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 SEPTEMBER 30, 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 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 November 6, 1997.

   $.01 par value of common stock                             2,224,161
   -------------------------------                            --------- 
             (class)                                        (outstanding)


<PAGE>


                         TELEBANC FINANCIAL CORPORATION

                                   FORM 10-Q

                                      INDEX


Part I - Financial Information                                           Page
------------------------------                                           ----

Consolidated Statements of Financial Condition -September 30, 1997 
   and December 31, 1996                                                  3

Consolidated Statements of Operations - Three and nine months ended 
   September 30, 1997 and 1996                                            4

Consolidated Statements of Changes in Stockholders' Equity - Nine 
   months ended September 30, 1997 and 1996                               6

Consolidated Statements of Cash Flows - Nine months ended 
   September 30, 1997 and 1996                                            7

Notes to Consolidated Financial Statements                                9

Management's Discussion and Analysis of Financial Condition and 
   Results of Operations                                                 13


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

Item 5, Other Information                                                21

Item 6, Exhibits and Reports on Form 8-K                                 21

Signatures                                                               22

                                       2

<PAGE>


                         TELEBANC FINANCIAL CORPORATION

                 Consolidated Statements of Financial Condition

                  (Dollars in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>

                                                                                      September 30,        December 31,
Assets:                                                                                   1997                 1996
                                                                                          ----                 ----- 
                                                                                       (unaudited)

<S>                                                                                        <C>             <C>       
Cash and cash equivalents                                                                  $ 5,123         $   3,259
Investment securities available for sale                                                    65,750            78,826
Mortgage-backed securities available for sale and trading                                  240,091           184,743
Loans receivable, net                                                                      324,968           185,757
Loans receivable held for sale                                                             170,343           166,064
Other assets                                                                                32,258            29,316
                                                                                            ------            ------       
                                 Total assets                                            $ 838,533         $ 647,965
                                                                                           =======           =======  
Liabilities and Stockholders' Equity:

Liabilities:
Deposits                                                                                 $ 445,241         $ 390,486
Advances from the Federal Home Loan Bank of Atlanta                                        170,000           144,800
Securities sold under agreements to repurchase                                             122,408            57,581
Subordinated debt                                                                           29,556            16,586
Other liabilities                                                                           16,466            13,854
                                                                                            ------            ------
                               Total liabilities                                           783,671           623,307
                                                                                           -------           -------
Corporation-Obligated Mandatorily Redeemable Capital Securities of
       Subsidiary Trust Holding Solely Junior Subordinated
       Debentures of the Corporation
                                                                                             9,602                --
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                                                                  31,392            14,637
Retained earnings, substantially restricted                                                 10,496             7,905
Unrealized gain on securities available for sale, net of deferred tax                        3,350             2,096
                                                                                             -----             -----          
                          Total stockholders' equity                                        45,260            24,658
                                                                                            ------            ------       
                               Total liabilities & stockholders' equity                  $ 838,533         $ 647,965
                                                                                           =======           =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3

<PAGE>


                         TELEBANC FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  (Dollars in Thousands, Except Per Share Data)

                                   (unaudited)
<TABLE>
<CAPTION>

                                                                        Three Months Ended            Nine Months Ended
                                                                           September 30,                 September 30,
                                                                           ------------                  ------------  
                                                                        1997           1996           1997         1996
                                                                        ----           ----           ----         ----
Interest income:
<S>                                                                    <C>            <C>            <C>          <C>     
   Mortgage loans and other loans                                    $  8,855       $  6,080       $ 24,727     $ 16,946
   Mortgage-backed and related securities                               4,248          4,483         13,179       14,117
   Investment securities                                                1,348          1,289          4,330        3,261
   Other                                                                  369             19            697           43
                                                                          ---             --            ---           --
         Total interest income                                         14,820         11,871         42,933       34,367
                                                                       ------         ------         ------       ------
Interest expense:
   Deposits                                                             6,649          5,635         18,686       15,419
   Advances from the Federal Home Loan Bank of Atlanta                  2,528          1,902          6,784        4,980
   Reverse repurchase agreements                                        1,493            978          5,422        3,885
   Subordinated debt                                                      878            519          2,399        1,556
                                                                          ---            ---          -----        -----
        Total interest expense                                         11,548          9,034         33,291       25,840
                                                                       ------          -----         ------       ------
        Net interest income                                             3,272          2,837          9,642        8,527

