FORM 10-Q
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



[X]       Quarterly  Report  Pursuant  to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934

                      FOR THE QUARTER ENDED MARCH 31, 1997

[ ]       Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934

                          Commission File No. 33-76930

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


             DELAWARE                                      13-3759196
  (State or other jurisdiction of                      (I.R.S. Employer
  incorporation or organization)                    Identification Number)

               1111 N. HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
               (Address of principal executive office) (Zip code)

                                 (703) 247-3700
              (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  for the  issuer's  classes of common
stock, as of April 28, 1997.

           $.01 par value of common stock              2,211,961
                       (class)                       (outstanding)


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                                    FORM 10-Q

                                      INDEX


<TABLE>
<CAPTION>


Part I - Financial Information                                                                  Page

<S>                                                                                              <C>
Consolidated Statements of Financial Condition - March 31, 1997 and December 31, 1996            3


Consolidated Statements of Operations -- Three months ended March 31, 1997 and 1996              4

Consolidated Statements of Changes in Stockholders' Equity - Three months ended March
   31, 1997 and 1996                                                                             6


Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1996               7

Notes to Consolidated Financial Statements                                                       9


Management's Discussion and Analysis of Financial Condition and Results of Operations            12

Part II -- Other Information

Item 5, Other Information                                                                        19

Item 6, Exhibits and Reports on Form 8-K                                                         19
Signatures                                                                                       20
</TABLE>




<PAGE>



                         TELEBANC FINANCIAL CORPORATION


                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                  (Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>

                                                                                         March 31,        December 31,
Assets:                                                                                    1997               1996
                                                                                       -----------       ------------
                                                                                       (unaudited)
<S>                                                                                        <C>            <C>       
Cash and cash equivalents                                                                  $ 8,522        $    3,259
Investment securities available for sale                                                    80,828            78,826
Mortgage-backed securities available for sale                                              242,114           184,743
Loans receivable, net                                                                      220,872           185,757
Loans receivable held for sale                                                             197,471           166,064
Other assets                                                                                33,067            29,316
                                                                                            ------            ------

                                 Total assets                                            $ 782,874         $ 647,965
                                                                                           =======           =======

Liabilities and Stockholders' Equity:

Liabilities:
Deposits                                                                                 $ 400,700         $ 390,486
Advances from the Federal Home Loan Bank of Atlanta                                        165,000           144,800
Securities sold under agreements to repurchase                                             132,266            57,581
Subordinated debt                                                                           29,444            16,586
Other liabilities                                                                           14,602            13,854
                                                                                            ------            ------

                               Total liabilities                                           742,012           623,307
                                                                                           -------           -------

Commitments and contingencies                                                                   --                --

Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value,
         500,000 shares authorized
         Series A, 18,850 issued and outstanding                                                --                --
         Series B, 4,050 issued and outstanding                                                 --                --
         Series C, 7,000 issued and outstanding                                                 --                --
Common stock, $0.01 par value, 3,500,000 shares authorized;  2,211,961 and
         2,049,500 issued and outstanding                                                       22                20
Additional paid-in capital                                                                  31,190            14,637
Retained earnings, substantially restricted                                                  8,719             7,905
Unrealized gain on securities available for sale, net of deferred tax                          931             2,096
                                                                                 -             ---             -----

                          Total stockholders' equity                                        40,862            24,658
                                                                                            ------            ------

                                                                                         $ 782,874         $ 647,965
                                                                                           =======           =======
          See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  (Dollars in Thousands, Except Per Share Data)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                           Three Months Ended
                                                                                March 31,
                                                                           1997           1996
<S>                                                                    <C>            <C>     
Interest income:
     Mortgage loans and other loans                                    $  7,557       $  5,296
     Mortgage-backed and related securities                               3,805          4,948
     Investment securities                                                1,444            875
     Other                                                                   31             12
                                                                             --             --

           Total interest income                                         12,837         11,131
                                                                         ------         ------

Interest expense:
     Deposits                                                             5,705          4,868
     Advances from the Federal Home Loan Bank of Atlanta                  2,073          1,464
     Reverse repurchase agreements                                        1,457          1,506
     Subordinated debt                                                      643            519
                                                                            ---            ---

          Total interest expense                                          9,878          8,357
                                                                          -----          -----

          Net interest income                                             2,959          2,774

Provision for loan losses                                                   243            419
                                                                            ---            ---

          Net interest income after provision for loan losses             2,716          2,355
                                                                          -----          -----

Non-interest income:
     Gain on sale of securities                                             238            241
     Gain on sale of loans                                                  127             --
     Fees, service charges, and other                                       253            364
                                                                            ---            ---

          Total non-interest income                                         618            605
                                                                            ---            ---
                                   (continued)
</TABLE>

