          23,100
Risk management contracts, classified as
   PMSR, and other assets (2)                       84,520          84,920           20,169          20,169
LIABILITIES
Note payable to Bank of Boston                     966,000         966,000        1,256,000       1,256,000
Long-term debt                                      13,816          16,211           13,790          21,695
OFF-BALANCE SHEET (1)
Commitments to originate mortgage loans               -              1,094              -            27,250
Mandatory forward contracts to
   sell mortgages (2)                                 -             (9,798)             -            16,099
Options on mortgage-backed securities (2)             -                -                -             7,607
</TABLE>

(1)  Parentheses  denote a liability.

(2)  See Note 12 for additional disclosures on notional amounts.

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

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

15. CONTINGENCIES

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

16. ACQUISITION OF BELL MORTGAGE

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

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

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


<PAGE>



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

     Effective  April  1,  1998,   HomeSide   dismissed  its  prior   certifying
accountants,  Arthur  Andersen,  L.L.P.  and  retained  as  its  new  certifying
accountants,  KPMG Peat Marwick,  L.L.P.  Arthur Andersen's report on HomeSide's
financial  statements during the two most recent fiscal years and all subsequent
interim  periods  preceding  the date hereof  contained no adverse  opinion or a
disclaimer of opinions, and was not qualified as to uncertainty,  audit scope or
accounting  principles.  The  decision  to change  accountants  was  approved by
HomeSide, Inc.'s Board of Directors.

     During the last two fiscal years and the  subsequent  interim period to the
date hereof, there were no disagreements between HomeSide and Arthur Andersen on
any  matters  of  accounting   principles  or  practices,   financial  statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the  satisfaction of Arthur Andersen would have caused it to make a reference
to the subject matter of the disagreements in connection with its reports.

     None of the "reportable  events"  described in Item 304(a)(1) of Regulation
S-K occurred  with respect to HomeSide  within the last two fiscal years and the
subsequent interim period to the date hereof.

     Effective April 1, 1998, HomeSide engaged KPMG Peat Marwick,  L.L.P. as its
principal  accountants.  During  the last two  fiscal  years and the  subsequent
interim  period to the date  hereof,  HomeSide did not consult KPMG Peat Marwick
regarding any of the matters or events set forth in Item 304(a)(2) of Regulation
S-K.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                                  MANAGEMENT

The  following  table sets forth the name,  age and position with the Company of
each  person  who is an  executive  officer  or  director  of the  Company.
<TABLE>
<CAPTION>

              Name                 Age        Position
<S>                                <C>     <C>                                                           
      Joe K. Pickett ...........   52      Chairman of the Board and Chief Executive Officer, Director
      Hugh R. Harris ...........   46      President and Chief Operating Officer; Director
      Kevin D. Race ............   37      Executive Vice President and Chief Financial Officer
      Robert J. Jacobs .........   45      Executive Vice President, Secretary and General Counsel, Director
      Betty L. Francis..........   51      Chief Credit Officer and Executive Vice President
      Mark F. Johnson...........   43      Executive Vice President - Production
      William Glasgow, Jr.......   48      Executive Vice President - Servicing
      Daniel T. Scheuble........   39      Executive Vice President - Technology
      W. Blake Wilson...........   32      Executive Vice President, Director of Capital Markets
      Ann R. Mackey.............   40      Senior Vice President and Finance Director
      Debra F. Watkins..........   40      Senior Vice President, Cash Management and Marketing
                                              Operations
</TABLE>

The  directors  of the Company are elected  each year by vote of the  directors.
Each of the  officers  and  directors  shall serve until  their  successors  are
elected and  qualified  or until their  earlier  resignation  or removal.  It is
expected that  corporate  officers of the Company will be appointed  annually by
its Board of Directors.

Joe K. Pickett has served as chairman of the Board and Chief  Executive  Officer
of  HomeSide  since April 1990 and as  Chairman  of the Board,  Chief  Executive
Officer and a Director of the Parent  since March 14,  1996.  From  October 1994
through  October  1995,  Mr.  Pickett  served  concurrently  as President of the
Mortgage Bankers  Association of America.  Mr. Pickett also serves as a Director
of Fannie Mae and of Baptist Medical Center, Jacksonville, Florida.

Hugh R. Harris has served as President and Chief  Operating  Officer of HomeSide
since January 1993 and as President,  Chief Operating  Officer and a Director of
the Parent since March 14, 1996.  From January 1988 to January 1993,  Mr. Harris
served as Vice  Chairman  of  HomeSide  in charge of  production  and  secondary
marketing.  Mr.  Harris  currently  serves as a Director  of  Republic  Mortgage
Insurance Company (RMIC).

Kevin D. Race has served as Executive Vice President and Chief Financial Officer
of HomeSide and Vice  President,  Chief  Financial  Officer and Treasurer of the
Parent since October 1996.  From 1993 to 1996, Mr. Race served as Executive Vice
President,  Chief  Financial  Officer and Treasurer of Fleet Mortgage  Group. In
1996, Mr. Race was named  president of Fleet Mortgage  Group.  In 1989, Mr. Race
served in the mortgage  capital  markets and  non-conforming  products  areas of
Fleet Mortgage  Group.  From 1985 to 1989, Mr. Race served as Vice President and
National Product Manager for Mortgage Backed Securities for Citicorp.  From 1982
to 1985,  Mr.  Race served in the  secondary  marketing  area of North  American
Mortgage Company.

Robert J.  Jacobs  has served as  Executive  Vice  President  and  Secretary  of
HomeSide since February 2, 1996. Mr. Jacobs has served as a Director of HomeSide
since March 14,  1996.  Mr.  Jacobs has also served as  Secretary  of the Parent
since March 14, 1996 and as Vice  president  of the Parent since April 10, 1996.
From 1987 to 1996,  Mr. Jacobs served as a Senior Vice President and Chief Legal
Officer of Chase Manhattan Mortgage  Corporation,  and served as General Counsel
for Citicorp  Savings of Florida from 1984 to 1986. Mr. Jacobs  currently serves
as President and  Legislative  Chairman of the Mortgage  Bankers  Association of
Florida.

