================================================================================
                                    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, 1999

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

                          Commission File No. 000-24549

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

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

               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 May 14, 1999.

     $.01 par value of common stock                             16,620,352
     ------------------------------                             ----------
                (class)                                       (outstanding)

================================================================================
<PAGE>



                                    FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
Part I - Financial Information                                                                   Page
------------------------------                                                                   ----
<S>                                                                                                <C>
Item 1.

   Consolidated Statements of Financial Condition - March 31, 1999 and December 31, 1998           3

   Consolidated Statements of Operations and Comprehensive Income -- Three months ended
     March 31, 1999 and 1998                                                                       4

   Consolidated Statements of Changes in Stockholders' Equity - Three months ended March
     31, 1999 and 1998                                                                             6

   Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998              7

   Notes to Consolidated Financial Statements                                                      8

Item 2.

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

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk                                     18


Part II - Other Information
---------------------------

Item 6.

   Exhibits and Reports on Form 8-K

      (a)  Exhibits                                                                               18
      (b)  Reports on Form 8-K                                                                    18

Signatures                                                                                        19
</TABLE>


                                       2

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                      (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                                         March 31,       December 31,
                                                                                           1999              1998
                                                                                         ---------       ------------
                                                                                        (unaudited)
<S>                                                                                    <C>              <C>
ASSETS:
Cash and cash equivalents                                                              $     19,218     $     26,282
Trading securities                                                                           18,929           29,584
Investment securities available for sale                                                    219,223          220,358
Mortgage-backed securities available for sale                                             1,123,460        1,012,163
Loans receivable held for sale                                                              103,857          117,928
Loans receivable, net                                                                     1,047,137          786,926
Other assets                                                                                 88,985           90,100
                                                                                       ------------     ------------

                          Total assets                                                 $  2,620,809     $  2,283,341
                                                                                       ============     ============


LIABILITIES AND STOCKHOLDERS' EQUITY:

Retail deposits                                                                        $  1,341,480     $  1,142,385
Brokered callable certificates of deposit                                                    67,116           67,085
Advances from the Federal Home Loan Bank of Atlanta                                         410,500          472,500
Securities sold under agreements to repurchase and other borrowings                         602,913          404,435
Subordinated debt, net                                                                       29,917           29,855
Other liabilities                                                                            14,628           18,261
                                                                                       ------------     ------------

                          Total liabilities                                               2,466,554        2,134,521
                                                                                       ------------     ------------

Company-Obligated Mandatorily Redeemable Preferred Capital Securities of
     Subsidiary Trust Holding Soley Junior Subordinated Debentures of the Company            35,402           35,385

Stockholders' equity:
Common stock, $0.01 par value, 29,500,000 shares authorized; 12,537,880 and
     12,388,242 issued and outstanding at March 31, 1999 and December 31, 1998                  126              123
Additional paid-in capital                                                                  105,750          103,194
Unearned ESOP shares                                                                         (2,549)          (2,578)
Retained earnings                                                                            12,067           10,819
Unrealized gain on securities available for sale, net of tax                                  3,459            1,877
                                                                                       ------------     ------------

                          Total stockholders' equity                                        118,853          113,435
                                                                                       ------------     ------------

                          Total liabilities and stockholders' equity                   $  2,620,809     $  2,283,341
                                                                                       ============     ============
</TABLE>


          See accompanying notes to consolidated financial statements.


<PAGE>



                         TELEBANC FINANCIAL CORPORATION

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

                      (In Thousands, Except Per Share Data)

                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended
                                                                                           March 31,
                                                                                      ------------------
                                                                                       1999          1998
                                                                                       ----          ----
<S>                                                                                 <C>            <C>
   Interest income:
       Loans                                                                        $ 19,111       $ 10,365
       Mortgage-backed and related securities                                         18,305          5,074
       Investment securities                                                           3,391          1,701
       Trading securities                                                                207            636
       Other                                                                             678            295
                                                                                    --------       --------

          Total interest income                                                       41,692         18,071

   Interest expense:
       Retail deposits                                                                17,158          8,055
       Brokered callable certificates of deposit                                       1,098            374
       Advances from the Federal Home Loan Bank of Atlanta                             5,745          2,718
       Repurchase agreements and other borrowings                                      7,477          2,451
       Subordinated debt                                                                 884            879
                                                                                    --------       --------

          Total interest expense                                                      32,362         14,477
                                                                                    --------       --------

          Net interest income                                                          9,330          3,594

   Provision for loan losses                                                             490            250
                                                                                    --------       --------

          Net interest income after provision for loan losses                          8,840          3,344
                                                                                    --------       --------

   Non-interest income:
       Gain on sale of available-for-sale securities                                   1,021            891
       Gain on sale of loans                                                           1,833            121
       Gain on trading securities                                                        143             62
       Gain on equity investment                                                         148            526
       Fees, service charges and other                                                   530            347
                                                                                    --------       --------

          Total non-interest income                                                    3,675          1,947

   Non-interest expenses:
       Selling, general and administrative expenses:
         Compensation and employee benefits                                            2,537          1,950
         Advertising and marketing                                                     2,459            629
         Other                                                                         3,389          1,310
                                                                                    --------       --------