Provision for loan losses                                                 120            125            671          744
                                                                          ---            ---            ---          ---
        Net interest income after provision for loan losses             3,152          2,712          8,971        7,783
                                                                        -----          -----          -----        -----
Non-interest income:
   Gain on sale of available for sale & trading securities                408            181          1,827          263
   Gain on sale of loans                                                  226             98            636          415
   Fees, service charges and other                                        450            261            472          758
                                                                          ---            ---            ---          ---
        Total non-interest income                                       1,084            540          2,935        1,436
                                                                        -----            ---          -----        -----
                                   (continued)
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>


                         TELEBANC FINANCIAL CORPORATION

                CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

                  (Dollars in Thousands, Except Per Share Data)

                                   (unaudited)
<TABLE>
<CAPTION>
                                                                 Three Months Eneded               Nine Months Ended
                                                                     September 30,                   September 30,
                                                                     ------------                    ------------
                                                                  1997           1996             1997           1996
                                                                  ----           ----             ----           ---- 
<S>                                                                  <C>              <C>            <C>            <C>  
Non-interest expenses:
     General and administrative expenses:
       Compensation and employee benefits                         1,049            882            3,427          2,670
       Federal insurance assessment                                  --          1,671               --          1,671
       Other                                                      1,029            734            2,798          2,373
                                                                  -----          -----            -----          -----
            Total general and administrative expenses             2,078          3,287            6,225          6,714
                                                                  -----          -----            -----          -----
     Other non-interest expenses:
       Net operating costs of real estate acquired
          through foreclosure                                        55            126              185            173
       Amortization of goodwill and other intangibles               204            121              486            457
                                                                    ---            ---              ---            ---
            Total other non-interest expenses                       259            247              671            630
                                                                    ---            ---              ---            ---
                  Total non-interest expenses                     2,337          3,534            6,896          7,344
                                                                  -----          -----            -----          -----
       Income (loss) before income tax expense and
             minority interest                                    1,899           (282)           5,010          1,875

Income tax expense (benefit)                                        709           (220)           1,682            528

Minority interest in subsidiary                                    (286)            --             (353)            --
                                                                   -----            --             -----            --
       Net income (loss)                                        $   904        $   (62)        $  2,975        $ 1,347
                                                                    ===            ====           =====          =====
Preferred stock dividends                                           162             --              384             --
                                                                    ---             --              ---             --
Net income after preferred stock dividends                      $   742        $   (62)        $  2,591        $ 1,347
                                                                    ===            ====           =====          =====
Net income per common share:
       Primary                                                  $  0.26         $(0.02)        $   0.94        $  0.63
       Fully diluted                                               0.26          (0.03)            0.93           0.63

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>


                         TELEBANC FINANCIAL CORPORATION

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

                             (Dollars in Thousands)

                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                 Unrealized
                                                                                                    Gain
                                                                      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   $   5,352     $   1,556      $ 21,565
                                                

Net income for the nine months ended
  September 30, 1996                            --           --              --       1,346            --         1,346

Unrealized Gain on Available for Sale
  Securities,  net of tax effect                --           --              --          --           928           928
                                                --           --          ------       -----         -----        ------
Balances at September 30, 1996            $     --         $ 20        $ 14,637    $  6,698   $     2,484      $ 23,839
                                                ==           ==          ======       =====         =====        ======    



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

Net income for the nine months ended
  September 30, 1997                            --           --              --       2,975            --         2,975

Stock issued                                    --            2           1,474          --            --         1,476

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

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

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

Dividends on 4% cumulative Preferred            --           --              --        (384)            --         (384)
  Stock

Unrealized Gain on Available for Sale
  Securities,  net of tax effect                --           --              --          --         1,254         1,254
                                                --           --          ------      ------         -----        ------
Balances at September 30, 1997            $     --         $ 22        $ 31,392   $  10,496       $ 3,350      $ 45,260
                                                ==           ==          ======      ======         =====        ======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       6

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (Dollars in thousands)