Betty L.  Francis  has served as Chief  Credit  Officer  and as  Executive  Vice
President of HomeSide  since  October  1996 and as Vice  President of the Parent
since April 10,  1996.  Ms.  Francis  served from March 1994 to October  1996 as
Chief Financial Officer of HomeSide. Ms. Francis served from April 1993 to March
1994 as the Senior Finance Officer of the Personal Banking Group, and from April
1990 to April 1993 as the Comptroller of Bank of Boston and BKBC. Ms. Francis is
a Trustee  of  Commonwealth  Energy  Services,  a gas and  electric  utility  in
Massachusetts.

Mark F. Johnson has served as Executive Vice President of Production of HomeSide
since  April 1,  1992.  From 1988 to 1992,  Mr.  Johnson  served as Senior  Vice
President and Director of Wholesale  Lending for HomeSide.  Mr. Johnson also has
served as Vice President of the Parent since April 10, 1996.

William  Glasgow,  Jr. has served as Executive  Vice President of HomeSide since
July 1991.  From October 1989 to July 1991,  Mr.  Glasgow  served as Senior Vice
President  with Citicorp  Mortgage Inc. in St. Louis,  Missouri.  Mr.Glasgow has
also served as Vice President of the Parent since April 10, 1996.

Daniel T. Scheuble has served as Executive Vice President for  Technology,  Loan
Processing  and Consumer  Direct  Lending of HomeSide  since 1993.  From 1990 to
1992, Mr. Scheuble served as a Senior Technology and Operational Manager at Bank
of Boston.  Mr.  Scheuble has also served as Vice  President of the Parent since
April 10, 1996.

W. Blake Wilson has served as Executive  Vice  President and Director of Capital
Markets of HomeSide since  September  1997. He previously  served as Senior Vice
President and Director of Capital Markets of the Company from June 1996.  Before
joining  HomeSide,  Mr. Wilson  served in Capital  Markets for  Prudential  Home
Mortgage ("PHM") from 1992 through June 1996. Prior to joining PHM, he worked in
KPMG  Peat  Marwick's   National  Mortgage  and  Structured   Finance  Group  in
Washington, D.C.

Ann R.  Mackey has served as Senior  Vice  President  and  Finance  Director  of
HomeSide since July 1993. From September 1992 to July 1993, Ms. Mackey served as
a manager  in  International  Risk  Management  for Bank of Boston.  Ms.  Mackey
previously  served as Senior  Audit  Manager at KPMG Peat  Marwick  from 1985 to
1992.

Debra F.  Watkins  has served as Senior  Vice  President,  Cash  Management  and
Marketing  Operations of HomeSide since October 1993.  From July 1987 to October
1993, Ms. Watkins served in various management  positions in Secondary Marketing
and  Production  Operations  at the Company.  Ms.  Watkins  currently  serves as
Chairperson of the GNMA Liaison Committee of Mortgage Association of America.


<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

                                            EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or paid to
the  Company's  Chief  Executive  Officer  and the  Company's  five most  highly
compensated  executive  officers for all services  rendered in all capacities to
the  Company and its  subsidiaries  for the periods  from  February  11, 1998 to
September 30, 1998, and the HomeSide  predecessor  periods from March 1, 1997 to
February 10, 1998 and March 16, 1996 to February 28, 1997.

<TABLE>
<CAPTION>
                                          SUMMARY COMPENSATION TABLE

                                                                  Lont-Term
                                                                Compensation
                                                                   Awards
                                                  Annual       ---------------- 
                                              Compensation        Securities
      Name and Principal            Fiscal  ------------------   Underlying             All Other
      HomeSide Lending Position      Year    Salary       Bonus       Options            Compensation
----------------------------------- ------- ----------    ----------- ---------------- ---------------------
<S>                                 <C>      <C>          <C>             <C>            <C>                 
Joe K. Pickett...............       1998(a)  $291,000     $500,000(c)     50,000(d)       $ 4,801,289(f)(g)(h)
       Chairman & CEO               1998(b)   372,000      500,000        45,000               23,954
                                    1997      312,000      362,000       242,862(e)            16,135(i)      
----------------------------------- ------- ----------    --------- ------------------ ---------------------
Hugh R. Harris...............       1998(a)   266,000      500,000(c)      45,000(d)        4,763,533(f)(g)(h) 
       Presidend and Chief          1998(b)   360,000      470,000         45,000              14,411
       Operating Officer            1997      300,000      350,000        242,862(e)            7,842(i) 
----------------------------------- ------- ----------     --------- ----------------- ---------------------
Kevin D. Race................       1998(a)   194,000      211,000(c)      35,000(d)        2,385,547(f)(g)(h) 
       Executive Vice President     1998(b)   250,000      300,000         45,000               9,333
       and Chief Financial Officer  1997      250,000(j)   100,000         97,155(e)          413,145(i)(k)    
----------------------------------- ------- ----------     --------- ----------------- ---------------------
Mark F. Johnson..............       1998(a)   150,000       227,000(c)     30,000(d)        1,753,605(f)(g)(h) 
       Executive Vice President
       Secondary Marketing and      1998(b)   230,000       200,000        30,000              10,623
       Production                   1997      200,000       150,000        97,155(e)            6,714(i)      
----------------------------------- ------- ----------     --------- ----------------- ---------------------
William Glasgow, Jr..........       1998(a)   150,000       227,000(c)     30,000(d)        1,754,109(f)(g)(h)      
       Executive Vice President     1998(b)   230,000       200,000        30,000              14,299
                                    1997      200,000       150,000        97,155 (e)           6,522 (i) 
-----------------------------------
</TABLE>