          Total selling, general and administrative expenses                           8,385          3,889

       Other non-interest expenses:
         Net operating costs of real estate acquired through foreclosure                 (40)            82
         Amortization of goodwill and other intangibles                                  609            233
                                                                                    --------       --------

          Total other non-interest expenses                                              569            315
                                                                                    --------       --------

            Total non-interest expenses                                                8,954          4,204
                                                                                    --------       --------
</TABLE>

                                   (continued)


                                       4

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

   CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

                      (In Thousands, Except Per Share Data)

                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                        March 31,
                                                                                   1999          1998
                                                                                 -------        -------
<S>                                                                              <C>            <C>
          Income before income tax expense                                         3,561          1,087

   Income tax expense                                                              1,283            475

   Minority interest in subsidiary                                                   561            176
                                                                                 -------        -------

          Income before cumulative effect of accounting change                     1,717            436

   Cumulative effect of accounting change, net of tax                                469             --
                                                                                 -------        -------

          Net income                                                               1,248            436

   Preferred stock dividends                                                          --            162
                                                                                 -------        -------

          Net income available to common stockholders                            $ 1,248        $   274
                                                                                 =======        =======


   Other comprehensive income, net of tax:
       Unrealized holding gain on securities arising during the period             2,215            814
       Less: reclassification adjustment for gains included in net income           (633)          (552)
                                                                                 -------        -------

          Other comprehensive income, net of tax                                   1,582            262
                                                                                 -------        -------

          Comprehensive income                                                   $ 2,830        $   536
                                                                                 =======        =======


   Earnings per share:
       Basic:
          Income before cumulative effect of accounting change                   $  0.14        $  0.06
          Cumulative effect of accounting change, net of tax                       (0.04)            --
                                                                                 -------        -------
          Net income                                                             $  0.10        $  0.06
                                                                                 =======        =======

       Diluted:
          Income before cumulative effect of accounting change                   $  0.12        $  0.05
          Cumulative effect of accounting change, net of tax                       (0.03)            --
                                                                                 -------        -------
          Net income                                                             $  0.09        $  0.05
                                                                                 =======        =======
</TABLE>



          See accompanying notes to consolidated financial statements.


                                       5

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

               FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998

                                 (In Thousands)

                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                                              Unrealized
                                                                                                               Gains on
                                                                        Additional   Unearned                 Available-
                                                 Preferred    Common     Paid-in      ESOP        Retained     for-Sale
                                                   Stock       Stock     Capital      Shares      Earnings    Securities    Total
                                                 ---------    ------    ----------   --------     --------    ----------    -----
<S>                                             <C>         <C>         <C>         <C>          <C>          <C>         <C>
Balances at December 31, 1997                   $  15,281   $      44   $  16,205   $      --    $  11,556    $   2,738   $  45,824

Net income for the three months ended March
   31, 1998                                            --          --          --          --          436           --         436

Exercise of stock options                              --          --         180          --           --           --         180

Dividends on 4% Cumulative Preferred Stock             --          --          --          --         (162)          --        (162)

Unrealized gain on available-for-sale
   securities,  net of tax effect
                                                       --          --          --          --           --          262         262
                                                ---------   ---------   ---------   ---------    ---------    ---------   ---------

Balances at March 31, 1998                      $  15,281   $      44   $  16,385   $      --    $  11,830    $   3,000   $  46,540
                                                =========   =========   =========   =========    =========    =========   =========

Balances at December 31, 1998                   $      --   $     123   $ 103,194   $  (2,578)   $  10,819    $   1,877   $ 113,435

Net income for the three months ended March
   31, 1999                                            --          --          --          --        1,248           --       1,248

Exercise of warrants and stock options,
   including related tax benefit                       --           3       2,501          --           --           --       2,504

Release of unearned ESOP shares                        --          --          55          29           --           --          84

Unrealized gain on available-for-sale
   securities,  net of tax effect
                                                       --          --          --          --           --        1,582       1,582
                                                ---------   ---------   ---------   ---------    ---------    ---------   ---------

Balances at March 31, 1999                      $      --   $     126   $ 105,750   $  (2,549)   $  12,067    $   3,459   $ 118,853
                                                =========   =========   =========   =========    =========    =========   =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       6

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In Thousands)

                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                             Three Months Ended
                                                                                                  March 31,
                                                                                          -------------------------
                                                                                             1999            1998
                                                                                          ---------       ---------
<S>                                                                                       <C>             <C>
Net cash provided by (used in) operating activities                                       $  27,467       $  (4,776)
                                                                                          ---------       ---------

Cash flows from investing activities:
    Net increase in loans held to maturity                                                 (259,481)        (26,002)
    Interest received on loans extended to Employee Stock Ownership Plan                         29              --
    Equity investment in subsidiaries                                                        (1,022)           (724)
    Purchases of available-for-sale securities                                             (279,795)       (143,899)
    Proceeds from sales of available-for-sale securities                                     82,251         151,543
    Proceeds from maturities of and principal payments on available-for-sale
     securities                                                                              85,561          18,419
    Net purchases of premises and equipment                                                    (914)           (226)
    Proceeds from sale of foreclosed real estate                                              1,159             494
                                                                                          ---------       ---------