                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                           Nine Months Ended
                                                                                           -----------------
                                                                                             September 30,
                                                                                             -------------
                                                                                        1997                1996
                                                                                        ----                ----
<S>                                                                                  <C>                 <C>       
Net cash (used in) provided by operating activities                                $  (16,375)         $   15,692
                                                                                      --------             ------
Cash flows from investing activities:
   Purchases of held-to-maturity loans                                               (184,634)           (105,761)
   Equity investments in subsidiaries                                                  (1,608)             (1,383)
   Purchases of available-for-sale securities                                        (250,956)           (274,147)
   Proceeds from sale of available-for-sale securities                                125,520             206,639
   Proceeds from maturities of and principal payments on
     Available-for-sale securities and loans                                          162,030             109,354
   Net sales (purchases) of premises and equipment                                        420                (623)
   Proceeds from sale of foreclosed real estate                                         1,239                 514
                                                                                        -----                 ---
Net cash used in investing activities                                                (147,989)            (65,407)
                                                                                     ---------           ---------
</TABLE>

                                   (continued)

          See accompanying notes to consolidated financial statements.


                                       7

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                             (Dollars in thousands)

                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                              -----------------
                                                                                                September 30,
                                                                                                -------------
                                                                                            1997              1996
                                                                                            ----              ----
<S>                                                                                      <C>                <C>   
Cash flows from financing activities:
   Net increase in non-interest bearing demand, savings, and
     NOW deposit accounts and certificates of deposit accounts                           37,256             75,924
   Increase in advances from FHLB                                                       244,000            237,000
   Payments on advances from FHLB                                                       218,800)          (221,000)
   Net decrease (increase) in securities sold under agreements
     to repurchase                                                                       64,827            (46,218)
   Net increase in other borrowed funds                                                  12,970                 68
   Issuance of trust preferred stock                                                      9,602                 --
   Issuance of common stock and 4% preferred stock                                       16,757                 --
   Dividends paid on common and preferred stock                                           (384)                 --


Net cash provided by financing activities                                              166,228              45,774
                                                                                       -------             -------

Net increase (decrease) in cash and cash equivalents                                     1,864              (3,941)

Cash and cash equivalents at beginning of period                                         3,259               8,965
                                                                                         -----               -----
Cash and cash equivalents at end of period                                           $   5,123            $  5,024
                                                                                         =====               =====


Supplemental information:

Interest paid on deposits and borrowed funds                                         $  26,526            $ 11,770
Income taxes paid                                                                          853                 822
Transfers from loans to real estate acquired through foreclosures                          568                 326
Gross unrealized gain on securities available for sale                                   1,888               1,292
Tax effect of gain on available for sale securities                                        634                 364

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       8

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 in which  deposit  accounts  are insured to  applicable
limits by the Federal Deposit Insurance Corporation  ("FDIC").  The consolidated
financial  statements  include  financial  information  from TeleBanc  Financial
Corporation and its wholly-owned subsidiaries.

         The financial statements as of September 30, 1997 and for the three and
nine months ended September 30, 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
September 30, 1997 and the results of consolidated  operations for the three and
nine  months  ended  September  30, 1997 and 1996.  The results of  consolidated
operations  for the three  and nine  months  ended  September  30,  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.  NET INCOME PER COMMON SHARE

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"),  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:


                                       9

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

                            Pro Forma EPS Calculation
<TABLE>
<CAPTION>
                                                              Three months ended             Nine months ended
                                                                 September 30,                 September 30,
                                                         ------------------------------------------------------------
Per share amounts                                             1997           1996           1997           1996
                                                         ------------------------------------------------------------

<S>                                                       <C>             <C>            <C>            <C>      
Primary EPS as reported                                   $    0.26       $  (0.02)      $    0.94      $    0.63
Effect of SFAS 128                                             0.07          (0.01)           0.25           0.03
                                                               ----          ------           ----           ----
Pro forma basic EPS                                       $    0.33       $  (0.03)      $    1.19      $    0.66
                                                               ====          ======           ====           ====

Fully diluted EPS as reported                             $    0.26       $  (0.03)      $    0.93      $    0.63
Effect of SFAS 128                                            (0.02)          0.01           (0.11)         (0.18)
                                                              ------         ------          ------         ------
Pro Forma diluted EPS                                     $    0.24       $  (0.02)      $    0.82      $    0.45
                                                               ====          ======           ====           ====
</TABLE>

         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 2,179,510 and 2,049,500
for the Company at September 30, 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.