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

                  (Dollars in Thousands, Except Per Share Data)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                         Three Months
                                                                             Ended
                                                                            March 31,
                                                                      1997            1996
<S>                                                                  <C>               <C>
Non-interest expenses:
     General and administrative expenses:
          Compensation and employee benefits                         1,176             924
          Other                                                        721             755
                                                                       ---             ---

               Total general and administrative expenses             1,897           1,679
                                                                     -----           -----

     Other non-interest expenses:
          Net operating costs of real estate acquired
             through foreclosure                                        74              10
          Amortization of goodwill and other tangibles                 134             290
                                                                       ---             ---

               Total other non-interest expenses                       208             300
                                                                       ---             ---

                    Total non-interest expenses                      2,105           1,979
                                                                     -----           -----

          Income before income tax expense                           1,229             981

Income tax expense                                                     355             332
                                                                       ---             ---

          Net income                                                $  874          $  649
                                                                       ===             ===

Preferred stock dividends                                               60              --
                                                                        --              --

Earnings available to Common Stockholders                           $  814          $  649
                                                                       ===             ===

Earnings per share:
          Primary                                                  $  0.36         $  0.31
          Fully diluted                                               0.36            0.31

</TABLE>



          See accompanying notes to consolidated financial statements.

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


               FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

                             (Dollars in Thousands)

                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                               Unrealized
                                                                                               Gain (Loss)
                                                                    Additional                on Available
                                          Preferred     Common       Paid-in     Retained       for Sale
                                            Stock       Stock        Capital     Earnings      Securities       Total

<S>                                       <C>             <C>      <C>           <C>           <C>            <C>     
Balances at December 31, 1995             $     --        $ 20     $ 14,637      $   5,353     $   1,556      $ 21,565

Net income for the three months ended
   March 31, 1996                               --          --           --            649            --           649

Unrealized Gain on Available for Sale
   Securities,  net of tax effect               --          --           --             --           221           221
                                                --          --           --             --           ---           ---

Balances at March 31, 1996                $     --        $ 20     $ 14,637       $  6,002   $     1,776      $ 22,435
                                                ==          ==       ======          =====         =====        ======



Balances at December 31, 1996             $     --        $ 20     $ 14,637      $   7,905     $   2,096      $ 24,658

Net income for the three months ended
   March 31, 1997                               --          --           --            874            --           874

Stock issued                                                 2        1,272             --            --         1,274

Issuance of 4% cumulative Preferred
   Stock, Series A                              --          --        9,634             --            --         9,634

Issuance of 4% cumulative Preferred
   Stock, Series B                              --          --        2,070             --            --         2,070

Issuance of 4% cumulative Preferred
   Stock, Series C                              --          --        3,577             --            --         3,577

Dividends on 4% cumulative Preferred
   Stock                                        --          --           --            (60)           --           (60)

Unrealized Loss on Available for Sale
   Securities,  net of tax effect               --          --           --             --        (1,165)       (1,165)
                                                --          --           --             --        -------       -------

Balances at March 31, 1997                $     --        $ 22     $ 31,190       $  8,719         $ 931      $ 40,862
                                                ==          ==       ======          =====           ===        ======
</TABLE>




          See accompanying notes to consolidated financial statements.




<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)

                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                           Three Months Ended
                                                                                                March 31,
                                                                                          1997                1996
                                                                                          ----                ----
<S>                                                                                   <C>                <C>        
Net cash provided by operating activities                                             $    5,750         $     7,139
                                                                                           -----               -----

Cash flows from investing activities:
     Mortgage loan originations                                                               --                 (25)
     Mortgage loans purchased                                                            (84,134)            (22,331)
     Proceeds from sale of mortgage loans held for sale                                       --               5,659
     Principal payments on loans and mortgage-backed and
       related securities                                                                 28,557              23,175
     Purchases of mortgage-backed and related securities                                 (75,163)            (39,614)
     Proceeds from sale of mortgage-backed securities available
       for sale                                                                            6,581               5,793
     Purchases of investment securities available for sale                               (49,088)            (47,210)
     Proceeds from sale or maturity of investment securities
      available for sale                                                                   4,059              42,784
     Principal repayments on investment securities
      available for sale                                                                  41,764                  --
     Increase in stock of the Federal Home Loan Bank                                      (1,100)                 --
     Proceeds from sale of real estate acquired through
       foreclosure                                                                           259                  --
     Investment in subsidiaries                                                             (700)                 --
     Purchase of premises and equipment                                                     (277)               (127)
                                                                                            -----               -----

          Net cash used in investing activities                                         (129,242)            (31,896)
                                                                                        ---------            --------

</TABLE>

                                   (continued)