          Net cash used in investing activities                                            (372,212)           (395)
                                                                                          ---------       ---------

Cash flows from financing activities:
    Net increase in deposits                                                                199,126          80,619
    Advances from the Federal Home Loan Bank of Atlanta                                     691,010          87,500
    Payments on advances from the Federal Home Loan Bank of Atlanta                        (753,010)        (97,500)
    Net increase (decrease) in securities sold under agreements to repurchase               198,478        (125,939)
    Net increase in other borrowed funds                                                         79              52
    Proceeds from the issuance of common stock                                                2,559             180
    Dividends paid on Trust Preferred securities                                               (561)           (176)
    Dividends paid on common and preferred stock
                                                                                                 --            (162)
                                                                                          ---------       ---------

          Net cash provided by (used in) financing activities                               337,681         (55,426)
                                                                                          ---------       ---------

Net decrease in cash and cash equivalents                                                    (7,064)        (60,597)

Cash and cash equivalents at beginning of period                                             26,282          92,156
                                                                                          ---------       ---------

Cash and cash equivalents at end of period                                                $  19,218       $  31,559
                                                                                          =========       =========


Supplemental information:
    Interest paid on deposits and borrowed funds                                          $  29,308       $  13,692
    Income taxes paid                                                                            60             242
    Gross unrealized gain on available-for-sale securities                                    2,552             465
    Tax effect of gain on available-for-sale securities                                         970             203
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       7

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998

NOTE 1. BASIS OF PRESENTATION

     TeleBanc Financial  Corporation  ("TeleBanc" or the "Company") is a savings
and loan  holding  company  organized  under the laws of Delaware  in 1994.  The
primary  business of the Company is the  activities  conducted by TeleBank  (the
"Bank" or "Telebank") and TeleBanc Capital Markets,  Inc. ("TCM"). The Bank, the
leading and largest  online  bank,  is a federally  chartered  savings bank that
provides deposit accounts insured by the Federal Deposit  Insurance  Corporation
to customers  nationwide.  TCM is a funds manager and registered  broker-dealer.
TeleBanc  Capital Trust I ("TCT I") and TeleBanc Capital Trust II ("TCT II") are
business  trusts  formed  for the  purpose  of issuing  capital  securities  and
investing the proceeds in junior subordinated  debentures issued by the Company.
The Bank,  through its wholly owned subsidiary  TeleBanc  Servicing  Corporation
("TSC"),  owns 100% of TeleBanc Insurance  Services,  Inc.  ("TBIS"),  which was
formed in May 1998 to offer co-branded insurance products.  TSC also owns 50% of
AGT PRA,  LLC ("AGT  PRA").  The primary  business of AGT PRA is its  two-thirds
investment in Portfolio  Recovery  Associates,  LLC ("PRA"),  which acquires and
collects delinquent consumer debt obligations for its own portfolio.

     The  financial  statements  as of March 31,  1999 and for the three  months
ended March 31, 1999 and 1998 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,
1999 and the results of consolidated operations for the three months ended March
31, 1999 and 1998. The results of  consolidated  operations for the three months
ended March 31, 1999 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, 1998,  included in the  Company's  Annual Report to
Stockholders for 1998, should be read in conjunction with these statements.

     Effective June 22, 1998, the Board of Directors of the Company approved the
distribution of a 100% stock dividend on its outstanding common stock, par value
$0.01  (the  "Common  Stock").  The  effect  of  the  stock  dividend  has  been
retroactively  applied in the consolidated  financial statements for all periods
presented.

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

     Effective January 1, 1999, the Company changed its method of accounting for
start-up costs to comply with Statement of Position 98-5,  Reporting on the Cost
of  Start-up  Activities  ("SOP  98-5"),  issued by the  American  Institute  of
Certified Public Accountants in 1998. SOP 98-5 requires that start-up activities
be expensed as incurred  rather than  capitalized.  Therefore,  as of January 1,
1999, the Company expensed all previously  capitalized start-up costs, reporting
the expense as a  cumulative  effect of  accounting  change in the  Consolidated
Statement of Operations and Comprehensive Income.


                                       8

<PAGE>



                         TELEBANC FINANCIAL CORPORATION


NOTE 2. EARNINGS PER SHARE

     Basic  earnings  per common  share,  as required by  Statement of Financial
Accounting Standards No. 128, is computed by dividing adjusted net income by the
total of the weighted  average  number of common shares  outstanding  during the
respective  periods.  Options  and  warrants  are deemed to be  dilutive  if the
average  market  price of the related  Common  Stock for the period  exceeds the
exercise price.

     In  February  1997,  the  Company  issued  29,900  shares of 4%  Cumulative
Preferred Stock (the "Preferred Stock"),  par value $0.01, which was convertible
to 2,399,479  shares of the Company's  Common Stock. For purposes of the diluted
earnings per share calculation,  the Company assumed that all outstanding shares
of Preferred  Stock had  converted  to Common  Stock as of the  beginning of the
respective  periods. In July 1998, the Preferred Stock converted to Common Stock
and, therefore, was no longer outstanding as of March 31, 1999.