                            Pro Forma EPS Calculation
<TABLE>
<CAPTION>
                                                      Income                 Shares             Per Share Amount
                                                      ------                 ------             ----------------
                                                             For the Quarter Ended September 30, 1996
                                              -----------------------------------------------------------------------
<S>                                                    <C>                   <C>                  <C>
Basic earnings per share
Net income                                    $       (62,000)            2,049,500            $   (0.03)
                                                                                         =========================
Options issued to management                               --               528,019
Warrants                                                   --               127,373
                                              ------------------------------------------
Diluted earnings per share                    $       (62,000)            2,704,892            $   (0.02)
                                              ======================================================================

                                                             For the Quarter Ended September 30, 1997
                                              -----------------------------------------------------------------------
Net income                                    $       904,000
less: Preferred Stock Dividends                      (162,000)
                                              -----------------------
Basic earnings per share
Income available to common shareholders
                                              $       742,000             2,218,513            $    0.33
                                                                                           =======================
Options issued to management                               --               382,677
Warrants                                                   --               254,261
Convertible preferred stock                           162,000               910,180
                                              ----------------------------------------------
Diluted earnings per share                    $       904,000             3,765,631            $    0.24
                                              ======================================================================

</TABLE>

                                       10

<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 which will be amortized through March 31, 2004.

         The $29.9 million of 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 sale of
the units,  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 over time 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.  Consisting of Series A Voting  Convertible  Preferred Stock,
Series  B  Nonvoting   Convertible   Preferred  Stock  and  Series  C  Nonvoting
Convertible  Preferred  Stock,  the preferred  stock 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 at any time after 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
obtained.

         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 assets 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.

         In June 1997,  the Company  formed  TeleBanc  Capital Trust 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 $10,000,000 in a private placement.
TeleBanc  Capital Trust 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. The trust preferred securities mature in 2027 and have an
annual dividend rate of 11.0% payable semi-annually, beginning in December 1997.
The net proceeds will be used for general  corporate  purposes which include the
funding  of Bank  operations  to create and expand  its  financial  service  and
product operations.

                                       11

<PAGE>

NOTE 4.       COMMITMENTS AND CONTINGENT LIABILITIES

         In managing the  Company's  interest-rate  risk,  the Company  utilizes
financial  derivatives in the normal course of business.  These products consist
primarily of interest rate cap and swap  agreements.  Financial  derivatives are
employed to assist in the management  and/or reduction of interest rate risk for
the Company and can  effectively  alter the interest  sensitivity of segments of
the balance sheet for specified periods of time.

         The  Company  accounts  for  interest  rate  swap  agreements  and  cap
agreements as hedges of debt issuances,  deposit balances and investment in loan
portfolio  to which such  agreements  have been  specifically  designated.  Cash
remittances  due or  received  pursuant  to these  agreements  are  reported  as
adjustments  to  interest  expense on an accrual  basis.  Any  premiums  paid in
conjunction  with these  interest rate swap and cap  agreements are amortized as
additional  interest  expense  on a  straight-line  basis over the term of these
agreements.  Any gain or loss upon early  termination of these instruments would
be deferred and amortized as an adjustment to interest  expense over the term of
the applicable interest rate agreement.




                                       12

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
               THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 (SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996)