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                             (Dollars in thousands)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                             Three Months Ended
                                                                                                  March 31,
                                                                                            1997              1996
                                                                                            ----           -  ----
<S>                                                                                        <C>              <C>     
Cash flows from financing activities:
     Net increase in demand deposits and passbook
       savings accounts                                                                    $ 4,910          $ 17,133
     Net (decrease) increase in certificates of deposit, net of
        interest credited                                                                     (393)            3,161
     Net increase in subordinated debt                                                      12,858                22
     Increase in advances from Federal Home Loan Bank of Atlanta                           107,000                --
     Payment on advances from Federal Home Loan Bank of
       Atlanta                                                                             (86,800)               --
     Net increase (decrease) in securities sold under agreements
      to repurchase                                                                         74,685            (1,397)
     Increase in common stock and preferred stock                                           16,555                --
     Dividends paid on common and preferred stock                                              (60)               --
                                                                                               ----               --

Net cash provided by financing activities                                                  128,755            18,919
                                                                                           -------            ------

Net decrease in cash and cash equivalents                                                    5,263            (5,838)

Cash and cash equivalents at beginning of period                                             3,259             8,965
                                                                                             -----             -----
Cash and cash equivalents at end of period                                                 $ 8,522           $ 3,127
                                                                                             =====             =====


Supplemental information:

Interest paid on deposits and borrowed funds                                              $  8,647          $  3,988
Income taxes paid                                                                              260                37
Transfers from loans to real estate acquired through foreclosures                               94               596
 Gross unrealized gain (loss) on securities available for sale                               2,327               368
Tax effect of gain (loss) on available for sale securities                                   1,392              (147)

</TABLE>

          See accompanying notes to consolidated financial statements.



<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE THREE ENDED MARCH 31, 1997 AND 1996

NOTE 1.       BASIS OF PRESENTATION

         TeleBanc  Financial  Corporation,  (the "Company") was  incorporated on
January 26, 1994 and in March,  1994 became the direct  savings and loan holding
company parent of TeleBank (the "Bank"), formerly known as Metropolitan Bank for
Savings, F.S.B. The primary business of the Company is the business of the Bank,
the Bank's subsidiaries and TeleBanc Capital Markets, Inc. ("TCM"), a registered
investment  advisor,  funds manager and broker  dealer.  The Bank is a federally
chartered  savings  bank,  deposit  accounts in which are insured to  applicable
limits by the Federal Deposit Insurance Corporation  ("FDIC").  The consolidated
financial statements include accounts of TeleBanc Financial  Corporation and its
wholly-owned subsidiaries, the Bank and TCM.

         The financial  statements as of March 31, 1997 and for the three months
ended March 31, 1997 and 1996 are  unaudited,  but in the opinion of management,
contain  all  adjustments,   consisting  solely  of  normal  recurring  entries,
necessary to present fairly the consolidated financial condition as of March 31,
1997 and the results of consolidated operations for the three months ended March
31, 1997 and 1996. The results of  consolidated  operations for the three months
ended March 31, 1997 are not  necessarily  indicative of the results that may be
expected for the entire year. The Notes to Consolidated Financial Statements for
the year ended  December 31, 1996,  included in the  Company's  Annual Report to
Stockholders for 1996, should be read in conjunction with these statements.

         Certain prior year's amounts have been  reclassified  to conform to the
current year's presentation.

NOTE 2.  EARNINGS PER SHARE

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting Standards No. 128 "Earnings per Share" ("SFAS
129"),  effective  December 15, 1997. This statement  specifies the computation,
presentation,  and  disclosure  requirements  for earnings per share ("EPS") for
entities with publicly held common stock or potential  common stock.  The impact
on the Company has been calculated below:


<PAGE>

                            Pro Forma EPS Calculation

                                                     March 31,
                                 -----------------------------------------------
PER SHARE AMOUNTS                      1997                           1996
                                 ------------------------ ----------------------

Primary EPS as reported             $    0.36                     $    0.31
Effect of SFAS 128                       0.03                          0.01
                                         ----                          ----
Pro forma basic EPS                 $    0.39                     $    0.32
                                         ====                          ====

Fully diluted EPS as reported       $    0.36                     $    0.31
Effect of SFAS 128                      (0.07)                        (0.06)
                                        ------                        ------
Pro Forma diluted EPS               $    0.29                     $    0.25
                                         ====                          ====

         Basic  earnings per common share,  as required by SFAS 128, is computed
by dividing  adjusted net income by the total of the weighted  average number of
common  shares  outstanding  during  the  respective  periods.  The year to date
weighted average number of common shares outstanding was 3,005,331 and 2,068,314
for the  Company  at March 31,  1997 and 1996,  respectively.  Weighted  average
shares  outstanding  also include  common  stock  equivalents  which  consist of
outstanding  stock  options  and  warrants,  if such  options  or  warrants  are
dilutive.
<TABLE>
<CAPTION>
                            Pro Forma EPS Calculation