     The  Company's  year to date  weighted  average  number  of  common  shares
outstanding  was  12,324,997  at March 31, 1999 and 4,467,610 at March 31, 1998.
For  the  diluted  earnings  per  share  computation,  weighted  average  shares
outstanding also includes potentially dilutive securities.

                                EPS CALCULATION

<TABLE>
<CAPTION>
                                                        Income                 Shares            Per Share Amount
                                                        ------                 ------            ----------------

                                                ---------------------------------------------------------------------
                                                                For the Quarter Ended March 31, 1999
                                                ---------------------------------------------------------------------
<S>                                            <C>                           <C>               <C>
Basic earnings per share
Income before cumulative effect of
  accounting change                            $       1,717,000             12,324,997        $        0.14
Cumulative effect of accounting
  change, net of tax                                    (469,000)                                      (0.04)
                                               -----------------                               -------------
Net income                                     $       1,248,000                               $        0.10
                                               =================                               =============

Options issued to management                                                  1,468,247
Warrants                                                                        728,258
                                                                             ----------

Diluted earnings per share
Income before cumulative effect of
  accounting change                            $       1,717,000             14,521,502        $        0.12
                                                                             ==========
Cumulative effect of accounting
  change, net of tax                                    (469,000)                                      (0.03)
                                               -----------------                               -------------
Net income                                     $       1,248,000                               $        0.09
                                               =================                               =============
</TABLE>




                                       9

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

<TABLE>
<CAPTION>
                                                        Income                 Shares            Per Share Amount
                                                ---------------------------------------------------------------------
                                                                For the Quarter Ended March 31, 1998
                                                ---------------------------------------------------------------------
<S>                                             <C>                            <C>             <C>
Net income                                      $         436,000
Less: preferred stock dividends                           162,000
                                                -----------------
Basic earnings per share
Income available to common shareholders         $         274,000              4,467,610       $         0.06
                                                                                               ======================
Options issued to management                                   --                666,360
Warrants                                                       --                623,012
Convertible preferred stock                                    --                     --

                                                ---------------------------------------------
Diluted earnings per share                      $         274,000              5,756,982       $         0.05 (a)
                                                =====================================================================
</TABLE>


(a) The impact of the convertible  preferred stock is antidilutive for the three
months ended March 31, 1998.


NOTE 3. TRUST PREFERRED SECURITIES

     In June 1997, the Company formed TCT I, which in turn sold, at par,  10,000
shares of trust preferred  securities,  Series A, liquidation  amount of $1,000,
for a total of $10.0 million in a private  placement.  TCT I is a business trust
formed for the purpose of issuing capital  securities and investing the proceeds
in  junior  subordinated   debentures  issued  by  the  Company.   These  junior
subordinated  debentures,  which are the sole  assets of TCT I, have a principal
amount of $10.0 million and bear interest at an annual rate of 11.0%. The junior
subordinated debentures mature in 2027.

     In July 1998, the Company formed TCT II, a business trust formed solely for
the purpose of issuing capital securities. TCT II sold, at par, 1,100,000 shares
of Beneficial Unsecured  Securities,  Series A, with a liquidation amount of $25
per share,  for a total of $27.5  million and  invested  the net proceeds in the
Company's 9.0% Junior  Subordinated  Deferrable Interest  Debentures,  Series A.
These Junior Subordinated  Deferrable Interest  Debentures,  Series A, which are
the sole assets of TCT II, have a principal  amount of $27.5  million and mature
in 2028.


NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and Hedging  Activities ("SFAS 133"). The statement  establishes  accounting and
reporting  standards  requiring  that  every  derivative  instrument,  including
certain derivative  instruments embedded in other contracts,  be recorded in the
balance sheet as either an asset or liability  measured at fair value.  SFAS 133
requires that changes in the  derivative  instrument's  fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting  for  qualifying  hedges allows a derivative  instrument's  gains and
losses to offset related results on the hedged item in the income  statement and
requires   that  a  company   formally   document,   designate  and  assess  the
effectiveness of transactions that receive hedge accounting treatment.  SFAS 133
is effective for fiscal years beginning after June 15, 1999,  although a company
may  implement  the  statement as of the  beginning


                                       10

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

of any fiscal quarter after issuance,  that is, fiscal  quarters  beginning June
16, 1998 and after. SFAS 133 cannot be applied  retroactively.  SFAS 133 must be
applied to (a) derivative  instruments  and (b) certain  derivative  instruments
embedded  in hybrid  contracts  that were  issued,  acquired,  or  substantively
modified after December 31, 1997 and, at the Company's election,  before January
1, 1998.  The Company  plans to adopt SFAS 133 as of January 1, 2000 but has not
yet  quantified  the impact of adopting  SFAS 133 on its  financial  statements.
However,   the  statement  could  increase  volatility  in  earnings  and  other
comprehensive income.

NOTE 4. SUBSEQUENT EVENTS

     In April 1999, the Company sold 3,970,000 shares of its Common Stock to the
public,  raising aggregate net proceeds of $396.2 million.  The Company plans to
use  $18.3   million  of  proceeds  to  redeem  $17.3  million  face  amount  of
subordinated debt after May 1, 1999, including a 5.75% premium.  This debt bears
interest at 11.5% and matures on May 1, 2004. The Company will use $13.7 million
of proceeds to redeem  $13.7  million face amount of  subordinated  debt bearing
interest at 9.5% and  maturing  on March 31,  2004.  The Company  intends to use
approximately  $282.2 million of the proceeds to invest as additional capital of
Telebank.  The  remainder  of the  proceeds  will be used for general  corporate
purposes,  which include funding the Company's  continued  growth and augmenting
working capital.