         The Company's  total assets  increased by $190.5  million or 29.4% from
$648.0 million at December 31, 1996 to $838.5 million at September 30, 1997. The
increase in total assets primarily reflects  increases in loans receivable,  net
and  loans  held for  sale of  $143.5  million,  or  40.8%  and  mortgage-backed
securities  available  for sale and  trading  of $55.3  million,  or 30.0%.  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.  In June 1997, the
Company raised $10.0 million from the sale of Trust  Preferred  securities  (see
Note 1 to Consolidated  Financial Statements for the three and nine months ended
September 30, 1997 and 1996).  The Company  continues to invest 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 and capital  securities.  The Company intends to continue to leverage such
proceeds, as well as capital raised from earnings,  for additional growth in 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 $54.8  million,  or 14.0% from  $390.5
million at December  31,  1996 to $445.2  million at  September  30,  1997.  The
average  term for the new time  deposits  gathered  in the  three  months  ended
September  30, 1997 was  approximately  30.7  months with an average  percentage
yield of 5.95%.  The Company has  continued  to focus on building  core  deposit
accounts. Money market checking and savings accounts increased 25.0% from $109.8
million at December 31, 1996 to $137.3  million at September  30, 1997.  Federal
Home Loan Bank Advances  remained  relatively  stable. As of September 30, 1997,
the weighted  average  interest  rate  (excluding  hedges) and weighted  average
maturity  for  Federal  Home  Loan  Bank   Advances  was  5.70%  and  554  days,
respectively. Securities sold under agreements to repurchase, increased by $64.8
million or 112.5% from $57.6  million at December 31, 1996 to $122.4  million at
September  30, 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 September 30, 1997, the weighted  average interest
rate (excluding  hedges) and weighted average maturity for securities sold under
agreements to repurchase was 5.80% and 128 days,  respectively.  As of September
30, 1997,  subordinated  debt, net of original issue discount was $29.6 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. In June 1997,
the Company formed TeleBanc  Capital Trust I, which in turn sold shares of trust
preferred securities, Series A, for a total of $10,000,000


                                       13

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

in a private placement.  The trust preferred  securities have an annual dividend
rate of 11.0% payable semi-annually, beginning in December 1997.

         Stockholders'  equity  increased  $20.6 million,  from $24.7 million at
December 31, 1996 to $45.3 million at September  30, 1997.  The increase was due
to the $15.3 million issuance of 4% convertible  preferred  stock,  $1.5 million
stock  issuance in exchange for Arbor's  assets,  $3.0 million in net income for
the nine months ended  September 30, 1997 and an  unrealized  gain on securities
available for sale, net of deferred  taxes,  of $1.3 million,  which pursuant to
SFAS 115  affects  the  Company's  stockholders'  equity but does not impact the
statement  of  operations.  This  increase  is  partially  offset by $384,000 of
preferred stock dividends.


                                       14

<PAGE>


                         TELEBANC FINANCIAL CORPORATION

         The consolidated  average balance sheets, along with income and expense
and related  interest yields and rates for the quarters ended September 30, 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 September 30, 1997     Quarter ended September 30, 1996
                                    ----------------------------------- ------------------------------------
                                                Interest     Average                  Interest     Average
(Dollars 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               $ 456,059   $  8,864      7.77%     $ 302,358    $  6,089      8.06%
Investment securities                   8,244        116      5.59          7,531         115      5.99
Mortgage-backed and related
  securities available for sale       212,961      4,397      8.26        218,350       4,453      8.16
Investment securities available
  for sale (a)                         66,609      1,111      6.67         67,263       1,109      6.59
Federal funds sold                      1,566         22      5.58            659           9      5.19
Investment in FHLB                      8,346        152      7.25          7,059         129      7.25
Trading account                        19,663        360      7.25             --          --        --
                                      -------    -------      ----        -------      ------      ----
  Total interest-earning assets       773,448     15,022      7.74%       603,220      11,904      7.90%

Non-interest-earning assets            70,621                              12,817
                                       ------                              ------

  Total assets                      $ 844,069                           $ 616,037
                                      =======                             =======

Interest-bearing liabilities:
Savings deposits                    $ 147,009   $  1,953      5.27%     $ 104,033    $  1,247      4.77%
Time deposits                         315,627      4,995      6.28        275,302       4,384      6.34
FHLB advances                         161,871      2,528      6.11        136,332       2,040      5.85
Other borrowings                       98,924      1,493      5.91         57,204         839      5.74
Subordinated debt, net                 39,519      1,153     11.67         17,250         519     12.03
  Total interest-bearing              762,950     12,122      6.28%       590,121       9,029      6.06%
   liabilities

Non-interest-bearing liabilities       37,256                               2,283
                                       ------                               -----

Total liabilities                     800,206                             592,404

Stockholders' equity                   43,863                              23,633
                                       ------                              ------

Total liabilities and
  stockholders' equity              $ 844,069                           $ 616,037
                                      =======                             =======