(a)  For the fiscal period from February 11, 1998 to September 30, 1998.
(b)  For the fiscal period from March 1, 1997 to February 10, 1998.
(c)  Bonus amounts relate to the proportion of the guaranteed annual bonus under
     employment  agreements  with the  National  earned  during the period  from
     February  11, 1998 to  September  30,  1998.  Annual  bonus  amounts  under
     HomeSide's bonus plan will not be determined until January 1999.
(d)  Options to purchase  common stock of National  Australia  Bank,  Ltd.,  the
     parent.
(e)  Reflects a 17 for 1 stock  split of the  Company's  Common  Stock  effected
     immediately prior to the Company's January 1997 initial public offering.
(f)  Includes  amounts  received  for  (1)  matching   contributions  under  the
     Company's 401K plan of $6,400 with respect to each  individual,  (2) profit
     sharing  contributions of $9,600 with respect to each  individual,  and (3)
     relocation expenses of $33,043 with respect to Mr. Pickett.
(g)  In consideration of entering into the  Confidentiality  and  Noncompetition
     Agreements with the National,  Messrs.  Pickett,  Harris, Race, Johnson and
     Glasgow  received  a one time cash  payment  in the  amount of  $1,500,000,
     $1,500,000,  $1,000,000, $400,000 and $400,000,  respectively,  immediately
     following the Merger with the National.
(h)  Executive   officers   received  the  following  amounts  with  respect  to
     accelerated  Options  pursuant to the Merger  Agreement:  Joe K.  Pickett -
     $2,380,595 Hugh R. Harris - $2,380,595, Kevin D. Race - $1,018,261, Mark F.
     Johnson - $981,636 and William Glasgow, Jr. - $981,636.  In addition,  such
     individuals  received the  following  amounts  with  respect to  previously
     vested options pursuant to the Merger Agreement: Joe K. Pickett - $851,533,
     Hugh R.  Harris -  $851,533,  Kevin D.  race -  $340,645,  Mark F.  Johnson
     $340,645 and William Glasgow, Jr. - $340,645.
(i)  Includes  amounts  received  for  (1)  matching   contributions  under  the
     Company's  savings plan of $6,000 with respect to each of Messrs.  Pickett,
     Harris,  Johnson,  Glasgow;  and (2) the  dollar  value  of life  insurance
     premiums  paid by the Company with  respect to: Mr.  Pickett  $10,135;  Mr.
     Harris $1,842; Mr. Race $74; Mr. Johnson $714; Mr. Glasgow $522.
(j)  The salary of Mr.  Race was per annum.  Mr.  Race has been  employed by the
     Company since October 1996.
(k)  Includes a bonus of $375,000  received by Mr. Race as an inducement to join
     the Company and $38,071 in relocation expenses.

<PAGE>


    Option Grants for the Period from February 11, 1998 to September 30, 1998

        The following  table provides  information on option grants with respect
to common stock of the parent,  National  Australia  Bank,  Ltd., for the period
from  February 11, 1998 to September 30, 1998 to the named  executive  officers.
Pursuant to applicable  regulations of the  Securities  and Exchange  commission
(the  "Commission"),  the following table also sets forth the hypothetical value
which might have been  realized  with respect to such  options  based on assumed
rates of stock appreciation of 5% and 10% compounded annually from date of grant
to the end of the option terms:

<TABLE>
<CAPTION>

                                       Individual
                                         Grants
                         ------------------------------------------------------
                                        % of                                      PotentialRealizable
                                        Total                                          Value at
                          Number of    Options                                  Assumed Annual Rates
                          Securities   Granted                                          of Stock
                         Underlying       to                                    Price Appreciation for        
                          Options      Employees      Exercise                       Option Term (c)
                          Granted       in the         Price        Expiration     -----------------
      Name                (#)(a)        period         ($/Sh)         Date           5%        10%
------------------       ----------    ---------    -------------   -----------    ------    -------
<S>                         <C>         <C>          <C>             <C>           <C>       <C>     
Joe K. Pickett              50,000       (b)          $11.81          02/26/03    $160,233  $332,211
                                             
Hugh R. Harris              45,000       (b)           11.81          02/26/03     144,210   298,990
                                                                                   
Kevin D. Race               35,000       (b)           11.81          02/26/03     112,163   232,548
                                                             
Mark F. Johnson             30,000       (b)           11.81          02/26/03      96,140   199,327
                                                                                   
William Glasgow,            30,000       (b)           11.81          02/26/03      96,140   199,327
       Jr.                                                                   
</TABLE>

(a)  Options  granted  during the period from February 11, 1998 to September 30,
     1998 pursuant to National Australia Bank's Executive Share Option Plan. The
     options  may be  exercised  during the period  from  February  26,  2001 to
     February 26, 2003 only if on any day during this period the total return to
     shareholders  exceeds 65% of the exercise price.  The total return includes
     the value of dividends and the share price growth over the relevant period.

(b)  Represents  less than 1% of the total  options  granted  to the  National's
     employees during the fiscal year ended September 30, 1998.

(c)  These values are based on assumed rates of appreciation only. Actual gains,
     if any, on shares acquired on option  exercises are dependent on the future
     performance  of the  National's  Common  Stock and in  accordance  with the
     Executive  Share Option Plan.  The market  price of the  National's  common
     stock at September 30, 1998 was $12.10.