     In April 1999,  the Company  announced  a  two-for-one  split of its Common
Stock,  subject to  shareholder  approval of an increase in the number of shares
outstanding.  If this increase is approved, shares resulting from the split will
be issued on June 8, 1999 to shareholders of record as of May 28, 1999.

     In May 1999, the Company completed the purchase of the building that houses
its current main headquarters in Arlington, Virginia, for $10.2 million.

NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES

     As of March 31,  1999,  we had  commitments  to purchase  $59.4  million in
loans.  Also,  certificates of deposit that are scheduled to mature in less than
one year as of March 31, 1999 totaled  $722.3  million.  In the normal course of
business,  we make various  commitments  to extend  credit and incur  contingent
liabilities that are not reflected in the balance sheets.



                                       11

<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, 1999

     This Quarterly Report on Form 10-Q contains forward-looking  statements and
information  relating to TeleBanc  and its  subsidiaries.  The words  "believe",
"expect",  "may",  "will",  "should",  "project",  "contemplate",  "anticipate",
"forecast",   "intend"  or  similar   terminology   are   intended  to  identify
forward-looking  statements.  These  statements  are  based  on the  beliefs  of
management as well as assumptions made using information  currently available to
management.  Because  these  statements  reflect the current views of management
concerning  future events,  they involve risks,  uncertainties  and assumptions.
Therefore, actual results may differ significantly from the results discussed in
the forward-looking statements. Certain factors that may cause such a difference
include interest rate fluctuations,  our ability to create brand awareness,  our
ability to grow  through the  introduction  of new products and services and our
ability to attain year 2000  compliance and to ensure year 2000  compliance from
the third parties with whom we do business.

     This discussion and analysis includes descriptions of material changes that
have affected our consolidated  financial condition and consolidated  results of
operations during the periods included in our financial statements.


FINANCIAL CONDITION (MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998)

     Total  assets  increased  $300.0  million to $2.6 billion at March 31, 1999
from $2.3 billion at December 31, 1998, a 13.0% increase. Loans receivable,  net
accounted for the majority of this rise,  increasing  $213.1 million from $786.9
million at December 31, 1998 to $1.0  billion at March 31, 1999,  an increase of
27.1%,   as  we  continued  to  build  our  core  assets   during  the  quarter.
Available-for-sale  mortgage-backed  securities  also  increased,  rising $100.0
million,  or 10.0%,  from $1.0  billion at December  31, 1998 to $1.1 billion at
March 31,  1999.  At the same time,  our  portfolio  of trading  mortgage-backed
securities decreased $10.7 million, or 36.1%, to $18.9 million at March 31, 1999
from $29.6 million at December 31, 1998.

     We funded this overall asset growth through  additional retail deposits and
other borrowings.  Specifically,  retail deposits grew $200.0 million, or 18.2%,
to $1.3 billion at March 31, 1999 from $1.1  billion at December 31, 1998.  This
rise  corresponds to net retail customer  account growth of 7,111,  bringing the
number of retail deposit accounts to 57,946 at March 31, 1999, up from 50,835 at
the end of 1998. Federal Home Loan Bank advances and other borrowings  increased
$123.1  million,  or 14.0%,  from $876.9  million at  December  31, 1998 to $1.0
billion at March 31, 1999.

     Stockholders' equity increased $5.5 million from $113.4 million at December
31, 1998 to $118.9 million at March 31, 1999.  The increase  reflects net income
of $1.2  million--net  of the  cumulative  effect  of an  accounting  change  of
$469,000--proceeds  of $2.6 million  from the exercise of options and  warrants,
and unrealized gains on available-for-sale securities of $1.6 million.


                                       12

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

     The  following  table  presents  consolidated  average  balance sheet data,
income and expenses and related interest yields and rates for the quarters ended
March 31, 1999 and 1998.  The table also  presents  information  for the periods
indicated with respect to net interest margin,  an indicator of an institution's
profitability.  Another indicator of profitability is net interest spread, which
is the difference between the weighted average yield earned on  interest-earning
assets and weighted average rate paid on interest-bearing  liabilities.  Average
annualized yield includes the incremental tax benefit of tax exempt income.