                                                      Income                 Shares             Per Share Amount
                                                               For the Quarter Ended March 31, 1996
                                              -----------------------------------------------------------------------
<S>                                           <C>                            <C>                   <C>     
BASIC EARNINGS PER SHARE
Net income                                    $         649,000              2,049,500             $   0.32
                                                                                            =========================
Options issued to management                                 --                253,954
Warrants                                                     --                338,808
                                              ======================= =====================
DILUTED EARNINGS PER SHARE                    $         649,000              2,642,262             $   0.25
                                              ======================= ===================== =========================
<CAPTION>

                                                               For the Quarter Ended March 31, 1997
                                              -----------------------------------------------------------------------
<S>                                           <C>                             <C>                  <C>     
Net income                                    $         874,000
less: Preferred Stock Dividends                         (60,000)
                                              -----------------------
BASIC EARNINGS PER SHARE

Income available to common shareholders       $         814,000               2,106,088            $   0.39
                                                                                              =======================
Options issued to management                                 --                290,975
Warrants                                                     --                232,987
Convertible preferred stock                              60,000                398,523
                                              ----------------------- -----------------------
DILUTED EARNINGS PER SHARE                    $         874,000               3,028,573            $   0.29
                                              ======================= ======================= =======================
</TABLE>




<PAGE>



                         TELEBANC FINANCIAL CORPORATION

NOTE 3.       RECENT EVENTS

         On February  28, 1997,  the Company sold $29.9  million of units in the
form of 4%  convertible  preferred  stock,  9.5% senior  subordinated  notes and
warrants,  and  purchased  substantially  all of the  assets  of  Arbor  Capital
Partners,  Inc. ("Arbor"),  a registered  investment advisor,  funds manager and
broker-dealer.  MET Holdings, TeleBanc's majority shareholder,  owned a majority
of Arbor. In connection with this sale, the Company incurred  approximately $1.7
million of  expenses,  of which,  approximately  $725,000 is  attributed  to the
senior subordinated notes and will be amortized through March 31, 2004.

         The $29.9 million in units were sold to investment partnerships managed
by Conning & Co., CIBC Wood Gundy Argosy  Merchant Fund 2, LLC, The  Progressive
Corporation and The Northwestern  Mutual Life Insurance  Company.  Upon the unit
sale,  representatives  from the Conning partnerships and the CIBC Merchant Fund
were  appointed to the  Company's  Board.  The units consist of $13.7 million in
9.5% senior subordinated notes with 198,088 detachable  warrants,  $16.2 million
in 4.0% convertible  preferred stock, and rights to 205,563 contingent warrants.
The senior  subordinated notes are due on March 31, 2004 and stipulate increases
in  interest  rates  subsequent  to March 31,  2002 from 9.5% up to 15.25%.  The
warrants are  exercisable at $9.50 with an expiration date of February 28, 2005.
The preferred  stock consists of Series A Voting  Convertible  Preferred  Stock,
Series  B  Nonvoting   Convertible   Preferred  Stock  and  Series  C  Nonvoting
Convertible  Preferred  Stock and is convertible  to 1,199,743  shares of common
stock. Series A and Series B shares may be converted at any time into fully-paid
and  non-assessable  shares  of  Voting  Common  Stock.  Series C shares  may be
converted  at any time to  Series  A or  Series  B  shares  or at any time  into
fully-paid and  non-assessable  nonvoting common stock. The contingent  warrants
may be  exercised  upon a change of control or on February  29, 2002  ("Exercise
Event"). If the Company's annual internal rate of return is less than 25% at the
time of an Exercise Event, unit holders may exercise the contingent warrants for
$0.01 until an internal rate of return of 25% is reached.

         Also in connection with the sale of units, the Arbor asset  acquisition
was structured as a tax free issuance of 162,461 shares of TeleBanc common stock
and a $500,000  cash  payment for the Arbor  assets.  An  independent  appraisal
valued the asset to be  acquired  from Arbor at $3.1  million.  Consistent  with
TeleBanc's  charter,  the number of shares issued to Arbor as consideration  was
limited to 5% of total market value of outstanding TeleBanc stock at the time of
acquisition.


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
                      THE THREE MONTHS ENDED MARCH 31, 1997

         This discussion and analysis includes  descriptions of material changes
which  have  affected  the  Company's   consolidated   financial  condition  and
consolidated  results of operations during the periods included in the Company's
financial statements.

FINANCIAL CONDITION (MARCH 31, 1997 COMPARED TO DECEMBER 31, 1996)

         The Company's  total assets  increased by $134.9  million or 20.8% from
$648.0  million at December 31, 1996 to $782.9  million at March 31,  1997.  The
increase in total assets primarily reflects  increases in loans receivable,  net
and  loans  held  for  sale of  $66.5  million,  or  18.9%  and  mortgage-backed
securities  available for sale of $57.4 million, or 31.1%. The increase in loans
receivable  includes purchases of primarily  adjustable rate loans. In February,
1997,  the Company  raised $28.2  million of net proceeds from the sale of units
consisting of debt and equity  securities (see Note 1 to Consolidated  Financial
Statements  for the three  months  ended March 31,  1997 and 1996).  The Company
immediately  invested  $10  million of the net  proceeds  as  additional  equity
capital of the Bank.  The increase in asset size reflects  management's  initial
efforts to leverage  the  proceeds  raised  from the sale of units.  The Company
intends to continue to leverage such  proceeds,  as well as capital  raised from
earnings, for additional growth for the foreseeable future.