                  AGGREGATED OPTION EXERCISES AND OPTION VALUES
           FOR THE PERIOD FROM FEBRUARY 11, 1998 TO SEPTEMBER 30, 1998

        The following table provides  information on option exercises during the
period from  February 11, 1998 to September  30, 1998 with respect to the Common
Stock  of the  National  and on the  values  of the  named  executive  officers'
unexercised options at September 30, 1998:

<TABLE>
<CAPTION>
                         Shares                                                     Value of Unexercised
                        Acqired    Securities    Underlying Unexercised                   In-the-Money
                          on          Value       Options at Year-End (#)             Options at Year-End
       Name            Exercise     Realized    Exercisable   Unexercisable      Exercisable  Unexercisable (a)
--------------------   ----------  ----------   -----------   ---------------    ----------   -----------------
<S>                         <C>        <C>          <C>           <C>                 <C>         <C>    
Joe K. Picket.......        0          $0           0             50,000              $0          $14,500
                                                                                     

Hugh R. Harris......        0           0           0             45,000               0           13,050

Kevin D. Race.......        0           0           0             35,000               0           10,150

Mark F. Johnson.....        0           0           0             30,000               0            8,700 

William Glasgow, Jr.        0           0           0             30,000               0            8,700    
</TABLE>

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

(a)  Value of unexercised  in-the-money  stock options represents the difference
     between the exercise  price of the stock  options and the closing  price of
     the National's Common Stock on September 30, 1998.


<PAGE>


Employment Contracts and Termination of Employment Arrangements

        Certain of the Company's  executive officers including each of the named
executive  officers are party to employment  agreements  and/or  non-competition
agreements with the Company. The Company is therefore contractually obligated to
continue to pay such salaries during the executive  officer's term of employment
with the Company.

        Employment  Agreements with the National and the Company.  In connection
with the  acquisition of HomeSide by the National,  the National and the Company
entered into employment  agreements  (the  "Employment  Agreement")  with Joe K.
Pickett, the Company's Chairman and Chief Executive Officer; Hugh R. Harris, the
Company's  President and Chief Operating  Officer;  Kevin D. Race, the Company's
Vice President,  Treasurer and Chief  Financial  Officer;  Mark F. Johnson,  the
Company's  Vice  President,  Loan  Production;  and William  Glasgow,  Jr.,  the
Company's  Vice  President,  Loan  Administration  and six other officers of the
Company (the "Executives").  Each Employment Agreement became effective upon the
consummation  of the merger with the National (the  "Merger") and provides for a
three-year term of employment  commencing  upon the  consummation of the Merger.
Pursuant to the Employment Agreements,  Mr. Pickett serves as Chairman and Chief
Executive  Officer of the Company.  Mr.  Harris  serves as  President  and Chief
Operating Officer of the Company and Mr. Race serves as Executive Vice President
and Chief  Financial  Officer of the  Company.  The  Employment  Agreements  for
Messrs.  Johnson  and  Glasgow  provide  that each such  Executive  serves as an
Executive Vice President of the Company.

     Pursuant  to  their  respective  Employment  Agreements,  Messrs.  Pickett,
Harris,  Race,  Johnson and Glasgow  each (i)  receives an annual base salary of
$450,000, $410,000, $300,000, $230,000 and $230,000, respectively, (ii) receives
a guaranteed annual bonus of $800,000, $800,000, $337,500, $362,500 and $362,500
respectively,  payable  on each of the first  and  second  anniversaries  of the
Effective  Time,  February  10,  1998,  of the  Merger,  (iii)  is  eligible  to
participate  in the  Company's  annual bonus plan  ("ABP"),  (iv) is eligible to
participate  in the National's  Executive  Share Option Plan and will receive an
initial grant of options to purchase 50,000,  45,000,  35,000, 30,000 and 30,000
NAB  ordinary  shares,  respectively,  and (v) is eligible to  participate  in a
long-term  incentive plan (funded by the National with a cash pool not in excess
of $15,000,000), the first award under such plan (the "Anniversary Award") to be
payable  in a  lump  sum  cash  payment  within  30  days  following  the  third
anniversary  of the  effective  time of the  Merger  (the  "Anniversary  Date"),
provided that the Executive is employed by the Company on the Anniversary  Date.
The  Employment  Agreements  provide  that the  National  shall cause the entire
long-term  incentive  plan  cash  pool to be  distributed  to  eligible  Company
executives.  The Employment  Agreements  for the six other officers  provide for
annual base salaries  aggregating  $1,120,000,  and  guaranteed  annual  bonuses
aggregating  $712,500;  and such officers will receive in the aggregate  initial
grants of options to purchase  150,000 NAB ordinary  shares and will be eligible
to participate in the Company's annual bonus plan and in the long-term incentive
plan referred to in clause (v) above.  The  Employment  Agreements  also provide
that each  Executive  will be (i) entitled to  participate  in employee  benefit
plans as may be in effect  for senior  executives  of the  Company  from time to
time,  (ii)  entitled to paid vacation in  accordance  with the vacation  policy
applicable to the Company's senior  executives,  (iii) reimbursed by the Company
for  reasonable  business  expenses  and  (iv)  entitled  to  receive  the  same
perquisites  that such Executives  received  immediately  prior to the Effective
Time.  The  Employment  Agreements  further  provide that each Executive will be
eligible to participate in a nonqualified  deferred  compensation  plan to which
such  Executive  may  elect  to  defer  any  amount  of  such  Executive's  cash
compensation.