Excess of interest-earning assets
  over interest-bearing
  liabilities/net interest          $  10,498   $  2,900      1.46%     $  13,099    $  2,875      1.84%
                                       ======      =====      ====         ======       =====      ====
  income/interest rate spread
Net yield on interest earning assets                          1.50%                                1.91%
                                                              ====                                 ====
Ratio of interest-earning assets
  to interest-bearing liabilities                           101.38%                              102.22%
                                                            ======                               ======

</TABLE>

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

                                       15

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996

         Net Income.  Net income for the three and nine months  ended  September
30, 1997 was $904,000 and $3.0  million,  compared to $(62,000) and $1.3 million
for the three and nine months ended September 30, 1996, respectively. Net income
for the three  months  ended  September  30, 1997  consisted  primarily  of $3.3
million of net interest income reduced by $120,000 in provision for loan losses,
$1.1 million in non-interest  income, $2.3 million in non-interest  expenses and
$709,000 in income tax expense.  Net income for the three months ended September
30, 1996  consisted  primarily of $2.8 million in net interest  income offset by
$125,000 in provision  for loan losses,  non-interest  income of $540,000,  $3.5
million in  non-interest  expenses  and a tax benefit of  $220,000.  General and
administrative expenses for the quarter ended September 30, 1996 included a $1.7
million  accrual  for a one-time  assessment  mandated  by the  Federal  Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund ("SAIF"). Net income for the nine months ended September 30, 1997 consisted
of $9.6 million of net interest  income offset by $671,000 in provision for loan
losses,  $2.9  million of  non-interest  income,  $6.9  million of  non-interest
expenses and $1.7 million in income tax expense.  Net income for the nine months
ended  September  30, 1996  consisted  of net  interest  income of $8.5  million
reduced by $744,000 of provision  for loan losses,  non-interest  income of $1.4
million  offset by $7.3 million of  non-interest  expense and $528,000 in income
tax expense.

         Net  Interest  Income.  Net  interest  income was $3.3 million and $2.8
million for the three months ended  September  30, 1997 and 1996,  respectively,
reflecting an  annualized  interest rate spread of 1.46% and 1.84% for the three
months ended September 30, 1997 and 1996, respectively.  The decline in yield is
attributable to a decrease in loan yield due to a larger held for sale portfolio
than in the same quarter last year and an increase in hedging  instruments  used
to reduce interest rate risk matched against the deposit portfolio  resulting in
higher costs. In the quarter ending  September 30, 1997,  total interest earning
assets,  consisting  primarily of loans receivable,  net and mortgage-backed and
related  securities,  yielded  7.74% as compared to 7.90% for the same period in
1996. The decline is attributed to an increase in the held for sale category and
an increase in non-accrual  loans. In 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 not amortized as interest revenue. Discounts on
loans  held  for sale are  recognized  as  non-interest  income  when  principal
repayments are received or when loans are sold. Non-accrual loans increased from
$8.9  million at  September  30,  1996 to $11.1  million at  September  30, 1997
causing a decline in loan interest income. Average  interest-earning assets were
$773.4 million and $603.2 million for the quarters ending September 30, 1997 and
1996, respectively. Average interest bearing liabilities were $763.0 million and
$590.1   million  for  the  quarters   ending   September  30,  1997  and  1996,
respectively.  Interest-bearing  liabilities  cost 6.28% in the third quarter of
1997 as compared  6.06% in the same period in 1996.  Third quarter  decreases in
interest-earning  assets and interest-bearing  liabilities  primarily reflect an
overall decrease in interest rates.

                                       16
<PAGE>

                         TELEBANC FINANCIAL CORPORATION

         Provision for Loan Losses.  Total  provision for loan losses  decreased
$5,000 from $125,000 for the three months ending  September 30, 1996 to $120,000
for the three months ending  September  30, 1997.  The provision for loan losses
reflects management's intent to provide prudent reserves for loan losses. During
the quarters ended September 30, 1997 and 1996, the Company provided  additional
reserves for single-family  loans acquired during each quarter.  Total provision
for loan losses  decreased  $73,000  from  $744,000  for the nine  months  ended
September 30, 1996 to $671,000 for the nine months ended September 30, 1997. For
the first  nine  months of 1997 and 1996,  the  Company  provided  reserves  for
several  single-family  loans and for loan  acquisitions  in accordance with the
Company's loan loss reserve policy. For the nine months ended September 30, 1997
and 1996, the Company purchased approximately $231.3 and $132.6 million in whole
loans.  The total loan loss  allowance  at  September  30, 1997 was $3.2 million
which was 0.7% of total loans outstanding.  Total loss allowance as a percentage
of total  non-performing  assets was 17.1%.  The total  loan loss  allowance  at
September 30, 1996 was $2.6 million  which was 0.8% of total loans  outstanding.
Total loss allowance as a percentage of total non-performing assets was 16.7%.