         The Company funded its asset growth with a mix of securities sold under
agreements to repurchase ("reverse repos"),  Federal Home Loan Bank advances and
deposits. Total deposits increased by $10.2 million, or 2.6% from $390.5 million
at December 31, 1996 to $400.7  million at March 31, 1997.  The average term for
the new time  deposits  gathered  in the three  months  ended March 31, 1997 was
approximately 37.5 months with an average percentage yield of 6.28%. The Company
has continued to focus on building core deposit accounts.  Money market checking
and savings accounts increased 21.6% from $109.8 million at December 31, 1996 to
$133.5 million at March 31, 1997.  Federal Home Loan Bank Advances  increased to
$165.0 million at March 31, 1997 from $144.8 million at December 31, 1996. As of
March 31, 1997, the weighted average interest rate and weighted average maturity
for  Federal  Home Loan  Bank  Advances  was  5.95% and 470 days,  respectively.
Securities  sold under  agreements to repurchase,  increased by $74.7 million or
129.7% from $57.6  million at December  31, 1996 to $132.3  million at March 31,
1997 largely as a result of management's intention to fund high growth after the
capital raising and to replace these  borrowings with the core deposits over the
year.  As of March 31, 1997,  the weighted  average  interest  rate and weighted
average  maturity for securities  sold under  agreements to repurchase was 5.66%
and 160 days,  respectively.  As of March 31, 1997,  subordinated  debt,  net of
original  issue  discount  was $29.4  million,  which  includes  the 9.5% senior
subordinated  debt  raised in  February,  1997 and the 11.5%  subordinated  debt
raised in the second quarter of 1994.


         Stockholders'  equity  increased  $16.2 million,  from $24.7 million at
December 31, 1996 to $40.9  million at March 31,  1997.  The increase was due to
the $15.3 million issuance of 4%

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

convertible preferred stock, $1.3 million stock issuance in exchange for Arbor's
assets,  $814,000 in net income for the three months ended March 31, 1997 and an
unrealized loss on securities available for sale, net of deferred taxes, of $1.2
million,  which pursuant to SFAS 115 affects the Company's  stockholders' equity
but does not impact the statement of operations.

         The growth in total assets reflects the Company's efforts to invest and
leverage in a prudent  manner the $28.2 million of net proceeds from the private
placement  offering in February  1997. As the Company  continues to leverage the
new capital, asset growth will be supported by increasing deposits, Federal Home
Loan Bank Advances and reverse repos.



<PAGE>
                         TELEBANC FINANCIAL CORPORATION

         The consolidated  average balance sheets, along with income and expense
and related  interest yields and rates for the quarters ended March 31, 1997 and
1996 are shown  below.  The table  also  presents  information  for the  periods
indicated  with respect to the  difference  between the weighted  average  yield
earned  on   interest-earning   assets  and   weighted   average  rate  paid  on
interest-bearing   liabilities,   or  "interest   rate  spread,"   which  saving
institutions have traditionally  used as an indicator of profitability.  Another
indicator  of an  institution's  net  interest  income  is  its  "net  yield  on
interest-earning  assets,"  which  is its net  interest  income  divided  by the
average balance of  interest-earning  assets and  interest-bearing  liabilities.
When interest-earning assets approximate or exceed interest-bearing liabilities,
any positive interest rate spread will generate interest income.

<TABLE>
<CAPTION>

                                       Quarter ended March 31, 1997         Quarter ended March 31, 1996
                                    ----------------------------------- ------------------------------------
                                                                                                   Average

                                                Interest     Average                  Interest   Annualized
(Dollars in thousands)               Average     Income/    Annualized    Average     Income/
         unaudited                   Balance     Expense    Yield/Cost    Balance      Expense   Yield/Cost
                                     -------     -------    ----------    -------      -------   ----------
<S>                                 <C>         <C>             <C>     <C>          <C>             <C>  
Interest-earning assets:
Loans receivable, net               $ 383,990   $    7,565      7.88%   $  243,227   $       5,296   8.71%
Mortgage-backed and related
   securities                              --           --       --            --            --       --
Investment securities                   4,817           88     7.43            --            --       --
Mortgage-backed and related
   securities available for sale      193,572        3,805     7.86       245,822         4,874     7.93
Investment securities available
   for sale (a)                        79,251        1,229     6.20        54,564           898     6.58
Federal funds sold                      1,557           20     5.11           859            10     4.66
Investment in FHLB                      7,840          140     7.25         5,275           153    11.60
Trading account                            --           --       --            --            --       --
                                    ---------   ----------  -------     ---------            --       --
  Total interest-earning assets     $ 671,027  $     12,847   7.66%    $  549,747   $     11,231   8.17%