     Each Employment Agreement may be terminated by the applicable Executive for
"good  reason" and by the Company for  "cause," as such terms are defined in the
Employment Agreements, or by voluntary resignation of the Executive, upon ninety
(90) days'  written  notice  provided the Executive  waives any amounts  payable
under the Employment Agreement and provided further that Executive's obligations
under the  Confidentiality  and  Noncompetition  Agreement  (described below) to
which such Executive is a party remain  unaffected by such  resignation.  In the
event that the Company  terminates  the  Executive's  employment  for any reason
other than cause or disability or the Executive  terminates  his  employment for
good  reason,  the  Company  is  obligated  to  (A)  pay to  the  Executive  his
Anniversary  Award pursuant to the long-term  incentive plan if he is terminated
prior to the third  anniversary  of the Merger and (B) (i) pay to the  Executive
for the twenty-four  (24) month period ( the eighteen (18) month period,  in the
case of each  Executive  other than Messrs.  Pickett and Harris)  following  the
Executive's  termination  (the  "Continuation  Period"),  an amount equal to his
average  monthly  base  salary  for the two year  period  (or  portion  thereof)
immediately  preceding  the  date of  termination,  plus  (ii) at the end of the
Continuation  Period,  an amount  equal to two times (1.5 times,  in the case of
each  Executive  other than  Messrs.  Pickett and Harris) the average of (x) the
Executive's  target bonus under the ABP for the year in which termination occurs
and (y) the annual bonus under the ABP for the year  immediately  preceding  the
year in which termination  occurs,  (iii) the pro rata portion of the guaranteed
annual bonus,  if any, for the year of termination and (iv) the pro rata portion
of  Executive's  ABP  award for the year of  termination,  and (C)  provide  the
Executive  during the  Continuation  Period with  continued  coverage  under the
Company's health, life and disability  insurance plans,  provided that Executive
continues  to  contribute  the  employee  share of the cost  applicable  to such
coverages.  The amounts  under  clauses (B) (i) and (ii) and the coverage  under
clause (C) in the immediately preceding sentence will be payable or provided, as
the case may be, only so long as the  Executive  complies  with his  obligations
under the  confidentiality  and  Noncompetition  Agreement  (described below) to
which such Executive is a party.

     In the event an Executive's  employment is terminated by reason of death or
disability,  the Company shall pay such Executive (or his designated beneficiary
or  estate,  as the case may be) the  pro-rated  portion  of (i) the  guaranteed
annual bonus,  if any, for the year of termination  of employment,  (ii) any ABP
award  such  Executive  would  have  received  for the  year of  termination  of
employment, and (iii) any applicable award payable under the long-term incentive
plan (which is the  Anniversary  Award in the event of termination of employment
on or before the third anniversary of the Merger).

     Each Employment  Agreement  provides that the Executive  waives any and all
rights to benefits  payable  under any prior  severance  agreement  to which the
Executive and the Company are parties and agrees that such  severance  agreement
shall be void and of no further  effect and shall be  superseded in its entirety
by the Employment Agreement

Historical Executive Compensation

     The following  table sets forth all  compensation  awarded to, earned by or
paid to the Company's Chief Executive Officer and the Company's four most highly
compensated  Executive  Officers  other than the Chief  executive  officer whose
total annual salary and bonus exceeded $100,000 for all services rendered in all
capacities to  BancBoston  Mortgage  Corporation  and its  subsidiaries  for the
fiscal year ended  December  31, 1995.  None of the  Company's  named  executive
officers received any compensation from Barnett Mortgage Company during 1995.

<TABLE>
<CAPTION>

                                          Summary Compensation Table

                                                        Long-Term Compensation
                                                       ---------------------------------
                                                          Awards (b)               Payouts
                                                        ---------------            ---------
                                                                               Long-Term
                                     Annual         Restricted   Securities     Incentive
 Name and Principal   Fiscal      Compensation         Stock      Underlying      Plan
      Position        Year     Salary(a)Bonus(a)       Awards      Options      Payouts (c) Compensation (d)
--------------------- ------   -------- --------   ------------    ---------    ---------- -----------------
<S>                    <C>     <C>      <C>           <C>            <C>         <C>          <C>    
Joe K. Pickett......   1995    $287,000 $200,000      $68,700        9,600       $215,156     $11,480
   Chairman & CEO

Hugh R. Harris......    1995    275,000  225,000       42,938        6,000              0      11,000
   President

Charles D. Gilmer...    1995    170,769  155,000            0            0              0           0
   Director, Risk
    Management

Mark F. Johnson.....    1995    190,577  125,000       28,625        4,000              0       7,623
   Director, Wholesale/
    Securities Marketing

William Glasgow, Jr.    1995    189,230  125,000       28,625        4,000              0       7,569
   Director, Loan
    Administration
</TABLE>

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

(a)  The salary and bonus amounts  presented were earned in 1995. The payment of
     certain such amounts  occurred in 1996. The amounts  reflected in the table
     do not include the following  bonuses paid to the named executive  officers
     in 1996 in  connection  with the closing of the  acquisition  of BancBoston
     Mortgage  Corporation:  Mr. Pickett,  $50,000;  Mr. Harris,  $225,000;  Mr.
     Gilmer, $175,000; Mr. Johnson, $200,000; and Mr. Glasgow, $200,000.

(b)  Involves common stock of BKBC. As of December 31, 1995, the named executive
     officers  held the  following  number of  restricted  shares of BKBC common
     stock having the corresponding year-end market values:

                             AS OF DECEMBER 31, 1995

                                             Total Number of
                                                 Restricted         Aggregate
        Name                                    Shares Held        Market Value
                                              --------------       ------------
Joe K. Pickett.............................       5,600              $259,900
Hugh R. Harris.............................       4,135               191,244
Charles D. Gilmer..........................           0                     0
Mark F. Johnson............................       1,784                82,510
William Glasgow, Jr........................       1,700                78,625

        In connection  with the  BancBoston  Mortgage  Corporation  acquisition,
        vesting on all of the restricted stock owned by its employees, including
        the  restricted  stock  listed  above,  was  accelerated  and all  prior
        forfeiture and transferability restrictions thereon were removed.

(c)     Represents the dollar value of vested shares of  performance  restricted
        stock  calculated by multiplying  the closing price of BKBC common stock
        on each vesting date by the number of shares that vested on that date.

(d)     Includes   matching   employer   contributions  and  credits  under  the
        BankBoston   thrift-incentive   plan   and   the   BankBoston   deferred
        compensation plan for the named executive officers.