         Non-Interest  Income.  Total non-interest  income increased by $544,000
from $540,000 for the three months ended  September 30, 1996 to $1.1 million for
the three months ended September 30, 1997. During the third quarter of 1997, the
Company sold corporate bonds held for liquidity purposes for a gain of $259,000,
recognized $226,000 on prepayments in the loan held for sale portfolio, $213,000
in gains in the  trading  account  and the  remainder  in loan fees and  service
charges.  For the three months ending  September 30, 1996,  non-interest  income
primarily  consists of  $195,000 in loan fees and service  charges on the Bank's
portfolio and on the purchase mortgage  servicing rights, a net gain of $181,000
on the  sale  of  several  liquid  bonds  in the  mortgage-backed  security  and
investment  portfolio,  $100,000 on the sale of real estate held for sale offset
by $108,000 loss on the Bank's equity  investments in a mortgage service company
and a company that acquires and collects  delinquent  consumer debt  obligations
for its own portfolio.  Total non-interest income increased by $1.5 million from
$1.4  million for the nine months ended  September  30, 1996 to $2.9 million for
the nine months ended September 30, 1997.  During the first nine months of 1997,
the  Company  reported  non-interest  income of $1.8  million in trading  income
attributed to the second quarter  securitization  of cooperative  mortgage loans
held for sale, the sale of  mortgage-backed  securities and investments held for
liquidity  purposes,  $636,000 on the sale of loans, and $472,000,  net, in loan
fees and TCM commission  income offset by a loss on its equity investment in AGT
Mortgage Services ("AGT").  AGT serviced performing and non-performing loans for
a fee.  Given lower than  anticipated  non-performing  loan levels,  AGT did not
achieve adequate economies of scale to generate sufficient revenue. Accordingly,
management  decided to cease  operations  of AGT on July 31, 1997.  Non-interest
income of $1.4 million for the nine months ended  September  30, 1996  primarily
reflects  $263,000 in income resulting from the sale of securities,  $415,000 on
the sale of loans and $758,000,  net, in loan fees, service charges,  and equity
investment.

         Non-Interest  Expenses.  Non-interest  expenses  for the three and nine
months  ended   September   30,  1997  were  $2.3  million  and  $6.9   million,
respectively.  Non-interest  expenses  for  the  three  and  nine  months  ended
September  30,  1996  were  $3.5  million  and $7.3  million,  respectively.  On
September 30, 1996,  President Clinton signed legislation calling for a one-time

                                       17

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

assessment on the FDIC's SAIF-insured  deposits held by depository  institutions
as of March 31, 1995 to recapitalize SAIF.  TeleBank recorded an accrual of $1.7
million,  $1.1 million after-tax,  for this assessment.  The recapitalization of
SAIF has  resulted in lower  deposit  insurance  premiums in the future for most
SAIF-insured  institutions,  including  TeleBank.  Total non-interest  expenses,
excluding  the special  assessment,  increased by $474,000 from $1.9 million for
the three months ended  September  30, 1996 to $2.3 million for the three months
ended  September 30, 1997.  Excluding the special  assessment,  this increase is
largely the result of a $462,000 increase in general and administrative expenses
associated  with a higher volume of deposit  accounts,  an increase in marketing
expenses,  and an overall increase in compensation  levels.  Total  non-interest
expenses, excluding the special assessment,  increased by $1.2 million from $5.7
million for the nine months  ended  September  30, 1996 to $6.9  million for the
nine months ended September 30, 1997. The increase in general and administrative
expense for the nine months ended  September 30, 1997 is the result of increases
in compensation,  increases in personnel,  marketing expenditures and an accrual
for bonuses as well as the inclusion of TCM's expenses.