Non-interest-earning assets         $  33,414                          $   15,020
                                        ------                             ------

  Total assets                      $ 704,441                          $  564,767
                                       =======                            =======

Interest-bearing liabilities:
Savings deposits                    $ 120,156   $    1,568     5.29%   $   87,161    $    1,001     4.57%
Time deposits                         274,686        4,230     6.25       236,360         3,867     6.51
FHLB advances                         151,919        2,263     5.96       105,500         1,584     5.88
Other borrowings                       89,573        1,266     5.65        93,040         1,386     5.83
Subordinated debt, net                 21,164          643    12.16        16,504           519    12.58
                                       ------   ----------  -------        ------           ---  -------
  Total interest-bearing
   liabilities                      $  657,497  $    9,971     6.11%   $  538,565    $    8,357     6.14%

Non-interest-bearing liabilities    $   15,463                         $    5,656
                                        ------                              -----

Total liabilities                   $  672,960                         $  544,221

Stockholders' equity                $   31,481                         $   20,546
                                        ------                              ------

Total liabilities and
   stockholders' equity             $  704,441                         $  564,767
                                       =======                             =======

Excess of interest-earning assets
   over interest-bearing
   liabilities/net interest
   income/interest rate spread      $   13,529  $    2,876     1.55%   $   11,182    $    2,874     2.03%
                                        ======
Net yield on interest earning
   assets                                                      1.71%                                2.09%
                                                               =====                                =====
Ratio of interest-earning assets
   to interest-bearing liabilities                           102.06%                              102.08%
                                                             =======                              =======
</TABLE>

(a)  Interest  income and average  yields on municipal  bonds are presented on a
     tax equivalent basis.


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996


         NET INCOME.  Net income for the three  months  ended March 31, 1997 was
$874,000  compared to $649,000 for the three  months  ended March 31, 1996.  Net
income for the three  months  ended March 31, 1997  consisted  primarily of $3.0
million of net interest  income and $618,000 in  non-interest  income reduced by
$243,000 in provision for loan losses, $2.1 million in non-interest expenses and
$355,000 in income tax expense.  Net income for the three months ended March 31,
1996 consisted  primarily of $2.8 million in net interest income and $605,000 in
non-interest  income  reduced by $419,000 in  provision  for loan  losses,  $2.0
million in non-interest  expenses and $332,000 in income tax expense. Net income
available to common  shareholders was $814,000 net of stock dividends of $60,000
at March 31, 1997.



         NET  INTEREST  INCOME.  Net  interest  income was $3.0 million and $2.8
million  for the  three  months  ended  March 31,  1997 and 1996,  respectively,
reflecting an  annualized  interest rate spread of 1.55% and 2.03% for the three
months ended March 31, 1997 and 1996, respectively.  In the quarter ending March
31,  1997,  total  interest  earning  assets,   consisting  primarily  of  loans
receivable,  net and mortgage-backed  and related  securities,  yielded 7.55% as
compared to 8.17% for the same period in 1996. The decline in yield is partially
comprised of the transfer of loans to the held for sale category.  In June 1996,
the Bank made a one-time  transfer of  approximately  $106.6  million from loans
receivable,  net to  loans  held  for  sale.  According  to  generally  accepted
accounting  principles,  purchase  discounts on mortgage loans held for sale are
recognized as  non-interest  income.  In the first quarter of 1997,  the Company
recognized $116,000 in discounts on prepayments on loans held for sale resulting
in a 12 basis  point  decline  in the yield of loans  receivable,  net.  Average
interest-earning  assets were $671.0 million and $549.7 million for the quarters
ending  March  31,  1997  and  1996,  respectively.   Average  interest  bearing
liabilities were $657.5 million and $538.6 million for the quarters ending March
31, 1997 and 1996, respectively.  Total interest-bearing  liabilities cost 6.11%
in the first  quarter of 1997 as  compared  to 6.14% in the same period in 1996.
The decrease in the cost of interest-bearing  liabilities  reflects decreases in
the  average  interest  rates  paid  on  time  deposits,  other  borrowings  and
subordinated  debt. The average interest rate related to the  subordinated  debt
declined  as  a  result  of  the  issuance  of  $16.2  million  of  9.5%  senior
subordinated  debt in February  1997 as part of the sale of units.  At March 31,
1997, the Company also has outstanding $17.3 million of 11.5%  subordinated debt
issued in May 1994. Net yield on interest-earning  assets for the quarter ending
March 31, 1997 decreased 38 basis points over the same quarter in 1996.