RETIREMENT BENEFITS

The  following  table  shows  the  years of  service  and the  estimated  annual
retirement  benefits  that are  payable at age 65 from BKBC to each of the named
executive  officers  in the form of a single  lifetime  annuity  with an assumed
future  annual  interest  rate of 6.3% through 1996 and 5.5%  thereafter on each
individual's cash balance account:

                         Prior Years of               Estimated Annual
                            Service
       Name              as of 12/31/95              Retirement Benefit
-------------------    -------------------    ----------------------------------
Joe K. Picket.......           15                         $73,883

Hugh R. Harris......           12                          50,676

Charles D. Gilmer               2                           2,386

Mark F. Johnson.....           13                          48,616

William Glasgow, Jr.            4                           6,836

     The estimates shown above reflect  BankBoston's  cash balance formula as of
December  31, 1995 (under  which  credits are made  annually to an  individual's
account at a rate based on the individual's age and years of service),  plus any
accrued benefits under the prior plan formula. These benefits are provided under
a  combination  of  BankBoston's   tax-qualified  retirement  plan  and  certain
supplemental plans.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Capital Stock of the Company

     All of the outstanding common stock of HomeSide Lending,  Inc.,  consisting
of 100 shares, is owned by the Parent.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On June 23, 1998,  HomeSide entered into an unsecured  revolving credit facility
with the National pursuant to which it can borrow up to $2.1 billion, subject to
any lending limitations imposed by regulatory  authorities.  As of September 30,
1998,  regulations limited the National's ability to lend funds to HomeSide, its
non-bank affiliate,  to approximately $1.8 billion.  The interest rates on these
borrowings are equal to 30 day LIBOR.

                                     PART IV

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

   (a) The following documents are filed as a part of this Report:

        1.  Financial Statements:  See Part II, Item 7 hereof.

        2.  Financial Statement Schedule and Auditors' Report

All schedules  omitted are inapplicable or the information  required is shown in
the Consolidated Financial Statements or notes thereto.

        3. The following exhibits are submitted herewith:

Unless  otherwise  indicated,  all Exhibits are incorporated by reference to the
Company's Registration Statement on Form S-1, No. 333-17685.

             Number   Description

3.1  Certificate of Incorporation of HomeSide Lending, Inc.
               
3.2  By-Laws of HomeSide Lending, Inc.

4.1  Form of Common Stock Certificate

10.1 Stock  Purchase  Agreement  dated  December  11, 1995  between  HomeAmerica
     Capital,  Inc.  (currently known as HomeSide,  Inc.) and The First National
     Bank of Boston (the "BBMC Purchase Agreement")

10.2 Amendment No. 1, dated as of March 15, 1996, to the BBMC Purchase Agreement

10.3 Marketing  Agreement dated as of March 15, 1996 between HomeSide,  Inc. and
     The First National Bank of Boston
               
10.4 Repurchase of Mortgage Loan Servicing Rights Letter  Agreement  between The
     First National Bank of Boston  (currently  known as  BankBoston,  N.A.) and
     BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)


10.5Operating  Agreement  effective  as of March  15,  1996  between  The  First
     National  Bank  of  Boston  (currently  known  as  BankBoston,   N.A.)  and
     BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)

10.6Brokered Loan Purchase and Sale Agreement dated as of March 15, 1996 between
     BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)
     and  each  of The  First  National  Bank  of  Boston  (currently  known  as
     BankBoston N.A.), Bank of Boston  Connecticut,  Rhode Island Hospital Trust
     National Bank and Bank of Boston Florida, N.A.

10.7 Master Take-Out  Commitment  dated as of March 15, 1996 between  BancBoston
     Mortgage Corporation  (currently known as HomeSide Lending,  Inc.) and each
     of The First National Bank of Boston (currently known as BankBoston, N.A.),
     Bank of Boston  Connecticut,  Rhode Island Hospital Trust National Bank and
     Bank of Boston Florida, N.A.

10.8Neighborhood  Assistance  Corporation  of  America  Mortgage  Loan  Take-Out
     Commitment  dated  as  of  March  15,  1996  between  BancBoston   Mortgage
     Corporation  (currently  known as  HomeSide  Lending,  Inc.)  and The First
     National Bank of Boston (currently known as BankBoston, N.A.)

10.9(DELTA)PMSR  Flow  Agreement  dated as of March 15, 1996 between  BancBoston
     Mortgage Corporation  (currently known as HomeSide Lending,  Inc.) and each
     of The First national Bank of Boston (currently known as BankBoston, N.A.),
     Bank of Boston  Connecticut,  Rhode Island Hospital Trust National Bank and
     Bank of Boston Florida, N.A.

10.10(DELTA)  Mortgage  Loan  Servicing  Agreement  dated as of March  15,  1996
     between  BancBoston  Mortgage   Corporation   (currently  known  asHomeSide
     Lending,  Inc.)  and each of the First  National  Bank of  Boston,  Bank of
     Boston  Connecticut,  Rhode Island Hospital Trust National Bank and Bank of
     Boston Florida, N.A.

10.11Stock Purchase  Agreement  dated as of March 4, 1996 between Grant America,
     Inc. (currently known as HomeSide,  Inc.) and Barnett Banks, Inc. (the "BMC
     Purchase Agreement")

10.12Amendment No. 1, dated as of May 31, 1996, to the BMC Purchase Agreement
                 
10.13Tax Indemnity  Letter  Agreement  dated as of March 4, 1996 between Barnett
     Mortgage Company (currently known as HomeSide  Holdings,  Inc.) and Barnett
     Banks, Inc.
              
10.14Amended and Restated  Shareholder  Agreement dated as of May 31, 1996 among
     HomeSide, Inc. and the shareholders thereof

10.15Amended and Restated Registration Rights Agreement dated as of May 31, 1996
     between HomeSide, Inc. and certain shareholders thereof

10.16Marketing  Agreement  dated as of May 31, 1996 between  HomeSide,  Inc. and
     Barnett Banks, Inc.  10.17Transitional  Services  Agreement dated as of may
     31, 1996 between Barnett Banks,  Inc.,  Barnett Mortgage Company (currently
     known as HomeSide Holdings, Inc.) and HomeSide, Inc.