         Income Tax Expense.  The  effective  tax rate for the nine months ended
September  30,  1997 was  33.6%  compared  to 28.2%  for the nine  months  ended
September 30, 1996.  The  effective  tax rate  increased due to the $1.7 million
federal  insurance  assessment which was incurred in 1996. The Company carried a
deferred  tax payable of $474,000 on its  Consolidated  Statement  of  Financial
Condition as of September 30, 1997.

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 provided
from  operating  activities,  consisting  primarily  of interest  received  less
interest  paid on borrowings  and  purchases  less sales of loans held for sale,
were $(16.4)  million and $15.7 million for the nine months ended  September 30,
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
$148.0  million and $65.4  million for the nine months ended  September 30, 1997
and  1996,  respectively.  The  increase  in cash  flows  related  to  investing
activities  for the nine months ended  September 30, 1997 reflects a significant
increase  in the  amount  of  mortgage-backed  securities,  mortgage  loans  and
investment  securities  purchased.  Net cash  provided by  financing  activities
(primarily  net activity in deposits  and  borrowings)  were $166.2  million and
$45.8  million  for  the  nine  months  ended   September  30,  1997  and  1996,
respectively.  The increase in net cash provided by financing activities for the
nine months ended September 30, 1997 is primarily the result of increased growth
in 1997 as compared to the same period in 1996.  The total net  increase in cash
and cash  equivalents  was $1.9 and $(3.9)  million  for the nine  months  ended
September 30, 1997 and 1996, respectively.


                                       18
<PAGE>

                         TELEBANC FINANCIAL CORPORATION

         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 and has utilized securities sold under agreements to repurchase.

         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 September 30, 1997, the Company's liquidity ratio was
5.43%.

         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. In
addition, the Company formed TeleBanc Capital Trust I, which in turn sold shares
of trust preferred securities, Series A, for a total of $10,000,000 in a private
placement.  The annual  expense to service the total  subordinated  debt and the
trust  preferred  securities  are $3.3 million and $1.1  million,  respectively.
Annual dividends on the 4% preferred stock are $648,000.

         Subject  to  regulatory  approval,  the Bank  anticipates  distributing
dividends  of $3.9  million to the  Company at year end to service  the debt and
preferred stock. There are various regulatory limitations on the extent to which
federally  chartered  savings  institutions  may pay  dividends.  Also,  savings
institution  subsidiaries of holding companies generally are required to provide
their OTS  Regional  Director  with no less than 30 days 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 $5.1 million and $3.3 million as of September
30, 1997 and December  31, 1996,  respectively.  As of September  30, 1997,  the
Company had commitments to purchase $10.2 million in loans.


                                       19

<PAGE>

                         TELEBANC FINANCIAL CORPORATION

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

CAPITAL RESOURCES

         Capital  ratios at September  30, 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 September 30, 1997 ($ in thousands):
<TABLE>
<CAPTION>
                                                                                             TO BE WELL CAPITALIZED
                                                                   FOR CAPITAL              UNDER PROMPT CORRECTIVE
                                       ACTUAL                   ADEQUACY PURPOSES               ACTION PROVISION
                              -------------------------------------------------------------------------------------

As of September 30, 1997        AMOUNT        RATIO          AMOUNT           RATIO                  AMOUNT
                                ------        -----          ------           -----                  ------
<S>                            <C>            <C>             <C>             <C>                   <C>    
Total Capital (to risk
  weighted assets)             $51,228        13.37%          $30,663         8.00%                 $20,565

Tier 1 Capital (to risk
  weighted assets)             $48,354        12.62%          $15,331         4.00%                 $33,023

Tier 1 Capital (to average
  assets)                      $48,354         5.99%          $32,278         4.00%                 $16,076

Tangible                       $48,344         6.15%          $11,788         1.50%                 $36,556

</TABLE>




                                       20

<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

                  No information to report.


                                       21

<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:  November 14, 1997                   By: /s/ Mitchell H. Caplan
       -----------------------------------     ---------------------------------
                                               Mitchell H. Caplan
                                               President



Date:  November 14, 1997                   By: /s/ Aileen Lopez Pugh
       -----------------------------------     ---------------------------------
                                               Aileen Lopez Pugh
                                               Executive Vice President
                                               Chief Financial Officer/Treasurer