         PROVISION FOR LOAN LOSSES.  Total  provision for loan losses  decreased
$176,000 or 42.0% from  $419,000 for the three  months  ending March 31, 1996 to
$243,000 for the three  months  ending  March 31,  1997.  Management  intends to
provide  prudent  reserves for  potential  loan losses.  In the first quarter of
1997, the Company  provided  $200,000 in general reserves for first quarter loan
acquisitions and charged off approximately $43,000 of mortgage loans. During the
quarter ended March 31, 1996, the Company provided  additional  general reserves
for loan  acquisitions  and charged off $19,000 on a one to four family mortgage
loan. The total loan loss

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

allowance  at March 31, 1997 and  December  31,  1996 was $2.9  million and $2.6
million,  respectively,  which was 0.7% and 0.9%,  respectively,  of total loans
outstanding.



         NON-INTEREST  INCOME.  The  Company  continues  to report a  relatively
stable  level of  non-interest  income  from the  Company's  loan  held for sale
portfolio,  loan fees on the total  portfolio,  and sales on liquid  securities.
Total non-interest  income remained stable with reported  non-interest income of
$618,000  and  $605,000  for the three  months  ended  March 31,  1997 and 1996,
respectively.  For the three months ended March 31, 1997,  the Company  reported
$238,000  on the  sale of  liquid  bonds  in the  mortgage-backed  security  and
investment  portfolio,  $127,000  on  prepayments  of  loans  held  for sale and
$253,000  in loan  fees and  service  charges  on the  Bank's  portfolio  and on
purchase mortgage servicing rights fee income. Non-interest income for the first
quarter of 1996  consisted  of a $241,000  net gain from the sale of a corporate
bond held for liquidity  purposes and $364,000 on purchased  mortgage  servicing
rights fee income.



         NON-INTEREST   EXPENSES.   Total  non-interest  expenses  increased  by
$126,000  from $2.0  million for the three  months  ended March 31, 1996 to $2.1
million for the three months ended March 31, 1997.  The increase  results from a
$218,000  increase  in  general  and  administrative  expenses  attributable  to
compensation incentives of $360,000 offset by a decrease in personnel due to the
transfer of servicing from the Bank to a 50% owned subsidiary. Other general and
administrative  expenses  declined by $34,000  largely as a result of a $104,000
decline in Federal  insurance  premiums offset by an increase in  administrative
expenses  associated with a higher volume of deposit accounts and an increase in
marketing  expenses.  Other non-interest  expenses decreased by $92,000 due to a
decline  in  prepayments  and a  corresponding  decline in the  amortization  of
purchased mortgage servicing rights. It is the Company's  compensation policy to
pay a  combination  of salary and highly  incentivized  additional  compensation
consisting of bonuses based on the overall  Company  performance  and individual
performance.  Although total dollars for compensation increased,  the annualized
general and administrative expenses net of bonuses as a percentage of assets for
the three months  ended March 31, 1997 was 0.95%,  a decline of 0.04% from 0.99%
for the same period in 1996. Annualized general and administrative expenses as a
percentage  of assets for the three  months  ended  March 31,  1997 and 1996 was
0.97% and 1.16%, respectively.



         INCOME TAX EXPENSE.  The effective tax rate for the quarter ended March
31, 1997 was 28.9%  compared to 33.8% for the quarter ended March 31, 1995.  The
income tax expense for the quarter ended March 31, 1997 was $355,000 compared to
$332,000 for the quarter  ended March 31, 1996.  The Company  carried a deferred
tax payable of $298,000 on its Consolidated  Statement of Financial Condition as
of March 31, 1997.



<PAGE>



                         TELEBANC FINANCIAL CORPORATION

LIQUIDITY

         Liquidity  is the  ability  of  the  Company  to  generate  cash  flows
sufficient  to  fund  operations  and  to  meet  present  and  future  financial
obligations  to borrowers  and  depositors in a timely  manner.  Cash flows from
operating  activities,  consisting  primarily of interest received less interest
paid on deposits  and  borrowings,  were $5.1  million and $7.1  million for the
three months ended March 31, 1997 and 1996, respectively.  Net cash flow used in
investing  activities   (primarily  purchases  of  mortgage-backed  and  related
securities  and  mortgage  loans,  offset  by  principal  payments  on loans and
mortgage-backed  and related  securities  and proceeds  from sale or maturity of
investment securities) was $128.5 million and $31.9 million for the three months
ended March 31, 1997 and 1996, respectively.  The increase in cash flows related
to investing  activities  for the three  months ended March 31, 1997  reflects a
significant increase in the amount of mortgage-backed securities, mortgage loans
and investment  securities  purchased.  Net financing activities  (primarily net
activity in deposits and  borrowings)  were $128.8 million and $54.7 million for
the three  months ended March 31, 1997 and 1996,  respectively.  The increase in
net cash provided by financing  activities  for the three months ended March 31,
1997 is primarily the result of increased growth in 1997 as compared to the same
period in 1996. The total net increase  (decrease) in cash and cash  equivalents
was $5.3 million and $(5.8)million for the three months ended March 31, 1997 and
1996, respectively.