10.18Operating Agreement dated as of May 31, 1996 between HomeSide Lending, Inc.
     and Barnett Banks, Inc.

10.19(DELTA)Mortgage  Loan Servicing  Agreement dated as of April,  1996 between
     HomeSide Lending, Inc. and Barnett Banks, Inc.

10.20(DELTA)PMSR  Flow  Agreement  dated  as of May 31,  1996  between  HomeSide
     Lending, Inc. and Barnett Banks, Inc.

10.21Correspondent  Agreement dated May 16, 1996 between HomeSide Lending,  Inc.
     and Barnett Banks, Inc.

10.22Delegated  Underwriting Agreement dated as of May 15, 1996 between HomeSide
     Lending, Inc. and HomeSide Holdings, Inc.

10.23* Amended and Restated Credit  Agreement dated as of January 31, 1997 among
     HomeSide  Lending,  Inc.,  Honolulu  Mortgage  Company,  Inc.,  the Lenders
     parties thereto,  and The Chase Manhattan Bank as Administrative Agent (the
     "Credit Agreement")

10.24* Amended and Restated  Holdings  Pledge  Agreement dated as of January 31,
     1997 between  HomeSide  Lending,  Inc.  and The Chase  Manhattan  Bank,  as
     Administrative Agent for the Lenders parties to the Credit Agreement

10.25* Amended  and  Restated  HomeSide  Lending  Pledge  Agreement  dated as of
     January 31, 1997 between  HomeSide  Lending,  Inc. and The Chase  Manhattan
     Bank,  as  Administrative  Agent  for the  Lenders  parties  to the  Credit
     Agreement

10.26* Amended and  Restated BMC Pledge  Agreement  dated as of January 31, 1997
     between  HomeSide   Holdings,   Inc.  and  The  Chase  Manhattan  Bank,  as
     Administrative Agent for the Lenders parties to the Credit Agreement

10.27Registration  Rights  Agreement  dated as of May 14,  1996 among  HomeSide,
     Inc.  and  Merrill  Lynch & Co.,  Merrill  Lynch,  Pierce,  Fenner  & Smith
     Incorporated, Smith Barney Inc. and Friedman, Billings, Ramsey & Co., Inc.

10.28* Amended and Restated  Holdings  Guaranty  dated as of January 31, 1997 by
     HomeSide,  Inc. in favor of The Chase  Manhattan  Bank,  as  Administrative
     Agent for the Lenders parties to the Credit Agreement

10.29* Amended and Restated  HomeSide  Lending  Guaranty dated as of January 31,
     1997 by HomeSide  Lending,  Inc. in favor of The Chase  Manhattan  Bank, as
     Administrative Agent for the Lenders parties to the Credit Agreement

10.30* Amended and Restated  Subsidiaries  Guaranty dated as of January 31, 1997
     by each of SWD Properties,  Inc.,  Stockton Plaza,  Inc.,  HomeSide Lending
     Mortgage Securities,  Inc. and Honolulu Mortgage Company,  Inc. in favor of
     The Chase Manhattan Bank, as  Administrative  Agent for the Lenders parties
     to the Credit Agreement

10.31* Amended  and  Restated  BMC  Guaranty  dated as of  January  31,  1997 by
     HomeSide  Holdings,   Inc.  in  favor  of  The  Chase  Manhattan  Bank,  as
     Administrative Agent for the Lenders parties to the Credit Agreement

10.32* Amended and Restated Security and Collateral Agency Agreement dated as of
     January 31, 1997 between  HomeSide  Lending,  Inc. and The Chase  Manhattan
     Bank,  as  Administrative  Agent  for the  Lenders  parties  to the  Credit
     Agreement

10.33* Amended and Restated Security and Collateral Agency Agreement dated as of
     January 31, 1997  between  Honolulu  Mortgage  Company,  Inc. and The Chase
     Manhattan  Bank,  as  Administrative  Agent for the Lenders  parties to the
     Credit Agreement

10.34* Amended and Restated Security and Collateral Agency Agreement dated as of
     January 31, 1997 between  HomeSide  Holdings,  Inc. and The Chase Manhattan
     Bank,  as  Administrative  Agent  for the  Lenders  parties  to the  Credit
     Agreement

10.35*  Intercreditor  Agreement  dated  as of May  31,  1996  between  HomeSide
     Lending, Inc. HomeSide Holdings,  The Bank of New York, as Trustee, and The
     Chase Manhattan Bank, as Administrative Agent under the Credit Agreement

10.36 HomeSide, Inc. Time Accelerated Restricted Stock Option Plan
                   
10.37 HomeSide, Inc. Non-Qualified Stock Option Plan

10.38Class B Non-Voting  Common Stock Issuance  Agreement  dated as of March 14,
     1996 between HomeSide, Inc. and Smith Barney Inc.

10.39Transitional  Services  Agreement  dated as of March 15,  1996  between The
     First National Bank of Boston  (currently  known as  BankBoston,  N.A.) and
     BancBoston Mortgage Corporation (currently known as HomeSide Lending, Inc.)

10.40Transitional  Services  Agreement  dated as of March 15,  1996  between The
     First National Bank of Boston  (currently  known as  BankBoston,  N.A.) and
     BancBoston Mortgage corporation (currently known as HomeSide Lending, Inc.)

10.41Management  Agreement  dated  as  of  March  15,  1996  between  BancBoston
     Mortgage  Corporation  (currently known as HomeSide Lending,  Inc.) and The
     First National Bank of Boston (currently known as BankBoston, N.A.)

10.42Management  Agreement  dated  as  of  March  15,  1996  between  BancBoston
     Mortgage Corporation (currently known as HomeSide Lending, Inc.) and Thomas
     H. Lee Company

10.43Management  Agreement  dated  as  of  March  15,  1996  between  BancBoston
     Mortgage  Corporation  (currently  known as  HomeSide  Lending,  Inc.)  and
     Madison Dearborn Partners, Inc.