<TABLE>
<CAPTION>
                                          Quarter Ended March 31, 1999                Quarter Ended March 31, 1998
                                     --------------------------------------  -----------------------------------------
                                                   Interest     Average                       Interest       Average
          (In thousands)             Average        Income/    Annualized       Average        Income/      Annualized
           (unaudited)               Balance        Expense    Yield/Cost       Balance        Expense      Yield/Cost
                                     -------        -------    ----------       -------        -------      ----------
<S>                                <C>             <C>                <C>     <C>             <C>                <C>
Interest-earning assets:
Loans receivable, net              $1,005,016      $   19,111         7.61%   $  545,827      $   10,358         7.59%
Interest-bearing deposits              21,824             223         4.14         6,410              92         5.72
Mortgage-backed and related
   securities available for sale    1,122,206          18,305         6.52       271,001           5,074         7.49

Investment securities available
   for sale                           220,985           3,391         6.34       109,270           1,736         6.35

Investment in FHLB stock               24,622             455         7.50         9,400             168         7.25

Trading securities                     11,118             207         7.45        29,672             549         7.41
                                   ----------      ----------                 ----------      ----------      
  Total interest-earning assets    $2,405,771      $   41,692         6.93%   $  971,580      $   17,977         7.40%

Non-interest-earning assets            88,343                                     27,382
                                   ----------                                 ----------

  Total assets                    $ 2,494,114                                 $  998,962
                                  ===========                                 ==========

Interest-bearing liabilities:
Retail deposits                   $ 1,223,657      $   17,158         5.69%   $  540,093      $    8,062         6.02%
Brokered callable certificates of
   deposit                             67,078           1,098         6.64        22,720             374
                                                                                                                 6.67
FHLB advances                         437,033           5,745         5.26       177,055           2,718
                                                                                                                 6.14
Other borrowings                      563,052           7,477         5.31       163,059           2,385
                                                                                                                 5.85
Subordinated debt, net                 29,877             884        11.83        29,944             880        11.75
                                   ----------      ----------                 ----------      ----------      
  Total interest-bearing
   liabilities                    $ 2,320,697      $   32,362         5.66%   $  932,871      $   14,419         6.23%

Non-interest-bearing liabilities       59,029                                     23,591
                                   ----------                                 ----------

Total liabilities                   2,379,726                                    956,462

Stockholders' equity                  114,388                                     42,500
                                   ----------                                 ----------

Total liabilities and
   stockholders' equity           $ 2,494,114                                 $  998,962
                                  ===========                                 ==========

Excess of interest-earning assets
   over interest-bearing
   liabilities/net interest income$    85,074      $    9,330                 $   38,709      $    3,558
                                  ===========      ==========                 ==========      ==========
Net interest spread                                                   1.27%                                        1.17%
                                                                 ===========                                  ===========
Net interest margin (net yield on
   interest-earning assets)                                           1.55%                                        1.47%
                                                                 ===========                                  ===========
Ratio of interest-earning assets
   to interest-bearing liabilities                                  103.67%                                      104.15%
                                                                 ===========                                  ===========
</TABLE>


                                       13

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998

     Net Income.  Net income for the three months ended March 31, 1999 increased
$764,000 to $1.2  million,  net of a $469,000  cumulative  effect of  accounting
change,  from  $436,000  for the quarter  ended March 31,  1998,  an increase of
175.2%. Net income for the three months ended March 31, 1999 consisted primarily
of $9.3 million of net interest income and $3.7 million of  non-interest  income
reduced by $490,000 in provision for loans losses,  $9.0 million in non-interest
expenses and $1.3 million in income tax expense. Net income for the three months
ended March 31, 1998 consisted  primarily of $3.6 million of net interest income
and $1.9 million in  non-interest  income  reduced by $250,000 in provision  for
loan losses,  $4.2 million in  non-interest  expenses and $475,000 in income tax
expense.  Our  return on average  assets  and  return on average  equity for the
quarter ended March 31, 1999 were 0.20% and 4.36%, respectively.

     Net  Interest  Income.  Net interest  income  totaled $9.3 million and $3.6
million  for the three  months  ended  March 31,  1999 and 1998,  reflecting  an
annualized net interest margin of 1.55% and 1.47%,  respectively.  This increase
in net interest income is related to the increase in net interest margin as well
as higher  volume,  as we increased our  interest-earning  assets  significantly
during  1998  and  early  1999.  During  the  first  quarter  of  1999,  average
interest-earning  assets,  consisting  primarily of loans  receivable,  net, and
mortgage-backed and related securities,  totaled $2.4 billion and yielded 6.93%,
as compared to $971.6 million,  reflecting a yield of 7.40%, for the same period
in 1998. Average interest-bearing  liabilities for the quarters ending March 31,
1999 and 1998 were $2.3 billion and $932.9  million,  costing 5.66% in the first
quarter of 1999 as compared to 6.23% during the same period in 1998. The decline
in the  yield  on  interest-earning  assets  and  the  decline  in the  cost  of
interest-bearing  liabilities resulted from changes in overall market conditions
during the latter part of 1998 and the first quarter of 1999.

     Provision  for  Loan  Losses.   The  provision  for  loan  losses  reflects
management's  intent to provide prudent  reserves for potential  losses on loans
held or  acquired  during the  quarter.  We  recorded a loan loss  provision  of
$490,000  for the  first  quarter  of 1999,  in  accordance  with our  policy of
providing   adequate  reserves  for  inherent  losses  in  the  portfolio.   Net
charge-offs  during the quarter totaled $30,000,  which represents an annualized
level of 1 basis point of average loan balances for the quarter. As of March 31,
1999,  our total loan loss  allowance was $5.2 million,  or 0.45% of total loans
outstanding.  The total loan loss  allowance at March 31, 1998 was $3.8 million,
which was 0.68% of total loans outstanding. Total general loan loss allowance as
a percentage of total  non-performing  assets was 60.3% as of March 31, 1999 and
29.2% as of March 31, 1998.