         The  Company's  primary  sources of funds are  deposits,  principal and
interest  payments on loans and  mortgage-backed  securities,  and proceeds from
sales and maturities of  mortgage-backed  and related  securities and investment
securities.  Investment  maturities,  and  scheduled  amortization  of loans and
mortgage-backed  securities are generally a predictable source of funds. Deposit
flows and mortgage  prepayments  are greatly  influenced by the general level of
interest rates, economic conditions, and competition.  The Company also accesses
FHLB  advances,  utilizes  securities  sold under  agreements to repurchase  and
subordinated debt.

         The Bank is  required to maintain  minimum  levels of liquid  assets as
defined  by the  OTS  regulations.  This  requirement,  which  may  vary  at the
discretion of the OTS depending upon economic  conditions and deposit flows,  is
based upon a  percentage  of deposits  and  short-term  borrowings.  The minimum
required  ratio is 5.0%. At March 31, 1997,  the Company's  liquidity  ratio was
5.06%.

         In the second quarter of 1994, the Company completed its initial public
offering,  raising an aggregate of $21.9 million  through the issuance of common
stock and  subordinated  notes with warrants.  Upon completion of this offering,
the  Company  invested  $15 million of the  proceeds as capital of the Bank.  In
February , 1997,  the Company  raised an  additional  $29.9 million in aggregate
through  the  issuance  of 4.0%  cumulative  preferred  stock  and  9.5%  senior
subordinated notes with warrants.  Upon completion of this offering, the Company
invested  $10 million of the proceeds as capital of the Bank.  The  subordinated
debt represents a stable,  although relatively  expensive,  source of funds. The
annual expense to service the total  subordinated  debt is $3.3 million.  Annual
dividends on the 4% preferred stock is $648,000. Subject to regulatory approval,
the Bank will  dividend  $3.9  million to the  Company  to service  the debt and
preferred stock. There are various regulatory limitations on the extent to which
federally chartered savings

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

institutions  may pay  dividends.  Also,  savings  institution  subsidiaries  of
holding companies  generally are required to provide their OTS Regional Director
with  no  less  than  30  days  notice  of  any  proposed   declaration  on  the
institution's  stock.  Under  terms of the  indentures  pursuant  to  which  the
subordinated  notes were issued,  the Company presently is required to maintain,
on an unconsolidated  basis, liquid assets in an amount equal to or greater than
$3.3 million,  which represents 100% of the aggregate  interest expenses for one
year on the subordinated debt.

         The Company's most liquid assets are cash and cash  equivalents,  which
include investments in liquid short-term investments and federal funds sold with
maturities of nine months or less. The levels of these assets are dependent upon
the Company's  operating,  financing,  and investing activities during any given
period.  Cash equivalents  totaled $8.5 million and $3.3 million as of March 31,
1997 and December 31, 1996, respectively.  As of March 31, 1997, the Company had
commitments to purchase $25.2 million in loans.  Also,  certificates  of deposit
which are scheduled to mature in less than one year as of March 31, 1997 totaled
$44.4 million.

         In the normal course of business, the Company makes various commitments
to extend credit and incurs  contingent  liabilities  which are not reflected in
the balance sheets.

CAPITAL RESOURCES

         Capital ratios at March 31, 1997 exceeded each of the three OTS capital
requirements  on a fully  phased-in  basis.  The following  table sets forth the
actual and required  minimum levels of regulatory  capital for the Company under
applicable OTS regulations as of March 31, 1997:
<TABLE>
<CAPTION>

                    ACTUAL         PERCENT            REQUIRED          PERCENT           EXCESS
                                              (DOLLARS IN THOUSANDS)
<S>                 <C>             <C>                <C>                 <C>            <C>    
Core                $43,055         5.71%              $22,640             3.00%          $20,415
Tangible             43,042         5.70                11,320             1.50            31,722
Risk-based           45,673        12.09                30,211             8.00            15,462




</TABLE>


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

PART II -- OTHER INFORMATION


Item 5.           Other Information

         No information to report.

Item 6.           Exhibits and Reports on Form 8-K

         (a) Exhibits

                  27. Financial Data Schedule

         (b) Reports on Form 8-K

                  Form 8-K filed on January 22, 1997 

                  Form 8-K filed on March 13, 1997


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

SIGNATURES

         Pursuant to the  requirements  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.


                                  TeleBanc Financial Corporation
                                              (Registrant)


Date: May 15, 1997                By:  /s/ Mitchell H. Caplan
      ---------------                  -----------------------------------------
                                         Mitchell H. Caplan
                                         President



Date: May 15, 1997                By:  /s/ Aileen Lopez Pugh
      ---------------                  -----------------------------------------


                                      Aileen Lopez Pugh
                                      Executive Vice President
                                      Chief Financial Officer/Treasurer