10.44Management   Stockholder  Agreement  dated  as  of  May  15,  1996  between
     HomeSide,  Inc.,  The  First  National  Bank  of  Boston  (currently  known
     BankBoston,  N.A.),  Thomas  H. Lee  Equity  Fund  III,  L.P.  and  certain
     affiliates  thereof,  Madison Dearborn Capital  Partners,  L.P. and certain
     employees of HomeSide Lending, Inc. and its subsidiaries

10.45Management  Agreement  dated as of May 31, 1996 between  HomeSide  Lending,
     Inc. and Barnett Banks, Inc.

10.46 Form of HomeSide Severance Agreement

10.47* Loan and  Security  Agreement  dated  January 15, 1997  between  HomeSide
     Lending, Inc. and The Chase Manhattan Bank

10.48* First  Amendment  dated February 28, 1997 to Loan and Security  Agreement
     dated  January  15,  1997  between  HomeSide  Lending,  Inc.  and The Chase
     Manhattan Bank

10.49* Second  Amendment  dated  March 31, 1997 to Loan and  Security  Agreement
     dated  January  15,  1997  between  HomeSide  Lending,  Inc.  and The Chase
     Manhattan Bank.

10.50* Loan and  Security  Agreement  dated  March  14,  1997  between  HomeSide
     Lending, Inc. and Merrill Lynch Mortgage Capital Inc.

10.51* First Amendment dated March 31, 1997 to Loan and Security Agreement dated
     March 14, 1997 between  HomeSide  Lending,  Inc. and Merrill Lynch Mortgage
     Capital Inc.

10.52* Third Amendment dated April 11, 1997 to Loan and Security Agreement dated
     January 15, 1997 between  HomeSide  Lending,  Inc. and The Chase  Manhattan
     Bank.

10.53* Second  Amendment  dated  April 14, 1997 to Loan and  Security  Agreement
     dated March 14, 1997  between  HomeSide  Lending,  Inc.  and Merrill  Lynch
     Mortgage Capital Inc.

10.54* Fourth  Amendment  dated  April 29, 1997 to Loan and  Security  Agreement
     dated  January  15,  1997  between  HomeSide  Lending,  Inc.  and The Chase
     Manhattan Bank.

10.55* Third Amendment dated April 29, 1997 to Loan and Security Agreement dated
     March 14, 1997 between  HomeSide  Lending,  Inc. and Merrill Lynch Mortgage
     Capital Inc.

10.56* Amendment dated as of September 30, 1997 to the Credit Agreement dated as
     of January 31,  1997.

10.57* Second  Amendment  dated as of December 31, 1997 to the Credit  Agreement
     dated as of January 31, 1997.

10.58* Employment  Agreement and Confidentiality and Non-Competition  Agreement,
     each dated as of October 25, 1997, each between HomeSide Lending,  Inc. and
     Joe K. Pickett.

10.59* Employment  Agreement and Confidentiality and Non-Competition  Agreement,
     each dated as of October 25, 1997, each between HomeSide Lending,  Inc. and
     Hugh R. Harris.

10.60* Employment  Agreement and Confidentiality and Non-Competition  Agreement,
     each dated as of October 25, 1997, each between HomeSide Lending,  Inc. and
     Kevin D. Race.

10.61* Employment  Agreement and Confidentiality and Non-Competition  Agreement,
     each dated as of October 25, 1997, each between HomeSide Lending,  Inc. and
     William Glasgow.

10.62* Employment  Agreement and Confidentiality and Non-Competition  Agreement,
     each dated October 25, 1997, each between HomeSide Lending,  Inc., and Mark
     F. Johnson.

12.1  Computation of the ratio of earnings to fixed charges

21.1* List of subsidiaries of HomeSide Lending, Inc.
                         
23.1  Consent of Arthur Andersen LLP

23.2  Consent of PriceWaterhouseCoopers LLP

23.6(a)  Consent of  Hutchins,  Wheeler & Dittmar,  A  Professional  Corporation
     (included in Exhibit 5.1) 24.1Powers of Attorney 26.0Excerpts from 1997 and
     1998 Annual Report to Stockholders

26.1 Item 15 of the Company's Registration Statement on form S-1, No. 333-17685

27   Financial Data Schedule

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

*    Incorporated  by  reference  to  Exhibits of  HomeSide  Lending,  Inc.'s (a
     wholly-owned  subsidiary of the Registrant  Registration  Statement on Form
     S-1, Registration No. 333-21193
        
(DELTA) Portions of this Exhibit  have been omitted  pursuant to an order by the
     Securities and Exchange Commission granting confidential treatment.

     (b)   Reports on form 8-K

        HomeSide  filed no reports on form 8-K  during  the three  months  ended
September 30, 1998.

                                                  SIGNATURES

   Pursuant to the  requirements  of the  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.

                                   HomeSide Lending, Inc.
                                   (Registrant)

                                   By:   /s/Joe K. Pickett
                                         -----------------
                                            Joe K. Pickett

                                            Chairman and Chief Executive Officer

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

<TABLE>
<CAPTION>

         SIGNATURE                          TITLE                                    DATE

<S>                   <C>                                                      <C>            <C>    
/s/Joe K. Pickett     Chairman of the Board, Chief Executive Officer and         December 28, 1998
--------------------  Director (Principal Executive Officer)
   Joe K. Pickett                 

/s/Hugh R. Harris     President, Chief Operating Officer and Director            December 28, 1998
--------------------
   Hugh R. Harris

/s/Kevin D. Race       Vice President and Chief Financial Officer and Treasurer  December 28, 1998
--------------------   (Principal Financial and Accounting Officer)
   Kevin D. Race

/s/Robert J. Jacobs   Vice President and Secretary, General Counsel              December 28, 1998
--------------------
   Robert J. Jacobs

</TABLE>