                                       14

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

     Non-interest Income.  Non-interest income increased $1.8 million, or 94.7%,
from $1.9  million for the three months ended March 31, 1998 to $3.7 million for
the three months ended March 31, 1999,  primarily  due to higher income from the
sale of available-for-sale securities and sales and prepayments of held-for-sale
loans.  For the three  months ended March 31,  1999,  we reported  gains of $1.0
million from the sale of mortgage-backed and investment securities, $1.8 million
from sales and  prepayments  of loans held for sale,  $143,000 from net realized
and unrealized gains on our trading  portfolio,  $148,000 from our equity-method
investment  in PRA,  and  $530,000  in loan  servicing  charges  and other fees.
Non-interest income for the first quarter of 1998 consisted of gains of $891,000
from the sale of mortgage-backed and investment securities, gains of $121,000 on
sales  and  prepayments  of loans  held for  sale,  $62,000  of net gains on our
trading  portfolio,  $526,000  from  equity  investments,  and  $347,000 in loan
servicing charges and other fees.

     Non-interest   Expenses.  We  incurred  substantially  higher  non-interest
expenses  for the  three-month  period  ended  March 31,  1999,  recording  $9.0
million,  a $4.8  million,  or 114.3%,  increase  from $4.2 million for the same
period in 1998.  The majority of this increase  resulted  from higher  marketing
costs, as we continued our strategy of increasing  marketing expenses associated
with brand building that seeks to establish the Telebank name as synonymous with
the  premier  national  provider  of  high-value  banking  products  through the
internet.  Specifically,  advertising and marketing costs rose $1.9 million,  or
297.5%,  from $629,000 for the three months ended March 31, 1998 to $2.5 million
for the  first  quarter  of 1999.  Additionally,  compensation  costs  increased
$500,000,  or 25.0%,  from $2.0  million  for the first  quarter of 1998 to $2.5
million for the same quarter in 1999 due to additional  personnel.  Amortization
of goodwill and other  intangibles  increased  $376,000,  or 161.4%,  due to the
amortization  of  goodwill  obtained  in our  acquisition  of  Direct  Financial
Corporation  in August  1998.  Annualized  selling,  general and  administrative
expenses  totaled 1.28% of total ending assets as of March 31, 1999 and 1.48% of
total ending assets as of March 31, 1998.

     Income Tax Expense. Income tax expense for the quarter ended March 31, 1999
totaled  $1.3  million,  yielding an  effective  tax rate of 36.1%,  compared to
$475,000 and an effective tax rate of 43.7% for the three months ended March 31,
1998.  The higher  earnings we experienced in the first quarter of 1999 lessened
the impact of non-deductible expenses and lowered our effective tax rate.


                                       15

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

LIQUIDITY

     Liquidity  represents  our ability to raise funds to support  asset growth,
fund operations and meet obligations,  including deposit  withdrawals,  maturing
liabilities, and other payment obligations, to maintain reserve requirements and
to otherwise meet our ongoing obligations. We meet our liquidity needs primarily
through  financing  activities,  such as  increases  in core  deposit  accounts,
maturing short-term investments,  loans and repayments of investment securities,
and, to a lesser extent, sales of loans or securities.

     Telebank is required to maintain minimum levels of liquid assets as defined
by  the  regulations  of  the  Office  of  Thrift  Supervision,   or  OTS.  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 4.0%. At March 31, 1999,
the Bank's liquidity ratio was 5.13%.

     In April 1999, we raised capital  through an equity  offering,  in which we
sold  3,970,000  shares of common  stock to the public,  raising  aggregate  net
proceeds of $396.2  million.  We intend to use a portion of the net  proceeds of
this offering to redeem $31.0 million face amount of subordinated debt after May
1, 1999, and approximately $282.2 million will be invested as additional capital
of Telebank.  We plan to use the  remainder  of the proceeds to augment  working
capital and to fund continued growth.


CAPITAL RESOURCES

     At March 31, 1999,  Telebank was in compliance  with all of its  regulatory
capital   requirements,   and  its  capital  ratios   exceeded  the  ratios  for
"well-capitalized" institutions under OTS regulations.

     The following  table sets forth  Telebank's  regulatory  capital  levels at
March 31,  1999 in  relation to the  regulatory  requirements  in effect at that
date. The information  below is based upon our  understanding of the regulations
and interpretations currently in effect and may be subject to change.

<TABLE>
<CAPTION>
                                                                                                        Required to be Well
                                                                  Required for Capital               Capitalized under Prompt
                                                                       Adequacy                    Corrective Action Provisions
                                             Actual                    Purposes
                                        Amount       Ratio         Amount         Ratio                 Amount         Ratio
                                                    (In Thousands)
<S>                                   <C>          <C>          <C>           <C>                    <C>          <C>
Core Capital (to adjusted tangible
   assets)                            $ 134,935     5.3%         $ 102,585     greater than 4.0%     $ 128,232    greater than  5.0%
Tangible Capital (to adjusted
   tangible assets)                   $ 134,935     5.3%         $  38,470     greater than 1.5%           N/A                  N/A
Tier I Capital (to risk-weighted
   assets)                            $ 134,935    12.4%               N/A                   N/A     $  65,075    greater than  6.0%
Total Capital (to risk-weighted
   assets)                            $ 139,704    12.9%          $ 86,767     greater than 8.0%     $ 108,459    greater than 10.0%
</TABLE>


                                       16

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

YEAR 2000 ISSUES

     In 1997, we began year 2000 planning,  following the five steps recommended
by the Federal Financial  Institutions  Examination  Council.  We have completed
phases focused on awareness and assessment and continue to update the results of
these phases for new  information  received.  Currently,  the renovation  phase,
which consists of implementing changes and monitoring vendor renovation, and the
validation phase, which consists of testing renovated systems, are underway.  We
are monitoring  vendors for software updates and final compliance  certification
statements  and  have  received  certifications  from all of our  vendors.  Some
vendors,  however,  have continued to update their products to correct year 2000
issues even after certifying that they are year 2000 compliant,  indicating that
these certifications may not be final. As a result, following the receipt of the
final  certification  statements relating to those systems identified as mission
critical in the assessment  phase,  we internally  validate such  certifications
through  testing.  To date, we have  identified no significant  year 2000 issues
through our testing of mission  critical  systems.  Our mission critical systems
include  the deposit  processing  system,  general  ledger  system and  internet
banking applications. We are substantially complete with renovation,  validation
and implementation of all mission critical systems.  As of May 12, 1999, we have
completed 100% of our remediation  efforts and 80% of the testing of our mission
critical systems.

     Our  steady  growth  over the  past  several  years  has  required  that we
continually  upgrade  our  systems;  we do not  anticipate  that we  will  incur
material costs related to our year 2000  remediation  efforts.  We have analyzed
the impact of year 2000 issues on our non-information technology systems such as
embedded  chips  necessary for proper  operation of mechanical  systems and have
concluded that these issues do not present a significant risk to our operations.

     Few upgrades have been  accelerated due to the year 2000 issue. To date, we
have  spent  approximately   $25,000  on  upgrades  related  to  our  year  2000
remediation  efforts,  with  an  additional  $75,000  expected  to be  spent  on
compliance  efforts  before  the year  2000.  In May 1999,  we hired an  outside
consulting firm to provide an additional hardware test environment that will aid
us in the continuation of our testing of mission critical systems.

     The  majority of our loans are  serviced by a large  company  that uses the
same system as several of the largest loan  servicers  in the United  States and
that is expected to be year 2000  compliant.  We are  currently  monitoring  the
servicer's year 2000 plan and testing.  However,  approximately 38% of our loans
are  serviced  by smaller  loan  servicers  whose  systems  may not be year 2000
compliant. If these systems were to fail, principal and interest payments on the
loans serviced by these servicers  could be delayed,  and we would lose interest
income  that we  would  normally  earn on  these  funds.  We  have  developed  a
contingency  plan to address this loan servicing issue  specifically.  Under the
contingency  plan,  we  notified  these  servicers  that if we did  not  receive
confirmation  of  compliance  by March 31,  1999,  we would  begin  transferring
servicing of these loans to servicers  who are known to be year 2000  complaint.
While most of these small  servicers  appear to be year 2000  compliant,  we are
contacting a small number of these servicers to discuss  transferring their loan
portfolios to larger  servicers.  We hope to complete such transfers by June 30,
1999.


                                       17

<PAGE>



                         TELEBANC FINANCIAL CORPORATION

     Based upon current information,  we do not anticipate costs associated with
the year 2000 issue to have a material financial impact.  There may, however, be
interruptions  or  other   limitations  of  financial  and  operating   systems'
functionality  and we may incur additional costs to avoid such  interruptions or
limitations.  Our expectations  about future costs associated with the year 2000
issue are subject to  uncertainties  that could cause  actual  results to have a
greater  financial  impact  than  currently  anticipated.   Factors  that  could
influence the amount and timing of future costs include:

     o    our success in identifying systems and programs that contain two-digit
          year codes;

     o    the nature and amount of  programming  required  to upgrade or replace
          each of the affected programs;

     o    the rate and magnitude of related labor and consulting costs; and

     o    our success in addressing the year 2000 issues with third-parties with
          which we do business.


MARKET RISK

     We manage interest rate risk through the use of financial  derivatives such
as  interest  rate  cap,  swap,  floor  and  futures  agreements.  We use  these
instruments  to ensure that the market value of equity and net  interest  income
are protected from the impact of changes in interest rates. We have  experienced
no material changes in market risk during the first three months of 1999.


PART II -- OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K

          (a)  Exhibits

               27.1 Financial Data Schedule

          (b)  Reports on Form 8-K

               No information to report.



                                       18

<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 14, 1999      By: /s/ Mitchell H. Caplan
      ----------------     -----------------------------------------------------
                           Mitchell H. Caplan
                           President and Chief Executive Officer

Date: May 14, 1999      By: /s/ Aileen Lopez Pugh
      ----------------     -----------------------------------------------------
                           Aileen Lopez Pugh
                           Executive Vice President and Chief Financial Officer



                                       19